UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission File No. 333-50995
PHOENIX COLOR CORP.
(Exact name of Registrant as specified in its charter)
Delaware 22-2269911
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 733-0018
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of each of the Registrant's classes of
common stock, as of the latest practicable date: Not Applicable
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
Page No.
--------
Consolidated Balance Sheets
December 31, 2001 and June 30, 2002 1
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2001 and 2002 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2002 3
Notes to Consolidated Financial Statements 4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
2001 June 30, 2002
(Audited) (Unaudited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 122,101 $ 231,099
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,780,704 in 2001 and $1,800,359 in 2002 ....................................... 19,606,187 22,353,578
Inventory ....................................................................... 6,428,524 6,291,614
Income tax receivable ........................................................... 748,142 494,829
Prepaid expenses and other current assets ....................................... 2,600,140 3,464,621
------------- -------------
Total current assets ................................................. 29,505,094 32,835,741
Property, plant and equipment, net ................................................ 66,794,386 65,563,529
Goodwill, net ..................................................................... 13,302,809 13,302,809
Deferred financing costs, net ..................................................... 3,434,959 3,163,270
Other assets ...................................................................... 9,364,936 12,563,371
------------- -------------
Total assets ......................................................... $ 122,402,184 $ 127,428,720
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes and capital leases payable ................................................ $ 7,418 $ 554,972
Accounts payable ................................................................ 10,884,790 10,724,815
Accrued expenses ................................................................ 10,613,097 12,261,840
------------- -------------
Total current liabilities ............................................ 21,505,305 23,541,627
10 3/8% Senior subordinated notes ................................................. 105,000,000 105,000,000
Revolving line of credit .......................................................... 12,394,941 13,435,835
MICRF Loan ........................................................................ 500,000 500,000
Notes and capital leases payable .................................................. -- 3,037,226
Deferred income taxes ............................................................. 625,457 625,457
------------- -------------
Total liabilities .................................................... 140,025,703 146,140,145
------------- -------------
Commitments and contingencies (Note 8)
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share, 20,000 authorized
shares, 14,560 issued shares, 11,100 outstanding shares .............. 146 146
Common Stock, Class B, non-voting, par value $0.01 per share, 200,000 authorized
shares, 9,794 issued shares, 7,794 outstanding shares ................ 98 98
Additional paid in capital ...................................................... 2,126,804 2,126,804
Accumulated deficit ............................................................. (17,920,245) (19,027,351)
Stock subscriptions receivable .................................................. (61,092) (41,892)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares ....... (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit .......................................... (17,623,519) (18,711,425)
------------- -------------
Total liabilities & stockholders' deficit ............................ $ 122,402,184 $ 127,428,720
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
1
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Sales ..................................... $ 32,359,481 $ 34,877,161 $ 64,503,509 $ 64,308,874
Cost of sales ............................. 26,108,143 26,566,314 51,590,666 51,348,683
------------ ------------ ------------ ------------
Gross profit .............................. 6,251,338 8,310,847 12,912,843 12,960,191
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing expenses ....... 2,096,295 1,541,188 4,146,249 3,353,069
General and administrative expenses... 3,863,275 2,709,552 7,941,677 5,982,102
Loss (gain) on sale of assets ........ (95,000) 3,650 (120,317) (27,580)
Lease termination charges ............ -- 1,483,000 -- 1,483,000
------------ ------------ ------------ ------------
Total operating expenses .................. 5,864,570 5,737,390 11,967,609 10,790,591
------------ ------------ ------------ ------------
Income from operations .................... 386,768 2,573,457 945,234 2,169,600
Other expenses:
Interest expense ..................... 3,117,716 3,256,590 6,240,607 6,384,667
Other (income) expense ............... (115,342) 179,392 (129,259) 161,039
------------ ------------ ------------ ------------
Loss before income taxes .................. (2,615,606) (862,525) (5,166,114) (4,376,106)
Income tax (benefit) expense .............. 1,021,789 -- (278,970) (3,269,000)
