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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 September 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to ________
Commission File 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 September 30, 2002 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 and 2002 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2002 3
Notes to Consolidated Financial Statements 4-7
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 September 30
2001 2002
(Audited) (Unaudited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 122,101 $ 63,105
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,780,704 in 2001 and $1,798,192 in 2002 ............................................ 19,606,187 22,820,899
Inventory ............................................................................. 6,428,524 6,182,446
Income tax receivable ................................................................. 748,142 495,129
Prepaid expenses and other current assets ............................................. 2,600,140 2,631,400
------------- -------------
Total current assets ...................................................... 29,505,094 32,192,979
Property, plant and equipment, net ....................................................... 66,794,386 63,017,330
Goodwill, net ............................................................................ 13,302,809 13,302,809
Deferred financing costs, net ............................................................ 3,434,959 3,024,159
Other assets ............................................................................. 9,364,936 12,576,164
------------- -------------
Total assets .............................................................. $ 122,402,184 $ 124,113,441
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes and capital leases payable ...................................................... $ 7,418 $ 1,116,745
Accounts payable ...................................................................... 10,884,790 9,252,466
Accrued expenses ...................................................................... 10,613,097 8,608,322
------------- -------------
Total current liabilities ................................................. 21,505,305 18,977,533
10 3/8% Senior subordinated notes ........................................................ 105,000,000 105,000,000
Revolving line of credit ................................................................. 12,394,941 11,650,902
MICRF Loan ............................................................................... 500,000 500,000
Notes and capital leases payable ......................................................... -- 3,480,826
Deferred income taxes .................................................................... 625,457 625,457
------------- -------------
Total liabilities ......................................................... 140,025,703 140,234,718
------------- -------------
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) (16,446,663)
Stock subscriptions receivable ........................................................ (61,092) (32,432)
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) (16,121,277)
------------- -------------
Total liabilities & stockholders' deficit ................................. $ 122,402,184 $ 124,113,441
============= =============
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2002 2001 2002
------------ ------------ ------------ -------------
Sales ............................................. $ 35,275,912 $ 39,058,716 $ 99,779,421 $ 103,367,590
Cost of sales ..................................... 27,803,101 28,320,383 79,393,767 79,669,066
------------ ------------ ------------ -------------
Gross profit ...................................... 7,472,811 10,738,333 20,385,654 23,698,524
------------ ------------ ------------ -------------
Operating expenses:
Selling and marketing expenses .............. 2,064,679 1,621,996 6,210,928 4,975,065
General and administrative expenses ......... 3,806,946 2,919,949 11,748,623 8,902,051
Lease termination charges ................... -- 276,836 -- 1,759,836
Loss (gain) on sale of assets ............... 133,104 (15,000) 12,787 (42,580)
Restructuring charge ........................ (303,881) -- (303,881) --
------------ ------------ ------------ -------------
Total operating expenses .......................... 5,700,848 4,803,781 17,668,457 15,594,372
------------ ------------ ------------ -------------
Income from operations ............................ 1,771,963 5,934,552 2,717.197 8,104,152
Other expenses:
Interest expense ............................ 3,165,786 3,170,775 9,406,393 9,555,442
Other (income) expense ...................... (13,094) 183,089 (142,353) 344,128
------------ ------------ ------------ -------------
Income (loss) before income taxes ................. (1,380,729) 2,580,688 (6,546,843) (1,795,418)
Income tax (benefit) expense ...................... 4,678,631 -- 4,399,661 (3,269,000)
------------ ------------ ------------ -------------
Net income (loss) ................................. ($ 6,059,360) $ 2,580,688 ($10,946,504) $ 1,473,582
============ ============ ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited) (Unaudited)
2001 2002
------------ -----------
Operating activities
Net income (loss) ....................................................................... ($10,946,504) $ 1,473,582
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment ....................... 8,021,709 7,665,599
