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 March 31, 2003
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 v 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 by check v whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of May 12, 2003, there were 11,100 shares of the Registrant's Class A
Common Stock issued and outstanding and 7,794 of the Registrant's Class B Common
Stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
Page No.
--------
Consolidated Balance Sheets
December 31, 2002 and March 31, 2003 1
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2003 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2003 3
Notes to Consolidated Financial Statements 4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2003
(Audited) (Unaudited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 109,297 $ 56,977
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,524,631 in 2002 and $1,471,437 in 2003 ............................... 18,343,018 19,553,518
Inventory ................................................................ 6,198,822 5,989,437
Income tax receivable .................................................... 481,138 485,832
Prepaid expenses and other current assets ................................ 2,645,563 2,083,615
------------- -------------
Total current assets ............................................... 27,777,838 28,169,379
Property, plant and equipment, net ............................................. 62,254,886 60,018,858
Goodwill ....................................................................... 13,302,809 13,302,809
Deferred financing costs, net .................................................. 2,885,048 2,745,936
Other assets ................................................................... 13,304,922 13,423,403
------------- -------------
Total assets ....................................................... $ 119,525,503 $ 117,660,385
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable ............................................................ $ 545,592 $ 545,592
Capital lease obligations ................................................ 725,060 752,663
Accounts payable ......................................................... 7,344,110 7,295,210
Accrued expenses ......................................................... 11,162,492 8,789,036
------------- -------------
Total current liabilities .......................................... 19,777,254 17,382,501
10 3/8% Senior subordinated notes .............................................. 105,000,000 105,000,000
MICRF Loan ..................................................................... 500,000 500,000
Notes payable .................................................................. 409,194 272,796
Capital lease obligations ...................................................... 3,364,187 3,165,844
Revolving line of credit ....................................................... 9,082,100 10,961,312
Deferred income taxes .......................................................... 625,457 625,457
------------- -------------
Total liabilities .................................................. 138,758,192 137,907,910
------------- -------------
Commitments and contingencies (Note 7)
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share, authorized
20,000 shares, 14,560 issued shares, 11,100 outstanding shares ..... 146 146
Common Stock, Class B, non-voting, par value $0.01 per share, authorized
200,000 shares, 9,794 issued shares, 7,794 outstanding shares ...... 98 98
Additional paid in capital ............................................... 2,126,804 2,126,804
Accumulated deficit ...................................................... (19,561,675) (20,580,111)
Stock subscriptions receivable ........................................... (28,832) (25,232)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit ........................................ (19,232,689) (20,247,525)
------------- -------------
Total liabilities & stockholders' deficit .......................... $ 119,525,503 $ 117,660,385
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
------------------------------
2002 2003
------------ ------------
Sales ...................................... $ 30,221,841 $ 33,822,319
Cost of sales .............................. 25,423,288 26,856,721
------------ ------------
Gross profit ............................... 4,798,553 6,965,598
------------ ------------
Operating expenses:
Selling and marketing expenses ......... 1,961,090 1,926,532
General and administrative expenses .... 3,272,550 3,086,554
Gain on sale of equipment .............. (31,230) (72,490)
------------ ------------
Total operating expenses ................... 5,202,410 4,940,596
------------ ------------
Income (loss) from operations .............. (403,857) 2,025,002
Other expenses:
Interest expense ....................... 3,128,077 3,074,145
Other income ........................... (18,353) (30,707)
------------ ------------
Loss before income taxes ................... (3,513,581) (1,018,436)
Income tax benefit ......................... (3,269,000) --
------------ ------------
Net loss ................................... $ (244,581) $ (1,018,436)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
2002 2003
----------- -----------
Operating activities
Net loss .......................................................................... $ (244,581) $(1,018,436)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property, plant and equipment ............ 2,507,202 2,526,780
Amortization of deferred financing costs .................................. 159,364 139,112
Provision for uncollectible accounts ...................................... 96,244 136,121