------------ ------------ ------------ ------------
Net loss .................................. ($ 3,637,395) ($ 862,525) ($ 4,887,144) ($ 1,107,106)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Unaudited) (Unaudited)
2001 2002
------------ -----------
Operating activities
Net loss .................................................................... ($4,887,144) ($1,107,106)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization of property, plant and equipment ............ 5,263,596 5,018,618
Amortization of goodwill .................................................. 1,340,628 --
Amortization of deferred financing costs .................................. 260,184 271,689
Provision for uncollectible accounts ...................................... 165,231 212,936
Lease termination charge .................................................. -- 1,483,000
Deferred income taxes ..................................................... (278,970) (3,269,000)
(Gain) on disposal of assets .............................................. (120,317) (27,580)
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable ....................................................... (4,421) (2,960,327)
Inventory ................................................................. (658,397) 136,910
Prepaid expenses and other assets ......................................... 289,468 (4,373,987)
Accounts payable .......................................................... (218,892) (185,191)
Accrued expenses .......................................................... 252,587 340,743
Income tax refund receivable .............................................. 764,193 3,522,313
----------- -----------
Net cash provided by (used in) operating activities ..................... 2,167,746 (936,982)
----------- -----------
Investing activities:
Proceeds from sale of equipment ........................................... 275,000 31,230
Capital expenditures ...................................................... (3,670,988) (175,149)
Equipment deposits ........................................................ (614,589) 136,071
----------- -----------
Net cash used in investing activities ................................... (4,010,577) (7,848)
----------- -----------
Financing activities:
Net borrowings from revolving line of credit .............................. 2,277,462 1,040,894
Principal payments on long term borrowings ................................ (6,664) (6,266)
Payment of stock subscription ............................................. 19,200 19,200
----------- -----------
Net cash provided by financing activities ............................... 2,289,998 1,053,828
----------- -----------
Net increase in cash .................................................... 447,167 108,998
Cash and cash equivalents at beginning of period ............................ 367,866 122,101
----------- -----------
Cash and cash equivalents at end of period .................................. $ 815,033 $ 231,099
=========== ===========
Non-cash investing and financing activities:
Equipment included in accounts payable .................................... $ 244,128 $ 25,216
=========== ===========
Equipment financed through capital lease obligations ...................... -- $ 3,591,046
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
The accompanying interim financial statements of Phoenix Color Corp. and
its subsidiaries (the "Company") do not include all of the information and
disclosures generally required for annual financial statements and are
unaudited. In the opinion of management, the accompanying unaudited financial
statements contain all material adjustments (consisting of normal recurring
accruals), as well as the accounting changes to adopt Statement of Financial
Accounting Standards (SFAS) 141, "Business Combinations", and SFAS 142,
"Goodwill and Other Intangible Assets", necessary to present fairly the
Company's financial position as of June 30, 2002, and the results of its
operations for the three and six month periods ended June 30, 2002 and 2001. The
unaudited interim financial statements should be read in conjunction with the
Company's audited Consolidated Financial Statements for the year ended December
31, 2001, included in the Company's Annual Report filed on Form 10-K.
2. Accounting Changes.
Effective January 1, 2002 the Company adopted both SFAS 141 and SFAS 142.
The Company no longer amortizes goodwill recorded on prior business combinations
but instead annually reviews the recorded goodwill for impairment. There was no
impairment of goodwill upon adoption of SFAS 142.
Net loss for the six and three months ended June 30, 2001 adjusted to
exclude amortization expense (net of taxes) is as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
Net loss reported ................. ($3,637,395) ($4,887,144)
Goodwill amortization ............. 670,314 1,340,628
----------- -----------
Adjusted Net Loss ........... ($2,967,081) ($3,546,516)
=========== ===========
3. Inventory.
Inventory consists of the following:
December 31, 2001 June 30, 2002
----------------- -------------
Raw materials .......... $4,002,662 $4,146,692
Work in process ........ 2,425,862 2,144,922
---------- ----------
$6,428,524 $6,291,614
========== ==========
4
4. Other Assets.
Other assets at December 31, 2001 and June 30, 2002 include equipment
deposits of $3,667,416 and $3,531,345, respectively.
5. Accrued Expenses.
Accrued expenses at December 31, 2001 and June 30, 2002 include accrued
interest expense of $4,550,833 and $4,639,867, respectively.