Amortization of goodwill ............................................................. 2,010,943 --
Amortization of deferred financing costs ............................................. 390,276 410,800
Provision for uncollectible accounts ................................................. 281,751 337,766
Lease termination charge ............................................................. -- 1,266,184
Deferred tax asset valuation allowance adjustment .................................... 4,399,661 (3,269,000)
(Gain) loss on disposal of assets .................................................... 12,787 (42,580)
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable .................................................................. (472,031) (3,552,478)
Inventory ............................................................................ (160,208) 246,078
Prepaid expenses and other assets .................................................... (241,374) (3,084,233)
Accounts payable ..................................................................... (600,275) (1,787,061)
Accrued expenses ..................................................................... (2,114,245) (2,004,775)
Accrual of expenses for restructuring charges ........................................ (330,770) --
Income tax refund receivable ......................................................... 672,734 3,522,013
------------ -----------
Net cash provided by operating activities ......................................... 924,454 1,181,895
------------ -----------
Investing activities:
Proceeds from sale of equipment ...................................................... 306,500 46,230
Capital expenditures ................................................................. (4,696,440) (142,759)
Equipment deposits ................................................................... 633,567 (336,905)
------------ -----------
Net cash used in investing activities ............................................. (3,756,373) (433,434)
------------ -----------
Financing activities:
Net borrowings (payments) from revolving line of credit .............................. 4,114,925 (744,039)
Principal payments on long term borrowings ........................................... (10,044) (92,078)
Payment of stock subscription ........................................................ 28,800 28,660
------------ -----------
Net cash provided (used in) by financing activities ............................... 4,133,681 (801,457)
------------ -----------
Net increase (decrease) in cash ................................................... 1,301,762 (58,996)
Cash and cash equivalents at beginning of period ........................................ 367,866 122,101
------------ -----------
Cash and cash equivalents at end of period .............................................. $ 1,669,628 $ 63,105
============ ===========
Non-cash investing and financing activities:
Equipment included in accounts payable ............................................... $ 59,452 $ 154,737
============ ===========
Equipment financed through capital lease obligations ................................. -- $ 3,591,046
============ ===========
Notes payable issued in connection with lease termination ............................ -- $ 1,091,184
============ ===========
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 September 30, 2002, and the results of its
operations for the three and nine month periods ended September 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 three and nine months ended September 30, 2001 adjusted
to exclude amortization expense (net of taxes) is as follows:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
Net loss reported ........... ($6,059,360) ($10,946,504)
Goodwill amortization ....... 670,315 2,010,943
----------- ------------
Adjusted Net Loss ..... ($5,389,045) ($ 8,935,561)
=========== ============
3. Inventory.
Inventory consists of the following:
December 31, 2001 September 30, 2002
----------------- ------------------
Raw materials ................ $4,002,662 $4,187,246
Work in process .............. 2,425,862 1,995,200
---------- ----------
$6,428,524 $6,182,446
========== ==========
4.Other Assets.
Other assets at December 31, 2001 and September 30, 2002 include equipment
and security deposits of $4,479,590 and $5,527,052, respectively.
5. Accrued Expenses.
Accrued expenses at December 31, 2001 and September 30, 2002 include
accrued interest expense of $4,550,833 and $1,906,295, respectively.
4
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 September 30, 2002:
January 1, September 30,
2002 2002
Type of Cost Balance Additions Deductions Balance
---------- --------- ---------- -------------
Lease termination costs $2,974,000 -- $292,000 $2,682,000
Deductions to the restructuring account are due to current lease payments
made on terminated operating leases.
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 September 30, 2002, the Company was in compliance
with the fixed coverage charge ratio.
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 September 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.
On July 10, 2002, the Company entered into an agreement to terminate the
operating lease for its Taunton, Massachsuetts manufacturing facility upon a
subsequent sale of the property, which occurred in September 2002. In June 2002,
the Company accrued a lease termination charge of $1.5 million comprised of a
$1.1 million termination
5
fee, a prepayment penalty of $125,000, a brokerage fee of $136,000 and
forgiveness of an existing Note Receivable of $175,000 due from the landlord.
