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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
333-50995
Commission File Number
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)
(301) 733-0018
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of June 30, 2003, Phoenix had no voting or non-voting common equity
registered under the Securities Exchange Act of 71934, as amended. There is no
trading market for the common equity of Phoenix.
As of March 15, 2004, there were 11,100 shares of Phoenix's Class A Common
Stock issued and outstanding and 7,794 of Phoenix's Class B Common Stock issued
and outstanding.
Documents Incorporated by Reference
None.
Table of Contents
Item No. Name of Item Page No.
Part I
Item 1. Business ..................................................... 2
Item 2. Properties ................................................... 8
Item 3. Legal Proceedings ............................................ 9
Item 4. Submission of Matters to a Vote of Security Holders .......... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................ 9
Item 6. Selected Consolidated Financial Data ......................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ... 20
Item 8. Financial Statements and Supplementary Data .................. 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 20
Item 9A Controls and Procedures ...................................... 20
Part III
Item 10. Directors and Executive Officers of the Registrant ........... 21
Item 11. Executive Compensation ....................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ................. 27
Item 13. Certain Relationships and Related Transactions ............... 28
Item 14 Principal Accountant Fees and Services ....................... 28
Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................... 29
1
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 2004, 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.
PART I
EXPLANATORY NOTE
During 2003, the Company determined that its revolving line of credit
should have been classified as a current liability. The 2002 consolidated
balance sheet has been restated to reflect this change, which had the impact of
increasing current liabilities by $9,082,100 at December 31, 2002.
ITEM 1. BUSINESS
Unless the context requires otherwise, "Phoenix," "we," "us," and "our"
refers to Phoenix Color Corp. and its subsidiaries.
Overview
We manufacture books and book components. We manufacture heavily
illustrated multicolor books and one and two color hard and soft cover books.
Book components include book jackets, paperback covers, pre-printed case covers
for hardcover books, illustrations, endpapers and inserts. We generate revenues
primarily through the sale of books and book components to book publishers. Book
publishers generally design book components to enhance the sales appeal of the
books. The production of book components requires specialized equipment,
materials and finishes and often demands high-quality, intricate work. As a
result, many leading publishers rely on specialty printers such as Phoenix to
supply high quality book components
In developing and growing our business, we have emphasized:
o Technologically advanced prepress and manufacturing equipment and
efficient production techniques;
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o Computer managed information systems that link all of our facilities
and customers and furnish real time operating data;
o Fast turnaround times made possible by our state-of-the-art
manufacturing equipment, the strategic location of our four plants
near major delivery points and the use of our own delivery trucks;
o Long-term relationships with suppliers of important raw materials
such as paper, laminating film and ink; and
o Highly motivated and trained sales personnel.
History
Phoenix was founded in 1979 by a group of fifteen printing industry
veterans, including Louis LaSorsa, our Chairman, President and Chief Executive
Officer. Initially, we focused on supplying book components for the higher
education and professional reference markets but in subsequent years expanded
into other segments of the publishing industry. In 1998, we began manufacturing
heavily illustrated multicolor books, and in 1999, one and two color hard and
soft cover books. We originally conducted our operations in a single production
facility in Long Island City, New York. In 1993, we moved the major portion of
our business to Hagerstown, Maryland. In December 2000, we closed the book
component manufacturing facility we previously operated in Taunton,
Massachusetts. We currently operate a total of four plants in the States of
Maryland and New Jersey and maintain a sales office in New York.
We were incorporated in the State of New York in 1979 and reincorporated
by merger in the State of Delaware in 1996. Our headquarters is at 540 Western
Maryland Parkway, Hagerstown, Maryland 21740 and our telephone number is (301)
733-0018.
Restructuring
During 2000, we announced a plan to restructure our operations, which
resulted in our closing a subsidiary operation and our Taunton, Massachusetts
facility. We negotiated settlements with respect to certain operating leases for
equipment previously included in our restructuring provision, which resulted in
a reduction of $304,000 and $2,181,000 in the years 2001 and 2003, respectively.
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The following table displays the activity and balances of the
restructuring accrual account from January 1, 2000 to December 31, 2003:
Lease
Termination Facility
Costs Closing Totals
----------------------------------------------------
January 1, 2000 ................... $ -- $ -- $ --
Additions ......................... 3,729,000 325,000 4,054,000
Payments .......................... 73,000 325,000 398,000
----------------------------------------------------
Balance December 31, 2000.......... 3,656,000 -- 3,656,000
Reductions ........................ 304,000 -- 304,000
Payments .......................... 378,000 -- 378,000
----------------------------------------------------
Balance December 31, 2001......... 2,974,000 -- 2,974,000
Payments .......................... 377,000 -- 377,000
----------------------------------------------------
Balance December 31, 2002 ......... 2,597,000 -- 2,597,000
Reductions ........................ 2,181,000 -- 2,181,000
Payments .......................... 416,000 -- 416,000
----------------------------------------------------
Balance December 31, 2003 ......... $ -- $ -- $ --
====================================================
Manufacturing Operations and Technology
Order Processing.
Our customers transmit orders to our various plant locations by physical
delivery or electronic file transfer. After entering a customer order into our
order processing system, we monitor the order on a real-time basis throughout
the entire manufacturing process. Our management allocates work orders among our
plants through our data network to maximize plant efficiency and minimize
operating cost.
To limit the costs associated with maintaining inventory, many of our
customers have instituted inventory controls to limit the amount of inventory
held by them. As a result, we and other specialty printers are under increasing
pressure to process orders quickly and efficiently. We have been able to meet
the demands of our customers by investing in modern printing and finishing
equipment, and digital communications and information network, as well as
operating our facilities on a 24-hour basis, seven days a week. As an additional
service, we provide real-time job status and plant capacity information to our
customers over the Internet.
Digital Prepress Services.
We provide a complete range of prepress services, including color
separations, high speed imaging, assembly, electronic retouching, archiving,
digital file transfer, color-accurate digital proofing and computer generated
platemaking. We offer prepress services at each of our manufacturing facilities
as well as our New York City sales office. Our prepress services are linked
through a high speed telecommunications network. We do not rely on any
subcontractors for our prepress needs.
4
Printing and Finishing Services.
We manufacture book components, heavily illustrated multicolor books, and
one and two color hard and soft cover books. We manufacture book components by
using 19 modern high-speed, sheet-feed offset lithographic printing presses
capable of printing up to eight colors in a single pass, some of which can print
both sides of the sheet at the same time, and most with inline coaters. We
protect the manufactured book components by applying an ultraviolet liquid
coating or laminating different types of film such as polypropelene and mylar.
We also offer a plethora of in-house services, including foil stamping, selected
and overall embossing, selected and overall liquid coatings and die cutting.
We produce heavily illustrated multicolor books in our manufacturing plant
in New Jersey, which has three presses capable of printing up to eight or ten
colors on a single side or four or five colors on each side during a single
pass. These presses employ roll stand technology, which sheets the paper as it
enters the press, (thereby eliminating the need to sheet paper off line) and
continually add paper to the feeder system of the press. We offer several
varieties of binding styles including smythe sewn, side sewn and thread seal for
hard cover books in addition to gluing for both hard cover and soft cover books.