6. 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.
The following table displays the activity and balances of the
restructuring accrual account from January 1, 2002 to June 30, 2002:
January 1, June 30,
2002 2002
Type of Cost Balance Additions Deductions Balance
---------- --------- ---------- ----------
Lease termination costs $2,974,000 -- $211,000 $2,763,000
7. Debt.
In February 1999, the Company issued $105.0 million of 10 3/8% Senior
Subordinated Notes due 2009 ("Senior Subordinated Notes") in a private offering
under Rule 144A of the Securities Act of 1933. The Senior Subordinated 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. All of the Company's current and future "restricted
subsidiaries," as defined in the Senior Subordinated Notes indenture, are
guarantors of the Senior Subordinated Notes on an uncollateralized senior
subordinated basis. The Senior Subordinated Notes indenture 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 subject to certain financial covenants.
The Company has an Amended and Restated Loan Agreement (the "Senior Credit
Facility") with a commercial bank for a three year $20,000,000 revolving credit
facility through August 1, 2004. Borrowings under the Senior Credit Facility are
subject to a borrowing base as defined in the agreement and are collateralized
by all of the assets of the Company. 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 as amended on August 14, 2001, compliance with a fixed
coverage charge ratio. As of June 30, 2002, the Company was in compliance with
the fixed coverage charge ratio.
5
In May 2000 the Company entered into a five year $500,000 loan agreement
with Maryland Industrial and Commercial Redevelopment Fund (MICRF) with 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 June 30, 2002, the Company
employed over 600 people in the state of Maryland.
In June 2002, the Company entered into a capital lease for the acquisition
of equipment at its book manufacturing facility in Hagerstown, Maryland. The
lease is payable over 60 months in monthly installments of $70,853 including
interest. As part of the capital lease agreement, the Company provided the
lessor with a letter of credit from Wachovia Bank in the amount of $1.6 million,
to be exercised in the event of a default. The Company's borrowing base under
the Senior Credit Facility has been reduced by this outstanding letter of
credit.
8. Commitments and Contingencies.
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH ("Krause Germany") and Krause America, Inc. ("Krause America" and together
with Krause Germany "Krause"), which was tried in October 2000 in the United
States District Court for the District of Maryland, based on breach of contract
and statutory warranties on certain prepress equipment which the Company had
agreed to purchase from Krause. The Company attempted to operate the equipment,
and contended that the equipment failed to perform as warranted. During 1999,
the Company removed the portion of the equipment actually delivered, and sought
recovery of the approximately $2.0 million paid on this equipment, which
included amounts for deposits on the balance of the equipment not yet delivered.
As of December 31, 2001 and June 30, 2002, the Company included in other
non-current assets a receivable from Krause of approximately $2.0 million. On
January 27, 2000, the court granted summary judgment in favor of the Company
with respect to the three machines previously delivered to the Company. On
October 24, 2000, a jury rendered a verdict against Krause for $1.9 million. On
December 27, 2001 the Federal Court of Appeals for the 4th Circuit rendered a
decision confirming the lower court's decision without modification. Due to
recent efforts by Krause America to avoid enforcement of the judgment, the
Company has been forced to file a new lawsuit in the U.S. District Court for the
District of Maryland against Krause America, Krause CTP, Limited, Krause
Germany, and Jurgen Horstmann, Krause Germany's sole shareholder.
In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. ("Motion Technology") in the Circuit Court for Washington County,
Maryland to recover approximately $300,000 in deposits made on equipment which
failed to perform in accordance with manufacturer's warranties, and $703,000 for
the purchase of substitute equipment. Motion Technology has counterclaimed for
$250,000 for the balance of the purchase price for the equipment, plus
incidental charges. In March 2001, the Company amended its complaint, adding
Eagles Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, the
Company obtained an order of default against Eagle. The Company has filed a
motion for summary judgment against Eagle and Motion Technology. On February 25,
2002, the court granted the Company's motions for summary judgment and entry of
an order of default and entered a judgment against Eagle and Motion Technology
in the amount of $1,006,750. Defendants had thirty (30) days from that date to
appeal the judgment. On February 26, 2002, defendants filed for bankruptcy.