Under the terms of the agreement, the Company agreed to pay the landlord the
lease termination fee in equal monthly installments of $45,466 over two years
commencing October 2002.
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 September 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
Eagle 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. As
of September 30, 2002, the Company has reserved the entire balance originally
paid to Motion Technology Horizons, Inc.
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 identify the specific accounts at issue
and state a claim on which relief may be granted. On October 29, 2002, the Court
issued an Order denying the motions to dismiss filed by Phoenix and
TechniGraphix. The case is in the very 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.
6
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 nine months ended September 30,
2002 was a benefit of 182.1% 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 nine months ended
September 30, 2002, no income tax benefit was recognized for the pre-tax loss
due to the uncertainty of the realization of the deferred tax asset.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Some of the statements in this Quarterly 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 remainder of 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 capital expenditure requirements and 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 September 30, Nine Months Ended September 30,
-------------------------------------- ----------------------------------------
2001 % 2002 % 2001 % 2002 %
------ ----- ------ ----- ------ ----- ------ -----
Sales ................................. $ 35.3 100.0 $ 39.0 100.0 $ 99.8 100.0 $103.4 100.0
Cost of sales ......................... 27.8 78.8 28.3 72.6 79.4 79.6 79.7 77.1
Gross profit .......................... 7.5 21.2 10.7 27.4 20.4 20.4 23.7 22.9
Operating expenses .................... 5.7 16.1 4.8 12.3 17.7 17.7 15.6 15.1
Income from operations ................ 1.8 5.1 5.9 15.1 2.7 2.7 8.1 7.8
Interest .............................. 3.2 9.1 3.2 8.2 9.4 9.4 9.6 9.3
Other (Income) expense ................ -- -- 0.1 0.3 (0.2) (0.2) 0.3 0.3
Income (loss) before income taxes ..... (1.4) (4.0) 2.6 6.6 (6.5) (6.5) (1.8) (1.8)
Income tax provision (benefit) ........ 4.7 13.3 -- -- 4.4 4.4 (3.3) (3.2)
Net income (loss) ..................... (6.1) (17.3) 2.6 6.6 (10.9) (10.9) 1.5 1.4
Three Months Ended September 30, 2002 and 2001
Net sales increased $3.7 million, or 10.5%, to $39.0 million for the three
months ended September 30, 2002, from $35.3 million for the same period in 2001.
The increase was a result of increased shipments as a result of improved sales
in the publishing industry.
Gross profit increased $3.2 million, or 42.7%, to $10.7 million for the
three months ended September 30, 2002, from $7.5 million for the same period in
2001. The increase was primarily due to lower material and labor costs as a
percentage of sales due to reductions in personnel and operating efficiencies
complemented by higher sales volumes as discussed above. The gross margin
increased 6.2% to 27.4% for the three months ended September 30, 2002, from
21.2% for the same period in 2001.
Operating expenses decreased $900,000, or 15.8%, to $4.8 million for the
three months ended September 30, 2002, from $5.7 million for the same period in
2001. The decrease was due primarily to reduction in administrative staff and
the elimination of goodwill amortization ($670,000 recognized in 2001) in
accordance with the adoption of "SFAS 142".
Interest expense remained unchanged at $3.2 million for the three months
ended September 30, 2002 and 2001. This was due to a decrease in borrowings on
the revolving loan offset by an increase in capital leases for equipment.
For the quarter ended September 30, 2002 the Company recorded no tax
expense or benefit compared to a tax expense of $4.7 million for the same period
in 2001. The Company did not record a tax benefit for the quarter ended
September 30, 2002, and recorded a charge in the same period in 2001 because of
the uncertainty of the Company realizing the benefit of the loss in future
periods.