We print one and two color hard and soft cover books in our manufacturing
plant in Maryland, which has two single color web presses and two two-color web
presses. Our workflow for the production of books is completely digital. In
connection with the manufacture of books, we offer perfect binding, saddle wire
binding and hard cover casing-in.
Distribution and Logistics.
We operate our own tractor-trailers to deliver a majority of our products.
This enables us to reduce transportation costs and to save one or more days of
delivery time in fulfilling customer requirements. The tractor-trailers are also
used to distribute raw materials among our manufacturing plants.
Technology.
We continue to invest in new technology to ensure modern highly efficient
production capabilities. We archive negative film and digital files to
facilitate reorders. We also have state of the art printing presses, foil
stamping presses, finishing equipment and binding equipment.
Before printing, we provide customers with a color accurate digital proof
of their jobs, which our customers must approve. We can transfer digital files
within our facilities and to our customers who have been provided with the
appropriate equipment. Proofs for book manufacturing consist of bound galleys,
which are digitally printed and bound. We may also receive or transmit files
from or to our customers through the Internet in various formats, including PDF
and HTML, among others.
Raw Materials, Purchasing and Inventory
We use substantial quantities of paper, ink, laminating film, foil and
other materials in our operations. We generally favor "single sourcing" of our
various raw materials purchases. We believe that establishing strong commercial
relationships with a relatively small number of suppliers enables us to
negotiate favorable prices and to maintain reliable supplies of such materials.
Nevertheless, we are not party to any long-term supply agreements, are not
dependent on any single source for our raw materials and believe we could
replace any individual supplier without disruption to our business. We maintain
minimal inventories of our supplies. A change in suppliers could cause a delay
in manufacturing, and a
5
possible loss of sales, which could adversely affect operating results.
We generally obtain annual pricing commitments from our suppliers, but
such commitments are not legally binding. Nevertheless, our vendors have
historically complied with commitments made to us. We generally pass through
material costs to our customers and believe that in the event of material price
increases by vendors, we could pass such increases through to our customers.
We use centralized purchasing and storage for book component inventory at
the Hagerstown, Maryland plants in order to control raw material costs. Further,
we purchase paper in large rolls and convert the paper, using our own
computerized sheeters, into sheets in the sizes required by our presses. By
converting in excess of 30 million pounds of paper in-house annually, we are
able to reduce paper costs, avoid delays in obtaining properly sized sheets and
minimize the need to maintain an inventory of specific sheet paper sizes.
Trademarks
Phoenix owns trademarks that are used in the conduct of its business.
These trademarks are valuable assets, the most important of which are "Phoenix
Color," and "Phoenix Colornet."
Markets
We sell book components, heavily illustrated multicolor books, and one and
two color hard and soft cover books to publishers in all segments of the book
publishing market. Various segments of the book publishing market may respond to
different economic and other factors, and declines in one or more segments in a
given year may be offset by improvements in other segments. Accordingly, we view
our sales to a broad range of book publishing market segments as a competitive
strength.
Sales of book components represented 60.1%, 63.2% and 65.6% of our net
sales in the years ended December 31, 2003, 2002 and 2001, respectively. Sales
of book components for use in general interest books accounted for 52.1% of our
net book component sales for the year 2003, 47.8% for 2002 and 50.1% for 2001.
Sales of book components to publishers of educational materials accounted for
24.9% of net book component sales in 2003 and 2002 and 24.3% in 2001, and sales
to publishers of business-related books accounted for 6.9%, 9.4% and 7.8% of net
book component sales in 2003, 2002 and 2001, respectively. Sales of book
components to all other book publishers, accounted for 16.1%, 17.9% and 17.8% of
net book component sales in 2003, 2002 and 2001, respectively.
We began selling heavily illustrated multicolor books to publishers of
juvenile books in the fourth quarter of 1998. We are continuing to expand our
customer base of both juvenile and non-juvenile illustrated multicolor book
customers. Sales of heavily illustrated multicolor books represented 17.5%,
17.6% and 17.1% of our net sales for the years ended December 31, 2003, 2002 and
2001, respectively.
We opened our one and two color hard and soft cover book manufacturing
facility in Hagerstown, Maryland in July 1999. Sales of hard and soft cover
books represented 22.4%, 19.2% and 17.3% of our net sales for the years ended
December 31, 2003, 2002 and 2001, respectively. We manufacture hard and soft
cover books for virtually all segments of the book publishing industry.
Customers
We have a base of over 400 active customers, including many of the leading
publishing companies in the world. Among our largest customers are
HarperCollins, Pearson Publishing, Simon & Schuster, Random House, Holtzbrinck
Publishers, McGraw-Hill, Time Warner, Thomson Learning, John Wiley &
6
Sons, Thomas Nelson, Oxford University Press, and W.W. Norton, many of which
have been our customers since our inception in 1979. Many of these customers
have decentralized operations in which purchasing decisions are made by various
divisions. Pearson Publishing and HarperCollins Publishers accounted for 16.5%
and 15.3%, respectively, of our net sales in 2003. Harper Collins Publishers and
Pearson Publishing accounted for 14.1%, and 13.7%, respectively, of our net
sales in 2002. Our ten largest customers accounted for approximately 71.0% and
70.2% of net sales in 2003 and 2002, respectively. The loss of any one or more
of our ten largest customers would be detrimental to our operating results.
Sales
We have a direct sales force consisting of 21 sales representatives
located throughout the U.S. We reduced our sales force in 2003 by 14 people to
conform the number of sales personnel assigned to each territory to the size of
the market represented by that territory. We train our sales force to provide
superior service to customers, which we believe will allow us to capture a
greater share of the business from our existing publishing customers, and to
identify potential new customers, including smaller regional publishers. We
train our sales personnel in techniques of selling and technical training in the
manufacturing process. We have established a marketing department, which works
with our sales department to promote our services, including participating in
publishing industry trade shows.
Backlog
We do not operate with any backlog at our book component and heavily
illustrated multicolor books facilities. We pre-schedule orders at our one and
two color hard and soft cover book facility to insure each job is delivered on
the date wanted by the customer, but pre-scheduled jobs are not firm commitments
and are subject to cancellation by the customer. Both we and our customers share
the same goal: processing orders on demand in the shortest possible time frame.
Competition
The printing industry in general, and the printing and manufacturing of
books in particular, are extremely competitive. Over the past several years,
there has been significant consolidation in the publishing industry, such that
fewer publishers control a greater share of the market. Although there are still
many small, independent publishers, they do not wield the leverage held by major
publishing houses. In addition, many of the larger publishers have become part
of much larger media companies with in-house production capabilities, and are
driven to maximize profits. These factors have combined to cause pricing
pressures for book and book component manufacturers.