6
On May 20, 2002, Xerox Corporation ("Xerox") filed a complaint against
Phoenix Color Corp. ("Phoenix") in United States District Court for the District
of Maryland alleging accounts due and owing pursuant to various equipment leases
between Xerox and Phoenix's subsidiary TechniGraphix, Inc. ("TechniGraphix").
TechniGraphix ceased operations pursuant to the Company's restructuring plan in
September 2000. Phoenix filed a motion to dismiss based on Xerox's failure to
state a claim upon which relief may be granted and failure to name an
indispensable party. On July 19, 2002, Xerox filed an amended complaint naming
Phoenix and TechniGraphix as defendants. The amended complaint alleges that
Phoenix has an account due and owing of $2.7 million and that Phoenix and
TechniGraphix are jointly liable for an account due and owing of $.5 million. On
August 1, 2002, Phoenix and TechniGraphix filed motions to dismiss the claims
against them based on Xerox's failure to state a claim on which relief may be
granted. Xerox must respond to the motions to dismiss on or before August 19,
2002.
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.
9. 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.
10. Income Taxes.
The Company's effective tax rate for the six months ended June 30, 2002
was a benefit of 74.7% compared to an expense of 41.5% for the year ended
December 31, 2001. The 2001 effective rate resulted from the Company recognizing
a valuation allowance of $7.3 million in the third quarter of 2001 due to the
uncertainty of the realization of certain deferred tax assets. The 2002
effective rate reflects the impact of the reversal of $3.3 million of the
Company's valuation allowance associated with net operating loss carry forwards
which can now be carried back to the prior five years in which the Company paid
income taxes pursuant to the Jobs Creation and Workers Assistance Act ( the
"Act") signed into law in March 2002. Further, for the six months ended June 30,
2002, no benefit was recognized for the pre-tax loss due to the uncertainty of
the utilization of the deferred tax asset.
7
11. Subsequent Event.
On July 10, 2002, the Company's entered into a Lease Termination Agreement
(the "Termination Agreement") with the Landlord or Lessor of its leased facility
located in Taunton, Massachusetts. The Termination Agreement provides for the
termination of the lease upon a subsequent sale of the property, which is
currently being negotiated by the Lessor. In June of 2002, the Company accrued a
lease termination charge of $1.5 million comprised of a $1.1 termination fee
payable to the Lessor over 24 months beginning in September, 2002, a prepayment
penalty of $125,000, a brokerage fee of $136,000 and a forgiveness of an
existing Note Receivable of $175,000 due from the Lessor.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Some of the statements in this Quarter Annual Report on Form 10-Q are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include indications regarding
the intent, belief or current expectations of the Company and its management,
including without limitation expectations regarding (i) the sufficiency of funds
generated from the Company's operations, together with existing cash, available
credit under the Senior Credit Facility and other financial sources, to finance
the Company's current operations, remaining capital expenditure requirements and
internal growth for the year 2002, (ii) whether any claims or lawsuits pending
against the Company, individually or in the aggregate, will have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows, and (iii) the Company's expectations regarding the
materiality of interest rate fluctuations to its business. In some cases, you
can identify forward-looking statements by terminology such as "may,"
"estimates," "anticipates," "intends," "will," "should," "expects," "believes,"
"continue" or "predicts." These statements involve a variety of known and
unknown risks, uncertainties, and other factors that may cause the Company's
actual results to differ materially from intended or expected results. These
factors include (i) the risk factors and other information presented in the
Company's Registration Statement filed with the Securities and Exchange
Commission, File No. 333-50995, which became effective May 13, 1999, (ii) the
sufficiency of funds to finance the Company's current operations, remaining
capital expenditures and internal growth for the year 2002, and (iii) the
outcome of any claims and lawsuits filed, threatened to be filed or pending