Deferred income taxes ..................................................... (3,269,000) --
Gain on disposal of assets ................................................ (31,230) (72,490)
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable ....................................................... (238,543) (1,346,621)
Inventory ................................................................. (13,768) 209,385
Prepaid expenses and other assets ......................................... (96,789) 839,858
Accounts payable .......................................................... (67,380) (120,822)
Accrued expenses .......................................................... (2,522,456) (2,373,456)
Income tax refund receivable .............................................. 686,121 (4,694)
----------- -----------
Net cash used in operating activities ............................. (3,034,816) (1,085,263)
----------- -----------
Investing activities:
Capital expenditures ...................................................... (2,401) (288,840)
Proceeds from sale of fixed assets ........................................ 31,230 142,500
Equipment deposits ........................................................ (103,735) (396,391)
----------- -----------
Net cash used in investing activities ................................ (74,906) (542,731)
----------- -----------
Financing activities:
Net borrowings from revolving line of credit .............................. 3,622,232 1,879,212
Principal payments on long term borrowings ................................ (3,409) (307,138)
Payment of stock subscription ............................................. 9,600 3,600
----------- -----------
Net cash provided by financing activities ............................ 3,628,423 1,575,674
----------- -----------
Net (decrease) increase in cash
518,701 (52,320)
Cash and cash equivalents at beginning of period .................................. 122,101 109,297
----------- -----------
Cash and cash equivalents at end of period ........................................ $ 640,802 $ 56,977
=========== ===========
Non-cash investing and financing activities:
Equipment included in accounts payable ............................... $ 45,827 $ 71,922
=========== ===========
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), necessary to present fairly the Company's financial position as of
March 31, 2003, and the results of its operations for the three month period
ended March 31, 2003 and 2002. The unaudited interim financial statements should
be read in conjunction with the Company's audited Consolidated Financial
Statements for the year ended December 31, 2002, included in the Company's
Annual Report filed on Form 10-K.
2. Inventory.
Inventory consists of the following:
December 31, 2002 March 31, 2003
----------------- --------------
Raw materials ........................ $4,477,238 $4,050,891
Work in process ...................... 1,721,584 1,938,546
---------- ----------
$6,198,822 $5,989,437
========== ==========
3. Other Assets.
Other assets at December 31, 2002 and March 31, 2003 include equipment
deposits of $2,988,457 and $3,384,848, respectively.
4. Accrued Expenses.
Accrued expenses at December 31, 2002 and March 31, 2003 include accrued
interest expense of $4,554,905 and $1,848,206, respectively.
5. 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, 2003 to March 31, 2003:
January 1, March 31,
2003 2003
Type of Cost Balance Additions Deductions Balance
----------- ----------- ------------ ------------
Lease termination costs $2,597,000 -- $ 54,000 $2,543,000
4
6. 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, and 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 December 31, 2002 and March 31, 2003, 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 March 31, 2003, the
Company employed over 600 people in the State of Maryland.
7. 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.
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. The Company
and Krause are currently negotiating a settlement of the monies due the Company.
The terms on which the Company believes this matter will be settled are as
follows: $1.4 million, comprised of a down payment of $200,000
5
and four annual installments of $300,000, to be paid beginning in January 2004.
There can be no assurances that such a settlement will be reached. As a result
of these developments, the Company recognized a non-cash charge of approximately
$745,000 in the fourth quarter of 2002. As of December 31, 2002 and March 31,
2003, the Company included in other non-current assets a receivable from Krause
of approximately $1.2 million.
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 period for discovery has been concluded in accordance with
the original scheduling order of the Court, although Phoenix has moved to extend
the period of discovery based on certain information discovered during the
initial discovery period. On April 7, 2003, Xerox moved for a partial summary
judgment against Phoenix based on $2 million of Xerox's claims. On April 21,
2003, Phoenix filed its opposition to Xerox's motion and moved for summary
judgment. Xerox's opposition to Phoenix's motion for summary judgment is due May
8, 2003.
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of its business. Although the
outcome of these claims and lawsuits against the Company can not be accurately
predicted the Company does not believe that any of the claims and lawsuits
described above or in this paragraph, individually or in the aggregate, will
have a material adverse effect on its business, financial condition, results of
operations and cash flows for any quarterly or annual period.
8. 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.