We compete in the printing and manufacturing of books with dominant
printers in the industry, consisting of R.R. Donnelley, Quebecor/World and Banta
Corporation, as well as smaller companies such as Von Hoffmann Corporation and
Courier Corp. All of the dominant printers and some of the smaller printers have
significantly more revenues and assets than us. We also compete with book
component printers, such as Coral Graphics, which offer services similar to ours
to the publishing industry.
Competitive factors in the printing of book components and the manufacture
of complete books include price, quality, speed of production and delivery, use
of technology and the ability to service specialized customer needs on a
consistent basis. Many of the largest publishers also have contracts with book
printers to insure that the publishers' products are printed on a preferred
basis in the event manufacturing availability becomes limited. The cost of
moving film or digital files from one printer to another is a disincentive for
publishers to order reprints from a printer other than the printer that
completed the original print job. In both the printing and manufacturing of
books and book components, we believe that we compete by offering a high level
of service that many customers, particularly medium sized
7
publishers, are unaccustomed to receiving from our competitors. We also compete
with our book component competitors by being able to perform in-house all
services required by publishers.
Employees
As of December 31, 2003, we had 769 employees, of whom 8 were engaged in
management, 38 in finance, administration and billing, 72 in sales, sales
support and customer service, 14 in information systems and technological
development, 15 in transportation and 622 in manufacturing. None of our
employees are represented by unions, and we believe we have satisfactory
relations with our workforce.
Working Capital
Through careful management, we have increased our working capital to $1.9
million at December 31, 2003 compared to a negative $1.7 million and negative
$4.4 million at December 31, 2002 and 2001, respectively. We maintain
inventories at the lowest levels possible while still fulfilling customer
orders, relying on our vendors to provide adequate inventory for delivery within
24 hours. We supply all of the materials for our book component and New Jersey
facilities, whereas certain large publishers provide paper at our one and two
color book manufacturing facility. We provide terms consistent with norms in the
industry for payment of invoices from customers. Smaller publishers generally
request more favorable payment terms, which we sometimes grant in accordance
with the publishers' respective financial stability, but never in excess of 90
days and with limits on overall credit advanced. We make no sales on
consignment.
ITEM 2. PROPERTIES
Our corporate and administrative offices are located in one of our two
adjacent manufacturing facilities in Hagerstown, Maryland. We lease various
manufacturing and regional sales offices. A summary of the location, size and
nature of the principal facilities appears below:
Leased/Owned; Square
Location Use Expiration Date Footage
- -------- --- --------------- -------
Hagerstown, MD Corporate offices; printing, prepress and Owned 114,000
finishing for book components
Hagerstown, MD Printing, prepress and finishing for book components Owned 86,000
New York City, NY Prepress and sales Leased; 10/31/09 11,000
Rockaway, NJ Printing, prepress and finishing for complete books Leased; 3/31/08 90,000
Hagerstown, MD Printing, prepress and binding for complete books Owned 170,000
All owned real property collateralizes our senior credit facility pursuant
to our Amended and Restated Credit Agreement with Wachovia Bank, N.A. dated
September 30, 2003 (the "Senior Credit Facility").
We believe that our existing facilities are suitable and adequate for our
current and short term future needs, without the necessity of major investment
in plant or equipment. We believe our book component and New Jersey facilities
operate at approximately 75% of capacity, while our Maryland book manufacturing
facility operates at approximately 50% of capacity.
8
ITEM 3. LEGAL PROCEEDINGS
On May 20, 2002, Xerox filed a complaint against Phoenix Color Corp. (for
purposes of this Item 3, "Phoenix") in the 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 our restructuring
plan in September 2000. On July 19, 2002, Xerox filed an amended complaint
naming Phoenix and TechniGraphix as defendants and alleging that Phoenix had an
account due and owing of $2.7 million and that Phoenix and TechniGraphix were
jointly liable for an account due and owing of $.5 million. We and Xerox engaged
in discovery and filed cross motions for summary judgment, resulting in Xerox's
claims against us being reduced to $1.9 million. On October 3, 2003, we mediated
the dispute and entered into a preliminary settlement agreement. We and Xerox
notified the court of settlement and, on October 21, 2003, the court dismissed
the case.
We are not a party to any other legal proceedings, other than claims and
lawsuits arising in the normal course of our business. Although the outcome of
claims and lawsuits against us can not be accurately predicted, we do not
believe that any potential claims and lawsuits existing as of the date of this
Annual Report on Form 10-K, will individually or in the aggregate, have a
material adverse effect on our business, financial condition, results of
operations and cash flows for any quarterly or annual period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No established public trading market exists for our Class A Common Stock
or Class B Common Stock. As of March 15, 2004 there were eleven holders of
record of our Class A Common Stock and two holders of record of our Class B
Common Stock.
We did not declare or pay any dividends on our capital stock in the past
three years. We expect to retain future earnings, if any, to finance the growth
and development of our business. Thus, we do not intend to declare or pay
dividends on our capital stock for the foreseeable future. Further, our Senior
Credit Facility prohibits, and the indenture governing our 10-3/8% Senior
Subordinated Notes (the "Indenture") restricts, the payment of dividends. Under
the terms of the Indenture, we may not pay dividends unless we are not in
default under the Indenture and we would, after giving effect to the dividend,
be in compliance with certain financial criteria, as set forth in the Indenture.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information is derived from our
Consolidated Financial Statements and related Notes thereto as of December 31,
1999 through 2003 and for the years then ended. PricewaterhouseCoopers LLP,
independent auditors, has audited our Consolidated Financial Statements for the
years ended December 31, 1999 through 2003. PricewaterhouseCoopers LLP's report
on our Consolidated Financial Statements as of December 31, 2002 and 2003 and
for each of the three years in the period ended December 31, 2003 is included as
Item 8 of this Form 10-K. The selected consolidated
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financial information set forth below should be read with our Consolidated
Financial Statements, the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Years Ended December 31,
1999(1) 2000 2001 2002 2003
------- ---- ---- ---- ----
(dollars in thousands)
Statement of Operations Data:
Sales .............................................. $ 141,338 $ 150,758 $ 132,260 $ 137,961 $ 136,676
Cost of sales ...................................... 109,357 121,742 107,590 107,556 108,917
Gross profit ....................................... 31,981 29,016 24,670 30,405 27,759
Operating expenses:
Selling and marketing expenses ..................... 5,688 6,840 7,721 7,652 6,633
General and administrative ......................... 17,168 17,511 15,619 12,172 13,455
(Gain) loss on sale of assets (2) .................. 358 2,630 122 (33) 614
Restructuring charge (credit) (3) .................. -- 11,425 (304) -- (2,181)
Impairment charge (4) .............................. -- -- -- 745 --
Lease termination charge (5) ....................... -- -- -- 1,760 --
Total operating expenses ........................... 23,214 38,406 23,158 22,296 18,521
Income (loss) from operations ...................... 8,767 (9,390) 1,512 8,109 9,238
Interest expense ................................... 14,939 12,943 12,374 12,675 12,066
Other (income) expense ............................. (282) (116) (253) 344 2
Loss before income taxes: .......................... (5,890) (22,217) (10,609) (4,910) (2,830)
Income tax (benefit) provision ..................... (1,046) (7,055) 4,400 (3,269) --
Net loss ........................................... $ (4,844) $ (15,162) $ (15,009) $ (1,641) $ (2,830)
Balance Sheet Data (at year end):
Cash and cash equivalents .......................... $ 271 $ 368 $ 122 $ 109 $ 64
Total assets ....................................... 151,505 133,072 122,402 119,044 111,780
Total debt (including capital lease obligations) ... 114,362 114,180 117,902 119,626 116,101
Total stockholders' equity (deficit) ............... 12,471 (2,653) (17,624) (19,233) (22,049)
Other Financial Data:
Depreciation and amortization expense .............. $ 15,637 $ 15,436 $ 13,955 $ 10,330 $ 10,631
Capital expenditures (6) ........................... 17,871 7,431 5,254 5,830 4,840
EBITDA (7) ......................................... 24,686 6,162 15,720 18,095 19,867
Ratio of earnings to fixed charges (8) ............. -- -- -- -- --
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(1) In January and February 1999, we acquired Mid-City Lithographers, Inc. and
TechniGraphix, Inc., respectively.