against the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
8
Results of Operations
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations
(dollars in millions):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
2001 % 2002 % 2001 % 2002 %
----- ----- ----- ----- ----- ----- ----- -----
Sales ................................. $32.4 100.0 $34.9 100.0 $64.5 100.0 $64.3 100.0
Cost of sales ......................... 26.1 80.6 26.6 76.2 51.6 80.0 51.3 79.8
Gross profit .......................... 6.3 19.4 8.3 23.8 12.9 20.0 13.0 20.2
Operating expenses .................... 5.9 18.2 5.7 16.3 12.0 18.6 10.8 16.8
Income from operations ................ 0.4 1.2 2.6 7.4 0.9 1.4 2.2 3.4
Interest .............................. 3.1 9.6 3.3 9.5 6.2 9.6 6.4 10.0
Other (Income) expense ................ (0.1) (0.3) 0.2 0.6 (0.1) (0.2) 0.2 0.3
Income (loss) before income taxes ..... (2.6) (8.0) (0.9) (2.6) (5.2) (8.1) (4.4) (6.8)
Income tax provision (benefit) ........ 1.0 3.1 -- -- (0.3) (0.5) (3.3) (5.1)
Net loss .............................. (3.6) (11.1) (0.9) (2.6) (4.9) (7.6) (1.1) (1.7)
Three Months Ended June 30, 2002 and 2001
Net sales increased $2.5 million, or 7.7%, to $34.9 million for the three
months ended June 30, 2002, from $32.4 million for the same period in 2001. The
increase was a result of increases in orders as a result of improved sales in
the publishing industry.
Gross profit increased $2.0 million, or 31.7%, to $8.3 million for the
three months ended June 30, 2002, from $6.3 million for the same period in 2001.
The increase was primarily due to increased sales combined with cost reductions
from reductions in personnel, resulting in an increase in the gross margin of
4.4% to 23.8% for the three months ended June 30, 2002 from 19.4% for the same
period in 2001.
Operating expenses decreased $200,000 or 3.4% to $5.7 million for the
three months ended June 30, 2002, from $5.9 million for the same period in 2001.
The Company recorded a lease termination charge of $1.5 million for the quarter
ended June 30, 2002. Had the lease termination charge not been incurred,
operating expenses would have decreased $1.7 million or 28.8% to $4.2 million
for the three months ended June 30, 2002, from $5.9 million for the same period
in 2001. The decrease was due primarily to reduction of staff, reduction in
transportation costs and the elimination of goodwill amortization ($670,000
recognized in 2001) in accordance with the adoption of "SFAS 142".
Interest expense increased $200,000 or 6.5% to $3.3 million for the three
months ended June 30, 2002, from $3.1 million for the same period in 2001. The
increase is primarily due to increased borrowings during the period.
9
For the quarter ended June 30, 2002 the Company recorded no tax expense or
benefit compared to a tax expense of $1.0 million for the same period in 2001.
The Company did not record a tax benefit for the quarter ended June 30, 2002
because of the uncertainty of the Company realizing the benefit of the loss in
future periods.
Net loss decreased $2.7 million or 75.0% to $900,000 for the three months
ended June 30, 2002, from $3.6 million for the same period in 2001. The change
in net loss was due to the factors described above.
Six Months Ended June 30, 2002 and 2001
Net sales decreased $200,000, or 0.3%, to $64.3 million for the six months
ended June 30, 2002, from $64.5 million for the same period in 2001. The
decrease was a result of reduced sales in the quarter ended March 31, 2002,
which was offset by increased sales in the quarter ended June 30, 2002.
Gross profit increased $100,000, or 0.8%, to $13.0 million for the six
months ended June 30, 2002, from $12.9 million for the same period in 2001. The
increase was primarily due to cost reductions from reductions in personnel
resulting in an increase in the gross margin of 0.2% to 20.2% for the six months
ended June 30, 2002 from 20.0% for the same period in 2001.
Operating expenses decreased $1.2 million or 10.0% to $10.8 million for
the six months ended June 30, 2002, from $12.0 million for the same period in
2001. The Company recorded a lease termination charge of $1.5 million for the
quarter ended June 30, 2002. Had the lease termination charge not been incurred,
operating expenses would have decreased $2.7 million or 22.5% to $9.3 million
for the six months ended June 30, 2002, from $12.0 million for the same period
in 2001. The decrease was due primarily to reduction of staff, reduction in
transportation costs and the elimination of goodwill amortization ($1.3 million
recognized in 2001) in accordance with the adoption of "SFAS 142".