9. Income Taxes.
The Company did not recognize an income tax benefit for its pre-tax loss
during the three months ended March 31, 2003, due to the uncertainty of the
utilization of its deferred tax asset. The Company's effective tax rate for the
three months ended March 31, 2002 was a benefit of 93.0% due to the impact of
the reversal of $3.3 million of the Company's valuation allowance associated
with net operating loss carry forwards which were 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.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Some of the statements in this Annual Report on Form 10-K are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include our indications
regarding our intent, beliefs or current expectations. In some cases, you can
identify forward-looking statements by terminology such as "may," "estimates,"
"anticipates," "intends," "will," "should," "could," "expects," "believes,"
"continues" or "predicts." These statements involve a variety of known and
unknown risks, uncertainties, and other factors that may cause our actual
results to differ materially from intended or expected results. These factors
include (i) the risk factors and other information presented in our 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
our current operations, remaining capital expenditures and internal growth for
the year 2003, and (iii) the outcome of any claims and lawsuits filed,
threatened to be filed or pending against us. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We expressly decline any 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.
The following discussion and analysis should be read in conjunction with
our unaudited Consolidated Financial Statements and the Notes thereto included
elsewhere in this Form 10-Q.
Critical Accounting Policies
The preparation of financial statements requires us to make difficult and
subjective estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We continually re-evaluate our estimates, including those
related to bad debts, inventories, goodwill, income taxes, restructuring,
contingencies and litigation. We base our estimates and judgments on historical
experience and on various other assumptions which we believe are reasonable
under the circumstances and are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
Revenue Recognition
We recognize revenue upon shipment of our products to or on behalf of our
customers.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments for products
shipped. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances might be
7
required. As of March 31, 2003, our accounts receivable balance, net of
allowances for doubtful accounts and rebates of $1.5 million, was $19.6 million.
Inventory
Our inventory is stated at the lower of cost or market value, as
determined under the first-in, first-out ("FIFO") method.
Intangible Assets
Our goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible assets acquired. For the years prior to 2002,
we amortized our goodwill over the estimated useful life of the assets to which
it related. Our total goodwill of $13.3 million consists of $4.7 million and
$8.6 million associated with the 1996 and 1999 acquisitions of New England Book
Holding Corporation, and Mid-City Lithographers, Inc., respectively. Effective
January 1, 2002, we adopted the Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") and ceased to
amortize goodwill. We test for impairment to the value of goodwill based on a
comparison of undiscounted cash flow to the recorded value. We test goodwill for
impairment at least annually, but more often when circumstances or events so
dictate. We performed the required annual test and determined that goodwill was
not impaired. If actual market conditions deteriorate from those we projected,
or if other events or circumstances occur that would reduce the recorded value
of goodwill below undiscounted cash flow, we might be required to recognize
impairment charges to our goodwill.
Long Lived Assets
We evaluate quarterly the carrying value of property, equipment and
tangible assets for impairment. We consider our historical performance and
anticipated future results by evaluating the carrying value of the assets in
relation to the operating performance of the business and future undiscounted
cash flows expected to result from the use of these assets. We recognize an
impairment loss on assets when the value of the assets is less than the sum of
the expected cash flows from those assets.
Restructuring
As part of our restructuring costs, we provided for the estimated cost of
the net lease expense for facilities that are no longer being used. The cost is
based on the contractual future minimum lease payments reduced by estimated
future sublease receipts. At March 31, 2003, our accrued restructuring liability
related to net lease payments and other related charges was $2.5 million. We may
incur additional restructuring charges if market conditions are less favorable
than we originally projected.
Deferred Tax Valuation Allowance
As of March 31, 2003, we recorded a valuation allowance of $6.8 million
against our total deferred tax assets of approximately $13.5 million. Statement
of Financial Accounting Standards No. 109 ("SFAS No. 109") requires us to
evaluate the likely realization of the tax asset, and if evidence exists that
would create doubt as to the realization of the tax asset, to provide an
allowance against it. Our results over the past three years created a large
cumulative loss and represented sufficient negative evidence to require us to
provide for a valuation allowance against the tax asset. We intend to maintain
this valuation allowance until such time as sufficient positive evidence exists
to support its reversal.