(2) Reflects non-cash (gains) and losses on sale of capital assets.
(3) Reflects, in 2000, a charge for closing the operations of TechniGraphix,
Inc. and the Taunton, Massachusetts facility, of which approximately $7.5
million are non-cash expenses, and in 2001 and 2003, reversals of part of
the charge due to a negotiated settlement of certain lease obligations.
(4) Reflects a charge for a decrease, under a settlement of a lawsuit, of the
amount owed to us by Krause America.
(5) Reflects a charge for the cancellation of a lease on the Taunton,
Massachusetts facility. See Note 5 of Notes to Consolidated Financial
Statements.
(6) Includes property and equipment acquired for cash or financed through
notes, deposits and capital leases. See Consolidated Statements of Cash
Flows in the Consolidated Financial Statements.
(7) EBITDA represents our net income before interest, income taxes,
depreciation and amortization. EBITDA is not a measure of financial
performance under GAAP and may not be comparable to other similarly titled
measures by other companies. EBITDA does not represent income or cash
flows from operations as defined by GAAP and does not necessarily indicate
that cash flows will be sufficient to fund cash needs. As a result, EBITDA
should not be considered an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA
is included in this Form 10-K because it is a basis on which we assess our
financial performance, and certain covenants in our borrowing agreements
are tied to similar measurements. See Consolidated Statements of Cash
Flows. The table below reflects how we calculate EBITDA.
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Pretax income (loss) .................... $ (5,890) $ (22,217) $ (10,609) $ (4,910) $ (2,830)
Interest expense ........................ 14,939 12,943 12,374 12,675 12,066
Depreciation and amortization expense ... 15,637 15,436 13,955 10,330 10,631
-------------------------------------------------------------------------
Total EBITDA ............................ $ 24,686 $ 6,162 $ 15,720 $ 18,095 $ 19,867
=========================================================================
(8) In calculating the ratio of earnings to fixed charges, earnings consist of
earnings before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs), whether expensed or
capitalized, and, that portion of rental expense on operating leases
estimated to be attributable to interest. For 1999, 2000, 2001 2002 and
2003 the ratio of earnings to fixed charges was less than one-to-one. The
dollar amount by which the earnings, as defined above, were insufficient
to cover fixed charges was $6.3 million, $22.2 million, $10.6 million $4.9
million and $2.8 million in the years 1999, 2000, 2001, 2002, and 2003,
respectively.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our "Selected Consolidated Financial Data" and the audited Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
Overview
In 2003, Phoenix's twenty-fifth year of operation, we reported sales of
$136.7 million, a decrease of 0.9% over the prior year. In recent years we have
seen a trend towards greater consolidation, such that fewer publishers control a
greater share of the market. In addition, larger publishers have become part of
much larger media companies with in-house capabilities and a drive to maximize
profits. Concurrently, we have seen a softening in the number and size of orders
to book manufacturers, creating excess capacity. These factors have combined to
cause pricing pressures for book and book component manufacturers.
Phoenix has responded to these developments by implementing cost cutting
initiatives and striving to increase efficiencies in the manufacturing process,
while reducing waste. We believe that the next few years will see a resurgence
in the book publishing industry, but we do not anticipate a material change in
current pricing patterns. We believe that we will be better positioned to
benefit from such resurgence due to cost cutting measures we have taken.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of
operations are based upon our Consolidated Financial Statements, which were
prepared in accordance with accounting principles generally accepted in the
United States. To prepare our financial statements, we must make certain
judgments and estimates which affect the reporting of assets and liabilities,
both real and contingent, and income and expenses. Assets and liabilities which
are continually re-evaluated include, but are not limited to, allowances for
doubtful accounts, inventories, goodwill, income taxes, restructuring,
contingencies and litigation. We use our best judgment when making estimates,
based on the current facts and historical experience with respect to numerous
factors that are difficult to predict and beyond management's control. Because
we are making judgments when we make estimates, actual results may differ
materially from these estimates. We believe our estimates are reasonable under
the circumstances based on our critical accounting policies used in preparing
our financial statements.
Management believes that the following policies are critical accounting
policies, as defined by the Securities and Exchange Commission (the "SEC"). The
SEC defines critical accounting policies as those that are both most important
to the portrayal of a company's financial condition and results of operations
and require management's most difficult, subjective or complex judgment, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain and might change in subsequent periods. We discuss our
significant accounting policies, including those that do not require management
to make difficult, subjective or complex judgments or estimates, in the Notes to
the Consolidated Financial Statements.
12
Revenue Recognition
We recognize revenue upon shipment of our products to or on behalf of our
customers. No sales are made on consignment.
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. All accounts are regularly reviewed to determine if the allowance is
adequate, and if not, additional allowances are made. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required. As of
December 2003, our accounts receivable balance, net of allowances for doubtful
accounts and rebates of $2.3 million, was $18.8 million. We believe the
allowance is reasonable.
Inventory
Our inventory, which is physically counted monthly, is stated at the lower
of cost or market value, as determined under the first-in, first-out ("FIFO")
method. We do not maintain an inventory of finished goods as all product
manufactured is for a specific order and is shipped upon completion.
Intangible Assets
Our goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible assets acquired. 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. Prior to 2002, we amortized goodwill over its
estimated useful life. In January 2002 we adopted the Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" and ceased
to amortize goodwill. We now test for impairment to the value of goodwill based
on a comparison of undiscounted cash flow to the recorded value at least
annually but more often if needed. In 2003, we performed the required annual
test and determined that goodwill was not impaired, but if market conditions
deteriorate, we may be required to recognize an impairment charge to the asset.
Long Lived Assets
We regularly evaluate the value of property, equipment and tangible assets
recorded on our balance sheet for impairment and record any impairment loss when
the value of the assets is less than the sum of the expected cash flows from
those assets. As of December 31, 2003, we do not believe there was any
impairment to the value of our physical assets.