Interest expense increased $200,000 or 3.2% to $6.4 million for the six
months ended June 30, 2002, from $6.2 million for the same period in 2001. The
increase is primarily due to increased borrowings during the period ended June
30, 2002.
For the six months ended June 30, 2002 and 2001, the Company recorded a
tax benefit of $3.3 million and $300,000, respectively. The effective rate for
the six month period ended June 30, 2002 was a benefit of 74.7% compared to 5.8%
for the same period in 2001. The increase in the effective rate for the six
months of 2002 compared to the same period in 2001 is due to a decrease in the
valuation allowance in 2002 resulting from the passage of the Jobs Creation and
Workers Assistance Act in March 2002, offset by an increase in the valuation
allowance for the six month period ended June 30, 2002, due to the uncertainty
of the realization of the Company's net operating losses generated during the
period.
Net loss decreased $3.8 million or 77.6% to $1.1 million for the six
months ended June 30, 2002, from $4.9 million for the same period in 2001. The
change in net loss was due to the factors described above.
10
Liquidity and Capital Resources
During the first six months of 2002, the Company generated approximately
$109,000 of cash. Net cash used in operating activities was approximately
$900,000, which consisted principally of a net loss of $1.1 million and
investment in additional working capital of $3.5 million, offset by non-cash
expenses of $3.7 million. Investing activities did not result in the use of cash
due to the $3.6 million in capital and equipment expenditures being offset by
long term financing of $3.6 million. Net cash provided by financing activities
was $1.1 million, resulting from borrowings on the Senior Credit Facility.
Working capital increased $1.3 million to $9.3 million as at June 30,
2002, from $8.0 million at December 31, 2001. This increase is primarily
attributable to increases in accounts receivable of $2.7 million, prepaid and
other current assets of $900,00, cash of $100,000, the current portion of long
term borrowings of $600,000, accrued liabilities of $1.6 million offset by
charges in other assets and liabilities of $200,000.
The Company historically has financed its operations with internally
generated funds, external short and long-term borrowings and operating leases.
The Company believes that funds generated from operations, together with
existing cash, available credit under the Senior Credit Facility and other
financial sources will be sufficient to finance its current operations,
remaining capital expenditure requirements and internal growth for the year
2002. Should the Company fail to achieve results in 2002 equal at least to the
year 2000, or should a decrease in demand for the Company's products, or
inability to reduce costs, adversely affect the availability of funds, such
decrease in the availability of funds could have a material adverse effect on
the Company's business prospects or results of operations.
If the Company were to make any significant acquisitions for cash, it may
be necessary to obtain additional debt or equity financing. There can be no
assurance that such financing will be available on satisfactory terms or at all.
The Company has no current agreements with respect to any acquisitions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company believes its current exposure to interest rate changes is
immaterial because approximately 89% of the Company's debt bears a fixed rate of
interest. However, if the ratio of debt with fixed interest were to materially
decline or interest rates were to materially increase it could have a material
adverse effect on the Company's business and results of operations.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH ("Krause Germany") and Krause America, Inc. ("Krause America" and together
with Krause Germany "Krause"), which was tried in October 2000 in the United
States District Court for the District of Maryland, based on breach of contract
and statutory warranties on certain prepress equipment which the Company had
agreed to purchase from Krause. The Company attempted to operate the equipment,
and contended that the equipment failed to perform as warranted. During 1999,
the Company removed the portion of the equipment actually delivered, and sought
recovery of the approximately $2.0 million paid on this equipment, which
included amounts for deposits on the balance of the equipment not yet delivered.
As of December 31, 2001 and March 31, 2002, the Company included in other
non-current assets a receivable from Krause of approximately $2.0 million. On
January 27, 2000, the court granted summary judgment in favor of the Company
with respect to the three machines previously delivered to the Company. On
October 24, 2000, a jury rendered a verdict against Krause for $1.9 million. On
December 27, 2001 the Federal Court of Appeals for the 4th Circuit rendered a
decision confirming the lower court's decision without modification. Due to
recent efforts by Krause America to avoid enforcement of the judgment, the
Company has been forced to file a new lawsuit in the U.S. District Court for the
District of Maryland against Krause America, Krause CTP, Limited, Krause
Germany, and Jurgen Horstmann, Krause Germany's sole shareholder.