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 March 31,
2003 % 2002 %
------ ----- ------ -----
Sales .................................. $ 33.8 100.0 $ 30.2 100.0
Cost of sales .......................... 26.9 80.0 25.4 84.1
Gross profit ........................... 6.9 20.0 4.8 15.9
Operating expenses ..................... 4.9 14.5 5.2 17.2
Income (loss) from operations .......... 2.0 5.5 (0.4) (1.3)
Interest expense ....................... 3.0 8.8 3.1 10.3
Loss before income taxes ............... (1.0) (3.3) (3.5) (11.6)
Income tax benefit ..................... -- -- (3.3) (10.9)
Net loss ............................... (1.0) (3.3) (0.2) (0.7)
Three Months Ended March 31, 2003 and 2002
Net sales increased $3.6 million, or 11.9%, to $33.8 million for the three
months ended March 31, 2003, from $30.2 million for the same period in 2002. The
increase occurred as a result of increased sales volume in all business units,
which resulted from strong sales efforts combined with, our manufacturing to
meet our customers' time sensitive delivery requirements.
Gross profit increased $2.1 million, or 43.8%, to $6.9 million for the
three months ended March 31, 2003, from $4.8 million for the same period in
2002. This increase was primarily the result of increased sales combined with
increases in the gross margin, due to reductions in material, labor and overhead
costs as a percentage of sales resulting from our focus on cost control
measures.
Operating expenses decreased $300,000 or 5.8% to $4.9 million for the
three months ended March 31, 2003, from $5.2 million for the same period in
2002. The decrease was due to cost control measures adopted by Phoenix with no
individual expense category accounting for a significant amount.
Interest expense decreased $100,000 to $3.0 million for the three months
ended March 31, 2003, from $3.1 million for the same period in 2002, primarily
due to reductions in borrowings under the revolving line of credit.
For the quarter ended March 31, 2003, we did not record a tax benefit due
to the uncertainty of realizing our deferred tax asset. For the three months
ended March 31, 2002, we recorded a tax benefit of $3.3 million due to the
carryback of net operating losses permitted by the passage of the Jobs Creation
and Workers Assistance Act in March 2002.
Net loss increased $800,000 or 400% to $1.0 million for the three months
ended March 31, 2003, from $200,000 for the same period in 2002. The change in
net loss was due primarily to the absence of a tax benefit in the first quarter
of 2003, as described above.
9
Liquidity and Capital Resources
During the first three months of 2003, we used approximately $50,000 of
cash. Net cash used in operating activities was approximately $1.1 million,
which consisted principally of a net loss of $1.0 million reduced by non-cash
expenses of $2.7 million, offset by investment in additional working capital of
$2.8 million. Net cash used in investing activities was $540,000 due to capital
and equipment expenditures. Net cash provided by financing activities was $1.6
million, resulting from borrowings on the Senior Credit Facility reduced by
repayments of long term borrowings associated with capital leases.
Working capital increased $2.8 million to $10.8 million as of March 31,
2003, from $8.0 million at December 31, 2002. This increase is primarily
attributable to a decrease in accrued liabilities of $2.4 million due to the pay
the pay down of accrued interest on the Senior Subordinated Notes, and an
increase in accounts receivable of $1.2 million resulting from increased sales.
We historically have financed our operations with internally generated
funds, external short and long-term borrowings and operating leases. We believe
that funds generated from operations, together with existing cash amounts,
available credit under the Senior Credit Facility ($9.3 million as of March 31,
2003) and other financial sources will be sufficient to finance our current
operations, remaining capital expenditure requirements and internal growth for
the year 2003. Should we fail to achieve results in 2003 equal at least to the
year 2002, or should a decrease in demand for our 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 our business
prospects or results of operations.
If we 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.
We have no current agreements with respect to any acquisitions.
In April 2003, we contracted for the acquisition of a $1.8 million eight
color printing press to manufacture book components. The equipment vendor has
agreed to accept installment payments over a six month period commencing upon
delivery of the press and we intend to pay for it through operating cash flows.