Restructuring
We record restructuring charges when we close a facility and there are
unsatisfied obligations such as lease expenses. In September 2000, we took such
a charge with respect to a restructuring plan that included closing
TechniGraphix, Inc. and our Taunton, Massachusetts facility. The charge was
based on the estimated costs of closing the facility including future minimum
lease payments reduced by any future sublease receipts. At the end of 2003, we
reduced our accrued restructuring liability to zero based on settlement of all
outstanding claims related to net lease payments.
Deferred Tax Valuation Allowance
13
As of December 31, 2003, we recorded a valuation allowance of $6.1 million
against our total deferred tax assets of $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.
Results of Operations
The following table sets forth, for the periods indicated, certain
information derived from our Consolidated Statements of Operations:
Years Ended December 31,
------------------------
(dollars in thousands)
----------------------
2003 2002 2001
---- ---- ----
$ % $ % $ %
--- --- --- --- --- ---
Sales ........................................ 136,676 100.0 137,961 100.0 132,260 100.0
Cost of sales ................................ 108,917 79.7 107,556 78.0 107,590 81.3
Gross profit ................................. 27,759 20.3 30,405 22.0 24,670 18.7
Operating Expenses:
Selling and marketing expenses ............... 6,633 4.9 7,652 5.5 7,721 5.8
General and administrative expenses .......... 13,455 9.8 12,172 8.8 15,619 11.8
Loss (gain) on sale of assets ................ 614 0.4 (33) -- 122 0.1
Restructuring credit ......................... (2,181) (1.6) -- -- (304) (0.2)
Impairment charge ............................ -- -- 745 0.5 -- --
Lease termination charge ..................... -- -- 1,760 1.3 -- --
Total operating expenses ..................... 18,521 13.5 22,296 16.1 23,158 17.5
Income from operations ...................... 9,238 6.8 8,109 5.9 1,512 1.2
Interest expense ............................. 12,066 8.8 12,675 9.2 12,374 9.4
Other(income) expense ...................... 2 -- 344 0.2 (253) (0.2)
Loss before income taxes ..................... (2,830) (2.0) (4,910) (3.5) (10,609) (8.0)
Income tax (benefit) provision ............... -- -- (3,269) (2.4) 4,400 3.3
Net loss ..................................... (2,830) (2.0) (1,641) (1.1) (15,009) (11.3)
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Sales decreased $1.3 million or 0.9% to $136.7 million for the year ended
December 31, 2003, from $138.0 million for the same period in 2002. This
decrease was primarily the result of a decrease in the volume of sales of book
components of 5.7% and of complete books manufactured in Rockaway, New Jersey of
1.1% offset by increases in sales of complete books manufactured in Hagerstown,
Maryland of 5.7%. Overall sales of complete books increased 7.1% to $54.4
million for the year ended December 31, 2003 from $50.8 million for the same
period in 2002 due to increased volume resulting from our ability to meet
customers' expectations with respect to quality and timely delivery. The
decrease in overall sales is
14
primarily the result of a soft book publishing market, with shorter runs, excess
manufacturing capacity and more aggressive pricing.
Gross profit decreased $2.6 million or 8.6% to $27.8 million for the year
ended December 31, 2003, from $30.4 million for the same period in 2002, and the
gross profit margin decreased to 20.3% for the year ended December 31, 2003,
from 22.0% for the same period in 2002. The decrease in the gross profit margin
was primarily attributable to decreased sales and increases in combined material
and overhead costs as a percentage of sales, which were 62.2% for the year ended
December 31, 2003 compared to 60.5% for the same period in 2002. Labor as a
percentage of sales remained unchanged between the years.
Operating expenses decreased $3.8 million or 17.0% to $18.5 million for
the year ended December 31, 2003, from $22.3 million for the same period in
2002. Selling, general and administrative expenses increased $300,000 or 1.5% to
$20.1 million for the year ended December 31, 2003, from $19.8 million for the
same period in 2002, which is primarily attributable to a $750,000 increase in
the provision for doubtful accounts attributable to one customer based on the
customer having filed for bankruptcy, a $260,000 increase in administrative
compensation and a $200,000 increase in legal costs associated with litigation
which was concluded in 2003, partially offset by decreases in sales compensation
and other selling expenses of $800,000. In 2003 we recognized $2.2 million from
the recovery of a prior year restructuring charge as a result of the resolution
in 2003 of disputes regarding equipment leases. In 2002, we incurred a non-cash
charge of $745,000 for the write down of our receivable relating to our lawsuit
with Krause America, and a lease termination charge of $1.8 million for
cancellation of our lease at our Taunton, Massachusetts facility.
Interest expense decreased $600,000 or 4.7% to $12.1 million for the year
ended December 31, 2003, from $12.7 million for the same period in 2002. The
decrease was the result of lower average outstanding debt under the revolving
line of credit combined with lower interest rates.
For the year ended December 31, 2003, we did not record a provision for
income taxes due to the uncertainty of the realization of certain deferred tax
assets created in 2003. In 2002, we recorded a tax benefit of $3.3 million with
an effective rate of 66.5%. The tax benefit was recognized 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.
Net loss increased $1.2 million to a loss of $2.8 million for the year
ended December 31, 2003, from a loss of $1.6 million for the same period in
2002. The decrease was due to the factors described above.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Sales increased $5.7 million or 4.3% to $138.0 million for the year ended
December 31, 2002, from $132.3 million for the same period in 2001. This
increase was primarily the result of an increase in the volume of sales of
complete books manufactured in Rockaway, New Jersey and Hagerstown, Maryland.
Sales of complete books increased $5.3 million or 11.7% to $50.7 million for the
year ended December 31, 2002, from $45.4 million for the same period in 2001.
Gross profit increased $5.7 million or 23.1% to $30.4 million for the year
ended December 31, 2002, from $24.7 million for the same period in 2001, and the
gross profit margin increased to 22.0% for the year ended December 31, 2002,
from 18.7% for the same period in 2001. The increase in the gross profit margin
was primarily attributable to increased sales combined with reductions in labor
and materials
15
as a percentage of sales to 52.6% for the year ended December 31, 2002, from
54.3% for the same period in 2001.
Operating expenses decreased $900,000 or 3.9% to $22.3 million for the
year ended December 31, 2002, from $23.2 million for the same period in 2001.
Selling, general and administrative expenses decreased $3.5 million or 15.0% to
$19.8 million for the year ended December 31, 2002, from $23.3 million for the
same period in 2001, which is primarily attributable to reductions in
administrative compensation, telephone costs and the elimination of amortization
of goodwill of $2.7 million in accordance with Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets", which we adopted
January 1, 2002. In 2002, we also incurred a non-cash charge of $745,000 for the
write down of our receivable relating to our lawsuit with Krause America, and a
lease termination charge of $1.8 million for cancellation of our lease at our
Taunton, Massachusetts facility. Had such expenses not been incurred, the total
decrease in recurring operating expenses would have been $3.5 million.
Interest expense increased $300,000 or 2.4% to $12.7 million for the year
ended December 31, 2002, from $12.4 million for the same period in 2001. The
increase was the result of larger average outstanding debt under the revolving
line of credit at the beginning of the fiscal year and additional debt for
equipment acquisitions in the second half of the year.