In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. ("Motion Technology") in the Circuit Court for Washington County,
Maryland to recover approximately $300,000 in deposits made on equipment which
failed to perform in accordance with manufacturer's warranties, and $703,000 for
the purchase of substitute equipment. Motion Technology has counterclaimed for
$250,000 for the balance of the purchase price for the equipment, plus
incidental charges. In March 2001, the Company amended its complaint, adding
Eagles Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, the
Company obtained an order of default against Eagle. The Company has filed a
motion for summary judgment against Eagle and Motion Technology. On February 25,
2002, the court granted the Company's motions for summary judgment and entry of
an order of default and entered a judgment against Eagle and Motion Technology
in the amount of $1,006,750. Defendants had thirty (30) days from that date to
appeal the judgment. On February 26, 2002, defendants filed for bankruptcy.
On May 20, 2002, Xerox Corporation ("Xerox") filed a complaint against
Phoenix Color Corp. ("Phoenix") in United States District Court for the District
of Maryland alleging accounts due and owing pursuant to various equipment leases
between Xerox and Phoenix's subsidiary TechniGraphix, Inc. ("TechniGraphix").
TechniGraphix ceased operations pursuant to the Company's restructuring plan in
September 2000. Phoenix filed a motion to dismiss based on Xerox's failure to
state a claim upon which relief may be granted and failure to name an
indispensable party. On July 19, 2002, Xerox filed an amended complaint naming
Phoenix and TechniGraphix as defendants. The amended complaint alleges that
Phoenix has an account due and owing of $2.7 million and that Phoenix and
TechniGraphix are jointly liable for an account due and owing of $.5 million. On
August 1, 2002, Phoenix and TechniGraphix filed motions to dismiss the claims
against them based on Xerox's failure to state a claim on which relief may be
granted. Xerox must respond to the motions to dismiss on or before August 19,
2002.
12
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows for any quarterly or
annual period.
Item 2. Change in Securities and Use of Proceeds.
None
13
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description
- ------- -----------
2.1 Acquisition Agreement dated as of November 30, 1998 among the Company,
Carl E. Carlson, Wayne L. Sorensen, Donald Davis, Margaret Davis and
Viking Leasing Partnership (schedules and exhibits omitted)**
2.2 Acquisition Agreement dated as of February 3, 1999 among the Company,
TechniGraphix, Inc., Debra A. Barry and Jack L. Tiner (schedules and
exhibits omitted)**
2.3 Stock Purchase Agreement dated as of December 27, 1995 among the
Company and various stockholders of New England Book Holding
Corporation*
2.4 Plan and Agreement of Merger of Phoenix Color Corp. (New York) into
Phoenix Merger Corp. (Delaware)*
3.1 Certificate of Incorporation of the Company*
3.2 By-Laws of the Company*
4.1 Note Purchase Agreement dated January 28, 1999 among the Company, the
Guarantors and the Initial Purchasers**
4.2 Indenture dated as of February 2, 1999 among the Company, the
Guarantors and Chase Manhattan Trust Company, National Association,
Trustee**
4.3 Registration Rights Agreement dated as of February 2, 1999 among the
Company, the Guarantors and the Initial Purchasers**
4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2)**
4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit
4.2)**
4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2)**
4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit
4.2)**
10.1 Employment Agreement dated as of February 12, 1999 between the Company
and Jack L. Tiner**
10.4(a) Credit Agreement dated as of September 15, 1998 among the Company, the
Guarantors and First Union National Bank as Agent, as Issuer and as
Lender (schedules omitted)**
10.4(b) First Amendment to Credit Agreement dated as of March 31, 1999 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.****
10.4(c) Second Amendment to Credit Agreement dated as of March 23, 2000 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.****
10.4(d) Third Amendment to Credit Agreement dated as of November 13, 2000 by
and among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.*****