The Company realized net income in the amount of $2.6 million for the
three months ended September 30, 2002, compared to a net loss of $6.1 million
for the same period in 2001. The change in net income was due to the factors
described above.
9
Nine Months Ended September 30, 2002 and 2001
Net sales increased $3.6 million, or 3.6%, to $103.4 million for the nine
months ended September 30, 2002, from $99.8 million for the same period in 2001.
The increase was a result of increased shipments as a result of improved sales
in the publishing industry.
Gross profit increased $3.3 million, or 16.2%, to $23.7 million for the
nine months ended September 30, 2002, from $20.4 million for the same period in
2001. The increase was primarily due to lower material and labor costs as a
percentage of sales due to reductions in personnel and operating efficiencies
complemented by higher sales volumes as discussed above. The gross margin
increased 2.5% to 22.9% for the nine months ended September 30, 2002, from 20.4%
for the same period in 2001.
Operating expenses decreased $2.1 million, or 11.9%, to $15.6 million for
the nine months ended September 30, 2002, from $17.7 million for the same period
in 2001. The decrease was due primarily to reduction in administrative staff and
the elimination of goodwill amortization ($2.0 million recognized in 2001) in
accordance with the adoption of "SFAS 142".
Interest expense increased $200,000, or 2.1%, to $9.6 million for the nine
months ended September 30, 2002, from $9.4 million for the same period in 2001.
The increase is primarily due to increased borrowings in the first two quarters
of the year under the Company's Senior Credit Facility.
For the nine months ended September 30, 2002, the Company recorded a tax
benefit of $3.3 million compared to a tax expense of $4.4 million for the same
period in 2001. The effective rate for the nine month period ended September 30,
2002 was a benefit of 183.3% compared to an expense of 67.7% for the same period
in 2001. The change in the effective rate for the nine 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 nine
month period ended September 30, 2002, due to the uncertainty of the realization
of the Company's net operating losses generated during the period.
The Company realized net income in the amount of $1.5 million for the nine
months ended September 30, 2002, compared to a net loss of $10.9 million for the
same period in 2001. The change in net income was due to the factors described
above.
Liquidity and Capital Resources
During the first nine months of 2002, the Company used approximately
$59,000 of cash. Net cash provided in operating activities was approximately
$1.2 million, which consisted principally of net income of $1.5 million and
non-cash expenses of $6.4 million, consisting primarily of $8.1 million in
depreciation and amortization expense, a ($3.3) million valuation allowance
adjustment, a $1.3 million lease termination charge and approximately $300,000
in bad debt provisions, offset by investments in additional working capital of
$6.7 million. Investing activities resulted in a use of cash of approximately
$400,000 due to increases in investment in plant and equipment. Net cash used in
financing activities was approximately $800,000, resulting from a reduction in
borrowings of $700,000 under the Senior Credit Facility and payments of
approximately $100,000 on long term borrowings.
Working capital increased $5.2 million to $13.2 million as at September
30, 2002, from $8.0 million at December 31, 2001. This increase is primarily
attributable to an increase in accounts receivable of $3.2 million, and a
reduction in accounts payable and accrued liabilities of $1.7 million and $2.0
million, respectively, offset by an increase in the current portions of long
term debt of $1.1 million.
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, which are projected to be minimal
for the
10
fourth quarter, and internal growth for the remainder of 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.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated, under the supervision and with the participation of the Company's
management, the Company's internal controls and disclosure controls procedures
within 90 days of the filing of this quarterly report. Based on that evaluation,
Messrs LaSorsa and Lieberman have concluded that the Company's disclosure
controls and procedures are functioning effectively in timely alerting them to
material information that is required to be included in the periodic reports
that the Company must file with the Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of that evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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 September 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
Eagle 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. As
of September 30, 2002, the Company has reserved the entire balance originally
paid to Motion Technology Horizons, Inc.
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 identify the specific accounts at issue
and state a claim on which relief may be granted. On October 29, 2002, the Court
issued an Order denying the motions to dismiss filed by Phoenix and
TechniGraphix. The case is in the very 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.