For the year ended December 31, 2002, we 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 year ended December 31, 2002, was a benefit of 66.5%
compared to an expense of 41.5% for the same period in 2001. The change in the
effective rate for 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. The expense in 2001 was due
to the recognition of a valuation allowance against our deferred tax assets due
to the uncertainty of the likelihood of the realization of certain of these
assets.
Net loss decreased $13.4 million to a loss of $1.6 million for the year
ended December 31, 2002, from a loss of $15.0 million for the same period in
2001. The decrease was due to the factors described above.
Liquidity and Capital Resources
Our cash and cash equivalents were approximately $64,000 at December 31,
2003 and $109,000 at December 31, 2002. Under the terms of our Senior Credit
Facility, our cash receipts are applied to reduce our revolving line of credit
on a daily basis. Our primary source of liquidity is cash from operations, which
increases and decreases our revolving line of credit, and is supplemented from
time to time by capital leases and notes payable.
On September 30, 2003, we entered into an Amended and Restated Loan and
Security Agreement with Wachovia Bank N.A. providing for the continuance of a
$20,000,000 revolving credit facility through August 31, 2006. As of December
31, 2003, the outstanding aggregate principal of the Senior Credit Facility was
$6.8 million, bearing interest at the rate of 3.8% per annum, and we had the
ability to borrow an additional $10.3 million in accordance with the terms of
our agreement. Our borrowings under the Senior Credit Facility are
collateralized by substantially all of our assets. The Senior Credit Facility
contains, without limitation, prohibitions against the payment of dividends and
distributions and the redemption of stock, limitations on the sale of assets,
compensation of executives and on additional debt, and other financial and
non-financial covenants, including a requirement that we maintain a defined
fixed
16
coverage ratio. As of December 31, 2003 and 2002, we were in compliance with the
covenants of the Senior Credit Facility.
The Senior Credit Facility provides for interest at a base rate plus an
applicable margin which varies depending on our attaining certain leverage
ratios, or at the LIBOR rate plus an applicable margin which varies depending on
our attaining certain leverage ratios but only if we are not in default of any
of the covenants of the Senior Credit Facility. At December 31, 2003 and 2002,
the weighted average interest rates on our borrowings under the Senior Credit
Facility were 3.7% and 4.6%, respectively.
On February 2, 1999, we issued $105.0 million in 10-3/8% Senior
Subordinated Notes maturing on February 2, 2009. The proceeds from the issuance
of the Senior Subordinated Notes were used to repay substantially all of our
existing debt, including capital leases, and to invest in our expansion. The
Indenture contains limitations on the payment of dividends, and distributions,
the redemption of stock, and the sale of assets and subsidiary stock, as well as
limitations on additional debt, and requires that we maintain certain
non-financial covenants.
On October 27, 2003, we entered into an interest rate swap agreement to
manage interest rate costs relating to our Indenture, which carry a 10-3/8%
fixed rate of interest. The interest rate swap effectively converts $50 million
of our $105 million of debt under the Senior Subordinated Notes into variable
rate debt. Pursuant to the interest rate swap agreement, we receive payments
based on a 10-3/8% rate and make payments based on (i) a fixed rate of 8.64%
until August 1, 2004 (representing LIBOR as of October 27, 2003 plus 7.42%) and
(ii) a LIBOR-based variable rate plus 7.42% thereafter, adjusted semiannually in
arrears. The interest rate swap does not qualify for hedge accounting and
therefore any change in the swap's future value will be recorded as a non-cash
charge or income through our consolidated statement of operations. We expect to
save approximately $580,000 from inception of the swap to August 1, 2004. If
interest rates remain relatively stable over the period of the swap, savings on
bond interest could approximate an additional $1 million. If the LIBOR-based
variable rate upon which our payments under the interest rate swap are made
exceeds 2.955% at or after August 1, 2004, the amount we would have to pay each
quarter pursuant to our interest rate swap would exceed the amount we would
receive each quarter pursuant to the swap.
We have operating lease arrangements for printing equipment. Rental
expense related to such leases was approximately $5.4 million for 2003, $4.9
million for 2002 and $4.5 million for 2001. The increases from 2002 to 2003 and
2001 to 2002 were due, in substantial part, to the addition of new operating
leases in 2002 for printing and binding equipment at the Maryland book
manufacturing facility.
Our net cash from operations increased $3.2 million, or 64.0% to $8.2
million for the year ended December 31, 2003, from $5.0 million for the same
period in 2002. Net cash flows from operations increased by $3.8 million to $5.0
million for the year ended December 31, 2002, from $1.2 million for the year
ended December 31, 2001. The 2003 operating cash flow reflects a loss of (i)
$2.8 million offset by (ii) (a) $11.1 million of non-cash charges partially
offset by (b) approximately $100,000 attributable to increases in working
capital primarily due to an increase in accounts receivable offset by a
reduction in prepaid and other assets. The 2002 operating cash flow reflects a
loss of (i) $1.6 million offset by (ii) (a) $10.0 million of non-cash charges
partially offset by (b) approximately $3.4 million attributable to increases in
working capital, primarily the paydown of certain trade payables. The 2001
operating cash flow reflects a loss of $15.0 million increased by $20.0 million
of non-cash charges and offset by $3.8 million increases in working capital.
Our cash used in investing activities was $4.6 million, $1.4 million, and
$4.9 million for the years ended December 31, 2003, 2002 and 2001, respectively,
for the acquisition of plant and equipment. We
17
invested an additional $4.3 million in equipment in 2002, which was funded
through capital leases, and accordingly did not require the outlay of funds.
Our cash used in financing activities was $3.6 million, and $3.7 million
for the years ended December 31, 2003 and 2002. Our cash provided by financing
activities was $3.4 million for the year ended 2001. We reduced our debt under
our revolving line of credit by $2.3 million and $3.3 million in 2003 and 2002,
respectively, compared to an increase of $3.7 million for the year 2001.
The following is a summary of our future payments under contractual
obligations as of December 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 (1) .......................... $105,909 $ 409 $ 500 $ -- $105,000
Capital Lease Obligations ................... 3,661 1,010 2,020 631 --
Operating Leases ............................ 26,970 7,028 13,716 5,632 594
--------------------------------------------------------------------
Total Contractual Cash Obligations .......... $136,540 $ 8,447 $ 16,236 $ 6,263 $105,594
====================================================================
(1) The amounts stated are the expected amounts of Phoenix's commitments under
the 10-3/8% Senior Subordinated Notes and assumes that no notes are tendered.
The following is a summary of our other commercial commitments by
commitment expiration date as of December 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 (1) ......................... $ 20,000 $ 20,000 $ -- $ -- $ --
----------------------------------------------------------------
Total Commercial Commitments ................ $ 20,000 $ 20,000 $ -- $ -- $ --
================================================================
(1) The line of credit is the maximum amount we could borrow and does not
represent the amount of debt outstanding under the line of credit.