The following is a summary of our future payments under contractual
obligations as of March 31, 2003. In the event of a default, many of the
contracts provide for acceleration of payments.
Payments Due by Period
(in thousands of dollars)
Contractual Obligations Less than 1-3 4-5 After
Total 1 year years Years 5 years
Long-Term Debt ......................... $105,819 $ 546 $ 273 $ -- $105,000
Capital Lease Obligations .............. 4,430 1,013 2,026 1,391 --
Operating Leases ....................... 29,285 6,529 12,781 9,060 915
Unconditional Purchase Obligations ..... -- -- -- -- --
Other Long-Term Obligations ............ -- -- -- -- --
--------------------------------------------------------
Total Contractual Cash Obligations ..... $139,534 $8,088 $15,080 $10,451 $105,915
========================================================
10
The following is a summary of our other commercial commitments by
commitment expiration date as of March 31, 2003:
Amount of Commitment Expiration Per Period
(in thousands of dollars)
Less than 1-3 4-5 After
Other Commercial Commitments Total 1 year Years years 5 years
Lines of Credit ..................... $20,000 $ -- $20,000 $ -- $ --
Standby Letter of Credit ............ -- -- -- -- --
Guarantees .......................... -- -- -- -- --
Standby Repurchase Obligations ...... -- -- -- -- --
Other Commercial Commitments ........ -- -- -- -- --
------- ------- ------- ------- -------
Total Commercial Commitments ........ $20,000 $ -- $20,000 $ -- $ --
======= ======= ======= ======= =======
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company believes its current exposure to interest rate changes is
immaterial because approximately 91% 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.
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
11
equipment, which included amounts for deposits on the balance of the equipment
not yet delivered. On January 27, 2000, the court granted summary judgment in
favor of the Company with respect to the three machines previously delivered to
the Company. On October 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. The Company and Krause are currently negotiating a settlement of
the monies due the Company. The terms on which the Company believes this matter
will be settled are as follows: $1.4 million, comprised of a down payment of
$200,000 and four annual installments of $300,000, to be paid beginning in
January 2004. There can be no assurances that such a settlement will be reached.
As a result of these developments, the Company recognized a non-cash charge of
approximately $745,000 in the fourth quarter of 2002. As of December 31, 2002
and March 31, 2003, the Company included in other non-current assets a
receivable from Krause of approximately $1.2 million.
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 period for discovery has been concluded in accordance with
the original scheduling order of the Court, although Phoenix has moved to extend
the period of discovery based on certain information discovered during the
initial discovery period. On April 7, 2003, Xerox moved for a partial summary
judgment against Phoenix based on $2 million of Xerox's claims. On April 21,
2003, Phoenix filed its opposition to Xerox's motion and moved for summary
judgment. Xerox's opposition to Phoenix's motion for summary judgment is due May
8, 2003.
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of its business. Although the
outcome of these claims and lawsuits against the Company can not be accurately
predicted the Company does not believe that any of the claims and lawsuits
described above or in this paragraph, individually or in the aggregate, will
have a material adverse effect on its 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.
Item 3. Defaults upon Senior Securities.
None.
12
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.
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)
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)
13
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)
10.14 Executive Employment Agreement by and between Phoenix Color Corp.
and Louis LaSorsa dated August 16, 2002. (10)
10.15 Executive Employment Agreement by and between Phoenix Color Corp.
and Edward Lieberman dated August 16, 2002. (10)
10.16 Phoenix Color Corp. 2002 Stock Incentive Plan. (10)
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. for the period ended March 31, 2003.
99.2 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., for the period ended March 31, 2003.
(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).
(10) Incorporated by reference in the Company's 2002 Quarterly Report on
Form 10-Q filed November 13, 2002 (SEC File No. 333-50995
(b) Reports on Form 8-K
None.
14
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: May 13, 2003
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
15
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: May 13, 2003
/s/ Louis LaSorsa
- ------------------------------
Louis LaSorsa, Chairman
and Chief Executive Officer
16
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: May 13, 2003
/s/ Edward Lieberman
- -----------------------------------------
Edward Lieberman, Chief Financial Officer
and Chief Accounting Officer
17