12
Item 2. Change in Securities and Use of Proceeds.
None.
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)
2.2 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)
2.3 Stock Purchase Agreement dated as of December 27, 1995 among the
Company and various stockholders of New England Book Holding
Corporation. (1)
2.4 Plan and Agreement of Merger of Phoenix Color Corp. (New York) into
Phoenix Merger Corp. (Delaware). (1)
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-Laws of the Company. (1)
4.1 Note Purchase Agreement dated January 28, 1999 among the Company,
the Guarantors and the Initial Purchasers. (2)
4.2 Indenture dated as of February 2, 1999 among the Company, the
Guarantors and Chase Manhattan Trust Company, National Association,
Trustee. (2)
4.3 Registration Rights Agreement dated as of February 2, 1999 among the
Company, the Guarantors and the Initial Purchasers. (2)
4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2).
(2)
4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit
4.2). (2)
4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2).
(2)
4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit
4.2). (2)
10.1 Employment Agreement dated as of February 12, 1999 between the
Company and Jack L. Tiner. (2)
13
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). (2)
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. (4)
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. (4)
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. (5)
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. (6)
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. (7)
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. (8)
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. (8)
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. (9)
10.5 Revolving Credit Note dated as of September 15, 1998 executed by the
Company and the Guarantors. (2)
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). (3)
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). (2)
10.8 Subsidiary Pledge Agreement dated as of September 15, 1998 executed
by the Company (schedules omitted). (2)
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. (2)
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. (2)
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. (2)
10.13 Executive Employment Agreement by and between Phoenix Color Corp.
and John Carbone dated August 16, 2002.
10.14 Executive Employment Agreement by and between Phoenix Color Corp.
and Louis LaSorsa dated August 16, 2002.
10.15 Executive Employment Agreement by and between Phoenix Color Corp.
and Edward Lieberman dated August 16, 2002.
10.16 Phoenix Color Corp. 2002 Stock Incentive Plan.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
14
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-50995), filed on April 24, 1998.
(2) Incorporated by reference to the Company's Amendment No. 1 on Form
S-4 to Registration Statement on Form S-1 (SEC File No. 333-50995),
filed on March 8, 1999.
(3) Incorporated by reference to the Company's Amendment No. 2 on Form
S-4 to Registration Statement on Form S-1 (SEC File No. 333-50995),
filed on May 5, 1999.
(4) Incorporated by reference in the Company's 1999 Annual Report on
Form 10-K filed on March 29, 2000. (SEC File. No. 333-50995).
(5) Incorporated by reference in the Company's 1999 Quarterly Report on
Form 10-Q filed on November 14, 2000. (SEC File No. 333-50995).
(6) Incorporated by reference in the Company's 2000 Annual Report on
Form 10-K filed on April 2, 2001. (SEC File No. 333-50995).
(7) Incorporated by reference in the Company's 2001 Quarterly Report on
Form 10-Q filed on August 14, 2001. (SEC File No. 333-50995).
(8) Incorporated by reference in the Company's 2001 Annual Report on
Form 10-K filed on March 26, 2002. (SEC File No. 333-50995).
(9) Incorporated by reference in the Company's 2002 Quarterly Report on
Form 10-Q filed May 15, 2002 (SEC File No. 333-50995).
(b) Reports on Form 8-K
None.
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: November 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
CERTIFICATIONS*
I, Louis LaSorsa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Phoenix Color
Corp.,
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date : November 13, 2002
/s/ Louis LaSorsa
- ---------------------------
Louis LaSorsa, Chairman
and Chief Executive Officer
17
CERTIFICATIONS*
I, Edward Lieberman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Phoenix Color
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date : November 13, 2002
/s/ Edward Lieberman
- -----------------------------------------
Edward Lieberman, Chief Financial Officer
and Chief Accounting Officer
18