Capital expenditures totaled $4.6 million for 2003, $6.6 million for 2002,
of which $4.3 million was financed through a capital lease, and $4.9 million for
2001. We have traditionally invested in facilities and equipment to increase
capacity, improve efficiency, maintain high levels of productivity and meet
customer needs. Our primary capital expenditures have been for prepress,
pressroom and finishing equipment and plant construction.
We currently estimate our capital expenditures for 2004 will total
approximately $3.8 million. The capital expenditures are principally for the
replacement of existing equipment including printing presses, finishing
equipment and prepress equipment. As of December 31, 2003, we had not met the
required consolidated coverage ratio under the Indenture and therefore, we are
unable to incur more than $5 million
18
of additional new indebtedness for capital expenditures until we attain the
consolidated coverage ratio as defined in the Indenture. As of December 31,
2003, we have used $3.4 million of the $5 million available for equipment
indebtedness pursuant to the Indenture.
We believe that in 2004 funds generated from operations and funds
available under the Senior Credit Facility ($10.3 million as of December 31,
2003) will be sufficient to complete our budgeted capital expenditures and
service our debt. Should we experience a material decrease in demand for our
products, or an inability to reduce costs, the resulting decrease in the
availability of funds could have a material adverse effect on our business
prospects or results of operations.
Recent Accounting Standards
The following is a discussion of recently issued accounting standards that
we have adopted.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure." SFAS No. 148 is effective
for fiscal years ending after December 15, 2002 and amends SFAS No. 123 to
provide for alternative methods of transition to a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have accounted for stock-based
employee compensation using the intrinsic value method under APB No. 25 and have
adopted the amendments to the disclosure provisions of SFAS No. 148.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." In December 2003, the FASB
revised FIN No. 46 to reflect decisions it made regarding a number of
implementation issues. FIN No. 46, as revised, requires that the primary
beneficiary of a variable interest entity consolidate the entity even if the
primary beneficiary does not have a majority voting interest. This
interpretation applies to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. This interpretation also identifies
those situations where a controlling financial interest may be achieved through
arrangements that do not involve voting interests. The interpretation also
establishes additional disclosures which are required regarding an enterprise's
involvement with a variable interest entity when it is not the primary
beneficiary. The requirements of this interpretation are required to be applied
for all new variable interest entities created or acquired after January 31,
2003. For variable interest entities defined as Special Purpose Entities
("SPE's") the provisions must be applied for the first interim or annual period
ending after December 15, 2003. For all other variable interest entities, the
provisions must be applied for the first interim or annual period ending after
March 15, 2004. We do not have any controlling interest, contractual
relationships or other business relationships with unconsolidated variable
interest entities which qualify as an SPE and therefore the adoption of this
standard for the year ending December 31, 2003 did not have any effect on our
financial position and results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The statement requires that contracts with comparable characteristics
be accounted for similarly and clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except in certain circumstances, and for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a material impact on
our financial position
19
and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which is effective for all financial instruments created or modified after May
31, 2003 and otherwise was effective July 1, 2003. SFAS No. 150 establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The adoption of this standard did not have any
effect on our financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On October 27, 2003, we entered into an interest rate swap agreement to
manage interest rate costs relating to our Senior Subordinated Notes, which
carry a 10-3/8% fixed rate of interest. The interest rate swap effectively
converts $50 million of our $105 million of debt under the Senior Subordinated
Notes into variable rate debt. Under our interest rate swap agreement, we
receive payments based on a 10-3/8% rate and make payments based on (i) a fixed
rate of 8.64% until August 1, 2004 (representing LIBOR as of October 27, 2003
plus 7.42%) and (ii) a LIBOR-based variable rate plus 7.42% thereafter, adjusted
semiannually in arrears.
Our interest rate swap is subject to interest rate risk. Interest rates
are highly sensitive to many factors, including governmental, monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond our control. We expect to receive net payments of
approximately $580,000 under the interest rate swap between October 27, 2003 and
August 1, 2004. If the LIBOR-based variable rate upon which our payments under
the interest rate swap are made exceeds 2.955% at or after August 1, 2004, the
amount we would have to pay each quarter pursuant to our interest rate swap
would exceed the amount we would receive each quarter pursuant to the swap. The
interest rate swap agreement is subject to the risk of early termination, under
certain circumstances, possibly at a time unfavorable to us. There can be no
assurances that we will be able to acquire hedging instruments at favorable
prices, or at all, when the existing interest rate swap expires or is
terminated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are included as part of this Form 10-K on pages F-1 through
F-23 and S-1 and S-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants or disagreements on any matter of accounting
principles or financial statement disclosures have occurred within the last
three years.
Item 9A. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, Phoenix carried out
an evaluation under the supervision and with the participation of Phoenix's
management, including Phoenix's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Phoenix's
disclosure controls and procedures pursuant to Rule 15d-14 under the Securities
Exchange Act of 1934, as
20
amended. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that Phoenix's disclosure controls and procedures
are adequate to ensure that material information relating to Phoenix required to
be included in Phoenix's periodic reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in Phoenix's internal controls or in
other factors that could significantly affect Phoenix's controls subsequent to
the date of that evaluation and no corrective actions with regard to significant
deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our Board of Directors is composed of seven members, of which there are
now five incumbents and two vacancies. Our Directors generally serve for
one-year terms and until their successors are duly elected and qualified. We
have three executive officers. Executive officers generally serve for one-year
terms and until their successors are duly appointed and qualified.
The following table sets forth certain information regarding our current
directors and executive officers:
Directors and Executive Officers Age Positions
- -------------------------------- --- ---------
Louis LaSorsa ................... 57 Chairman, Chief Executive Officer and Director
Edward Lieberman ................ 61 Executive Vice President, Chief Financial Officer, Secretary and Director
John Carbone .................... 45 Executive Vice President, Chief Operating Officer Book Components, and
Director
David Rubin ..................... 47 Director
Earl S. sWellschlager ........... 56 Director
Louis LaSorsa has been with us since our inception in 1979, when he became Vice
President, Sales and Marketing. Mr. LaSorsa has been President of Phoenix since
1982, was elected Chairman and Chief Executive Officer in 1996, and is involved
in the management of all areas of our operations, planning and growth. Mr.
LaSorsa has been a director of Phoenix since 1979.
Edward Lieberman joined us in 1981, has been Executive Vice President, Chief
Financial Officer and Secretary since February 1988, and is responsible for
financial information, general financing, legal matters, human resources and
benefits. From 1967 to 1981, Mr. Lieberman, a certified public accountant, was a
principal of Louis Lieberman & Company, an independent public accounting firm.
Mr. Lieberman has been a director of Phoenix since 1983.
John Carbone joined us in 1981, has been Executive Vice President, Chief
Operating Officer Book Components since February 2001. Prior to becoming
Executive Vice President and Chief Operating Officer Book Components, Mr.
Carbone held the positions of Vice President of Manufacturing/Hagerstown, Vice
President of Operations/New York, and Vice President of Sales. Mr. Carbone has
been a director of Phoenix since 1997.