10.4(e) Fourth Amendment to Credit Agreement dated as of March 30, 2001 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent.******
14
10.4(f) Fifth Amendment to Credit Agreement dated as of August 13, 2001 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. *******
10.4(g) Sixth Amendment to Credit Agreement dated as of December 26, 2001 by
and among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. ********
10.4(h) Seventh Amendment to Credit Agreement dated as of March 15, 2002 by
and among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. ********
10.4(i) Eighth Amendment to Credit Agreement dated as of May 13, 2002 by and
among Phoenix Color Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent./\
10.5 Revolving Credit Note dated as of September 15, 1998 executed by the
Company and the Guarantors**
10.6 Master Security Agreement dated as of September 15, 1998 among the
Company, the Guarantors and First Union National Bank as Collateral
Agent (schedules omitted)***
10.7 Master Pledge Agreement dated as of September 15, 1998 executed by the
stockholders of the Company in favor of First Union National Bank, as
Collateral Agent (schedules omitted)**
10.8 Subsidiary Pledge Agreement dated as of September 15, 1998 executed by
the Company (schedules omitted**)
10.10 Lease Agreement dated as of March 20, 1998 between the Company and
Maurice M. Weill, Trustee Under Indenture Dated December 6, 1984 for
the facility located at 40 Green Pond Road, Rockaway, NJ 07866**
10.11 Lease Agreement dated as of March 31, 1997 between the Company and
Constitution Realty Company, LLC for the facility located at 555
Constitution Drive, Taunton, MA 02780**
10.12 Lease Agreement dated as of December 19, 1996 between the Company and
CMC Factory Holding Company, L.L.C. for the facility located at 47-07
30th Place, Long Island City, NY 11101**
12.1 Statement regarding Ratios of Earnings to Fixed Charges
12.2 Statement concerning calculation of EBITDA
21.1 Subsidiaries of the Company
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-50995), filed on April 24, 1998.
** Incorporated by reference to the Company's Amendment No. 1 on Form S-4
to Registration Statement on Form S-1 (Reg. No. 333-50995), filed on
March 8, 1999.
*** Incorporated by reference to the Company's Amendment No. 2 on Form S-4
to Registration Statement on Form S-1 (Reg. No. 333-50995), filed on
May 5, 1999.
**** Incorporated by reference in the Company's 1999 Annual Report on Form
10-K filed on March 29, 2000. (Reg. No. 333-50995).
***** Incorporated by reference in the Company's 1999 Quarterly Report on
Form 10-Q filed on November 14, 2000. (Reg. No. 333-50995).
****** Incorporated by reference in the Company's 2000 Annual Report on Form
10-K filed on April 2, 2001. (Reg. No. 333-50995).
******* Incorporated by reference in the Company's 2001 Quarterly Report on
Form 10-Q filed on August 14, 2001. (Reg. No. 333-50995).
******** Incorporated by reference in the Company's 2001 Annual Report on Form
10-K filed on March 26, 2002. (Reg. No. 333-50995).
/\ Incorporated by reference in the Company's 2002 Quarterly Report on
Form 10-Q filed May 15, 2002 (reg. No. 333-50995).
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATE: August 13, 2002
PHOENIX COLOR CORP.
By: /s/ Louis LaSorsa
-----------------------------
Louis LaSorsa, Chairman
and Chief Executive Officer
By: /s/ Edward Lieberman
-----------------------------
Edward Lieberman
Chief Financial Officer
and Chief Accounting Officer
16
Phoenix Color Corp.
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Louis LaSorsa, Chairman and Chief Executive Officer (principal executive
officer) of Phoenix Color Corp. (the "Registrant"), certify that to the best of
my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the
period ended June 30, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Louis LaSorsa
-----------------------------
Louis LaSorsa
August 13, 2002
Phoenix Color Corp.
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Edward Lieberman, Chief Financial Officer of Phoenix Color Corp. (the
"Registrant"), certify that to the best of my knowledge, based upon a review of
the Quarterly Report on Form 10-Q for the period ended June 30, 2002 of the
Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Edward Lieberman
--------------------------------
Edward Lieberman
August 13, 2002