David Rubin was elected a director of Phoenix in February 1998, and is a partner
in the firm J.H. Cohn LLP, a privately-held accounting and consulting firm which
services a wide range of manufacturing,
21
distribution and service oriented client companies. Between 1984 and 2003, Mr.
Rubin was employed by Don Aux Associates, and served as Corporate Vice President
and director, assuming the presidency in 1998. In February 2003, Mr. Rubin
became a principal of Videre Consulting, LLP, which was subsequently merged into
J.H. Cohn LLP.
Earl S. Wellschlager has served as a director of Phoenix since March 2000. Mr.
Wellschlager, a partner with Piper Rudnick LLP, has a business law practice,
including significant experience with closely held companies and shareholder
dispute resolution. He currently serves as outside or United States counsel to
approximately twenty domestic and foreign companies, both publicly and privately
held.
Directors Compensation
Our directors who are also employees of Phoenix do not receive additional
compensation for their services as directors. Our non-employee directors receive
annual director compensation of $10,000 cash.
Committees of the Board of Directors
We have a compensation committee consisting of our outside directors, Earl
S. Wellschlager and David Rubin, each of whom are principals in their respective
companies, each of which provide services to us.
We have a disclosure committee consisting of our outside directors, Earl.
S. Wellschlager and David Rubin, and Edward Lieberman, Executive Vice President
and Chief Financial Officer.
We have an audit committee consisting of our outside directors, Earl. S.
Wellschlager and David Rubin, each of whom are principals in their respective
companies, each of which provide services to us. Based on its review of the
criteria to be met by Audit Committee Financial Experts, the Board of Directors
does not believe that either Mr. Wellschlager or Mr. Rubin would be described as
an Audit Committee Financial Expert. Each of Mr. Wellschlager and Mr. Rubin has
made significant contributions and provided valuable service to Phoenix. The
Board of Directors believes that each of Mr. Wellschlager and Mr. Rubin has
demonstrated that he is capable of (i) understanding generally accepted
accounting principles and financial statements; (ii) assessing the general
application of such principles in connection with the accounting for estimates,
accruals and reserves; (iii) analyzing and evaluating Phoenix's financial
statements; (iv) understanding internal control over financial reporting; and
(v) understanding Audit Committee functions. Given the business experience of
Messrs. Wellschlager and Rubin, the Board of Directors believes that Messrs.
Wellschlager and Rubin are qualified to carry out all duties and
responsibilities of Phoenix's Audit Committee. At this time, the Board of
Directors does not believe it is necessary to actively search for an outside
person to serve on the Board of Directors who would qualify as an Audit
Committee Financial Expert.
We have adopted a Code of Ethics applicable to our officers, directors and
employees, a copy of which is filed as an Exhibit to this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to us in all capacities during the three years ended
December 31, 2003 by the Chief Executive Officer and the three other most highly
compensated executive officers of Phoenix, including both fixed salary
compensation and discretionary management incentive compensation ("Bonus").
22
Summary Compensation Table
Annual Compensation
Securities
Underlying Other Annual
Salary Bonus Options Compensation (1)
Name and Principal Position Year ($) ($) (#) ($)
Louis LaSorsa .................. 2003 506,591 435,536 -- 105,474
Chief Executive Officer 2002 506,586 435,966 -- 115,480
2001 554,162 439,330 -- --
Edward Lieberman ............... 2003 352,956 277,395 415 57,417
Chief Financial Officer 2002 353,054 247,826 -- 63,114
2001 368,457 219,665 -- --
Mitchell Weiss ................. 2003 43,962 -- -- 88,441
Vice President 2002 255,448 -- -- 3,479
2001 193,234 57,113 -- --
John Carbone ................... 2003 279,933 255,590 242 4,234
Vice President 2002 288,667 243,336 -- 3,479
2001 272,625 219,665 -- --
(1) Other annual compensation for Louis LaSorsa consists of life insurance
premiums in the amount of $68,253 for each of the years 2003 and 2002,
auto lease payments in the amount of $32,987 and $43,748 for the years
2003 and 2002, respectively, and contributions to the Employee Stock Bonus
Plan allocable to him in the amounts of $4,234 and $3,479 for the years
2003 and 2002, respectively. Other annual compensation for Edward
Lieberman consists of life insurance premiums in the amount of $43,420 for
each of the years 2003 and 2002, auto lease payments in the amount of
$9,763 and $16,215 for the years 2003 and 2002, respectively, and
contributions to the Employee Stock Bonus Plan allocable to him in the
amounts of $4,234 and $3,479 for the years 2003 and 2002, respectively.
Other annual compensation for John Carbone consists of contributions to
the Employee Stock Bonus Plan allocable to him in the amounts of $4,234
and $3,479 for the years 2003 and 2002, respectively. Other annual
compensation for Mitchel Weiss consists of contributions to our Employee
Stock Bonus Plan allocable to him in the amount of $3,479 for the year
2002 and his vested balance in the Employee Stock Bonus Plan distributed
to him in the amount of $88,441 in the year 2003.
We implemented the 2002 Stock Incentive Plan in August of 2002. The
Compensation Committee has authorized 2,835 shares to be acquired under the
plan, of which 657 options have been granted consisting of 242 options to John
Carbone and 415 options to Edward Lieberman.
23
The following table sets forth information concerning grants to the Named
Executive Officers of options to purchase shares of Phoenix's Common Stock
granted in 2003.
OPTIONS GRANTED IN 2003
Potential realizable value
Individual Grants(1) at assumed annual rates
----------------------------------------------------------------- of stock price
Percent of total appreciation for option
options granted to Exercise price term(2)
Options all employees in per share Expiration --------------------------
Name (#) fiscal year ($) Date 5%($) 10%($)
--------------------- ------- ------------------ -------------- ---------- ------- -------
Louis LaSorsa ....... -- 0% N/A N/A N/A N/A
Edward Lieberman .... 415 63.17% 661 8/16/2013 159,465 404,117
Mitchell Weiss ...... -- 0% N/A N/A N/A N/A
John Carbone ........ 242 36.83% 661 8/16/2013 92,990 235,654
- ----------
(1) Exercisable beginning August 2006.
(2) The assumed annual rates of stock price appreciation of 5% and 10% are
required by the Securities and Exchange Commission to be used for
illustration purposes and are not intended to forecast possible future
appreciation, if any, of Phoenix's Class A Common Stock.
The following table sets forth information with respect to option
exercises by and year-end values during 2002 for the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT END OF FISCAL YEAR
Number of unexercised Value of unexercised in-the-
options at money options at fiscal
fiscal year-end(#) year-end($)(1)
Shares ---------------------------- ----------------------------
acquired on Value
Name exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ----------- ----------- ------------- ----------- -------------
Louis LaSorsa ......... -- -- -- -- -- --
Edward Lieberman ...... -- -- -- 415 -- --
Mitchell Weiss ........ -- -- -- -- -- --
John Carbone .......... -- -- -- 242 -- --
- ----------
(1) There is no public market for Phoenix's stock. All stock underlying the
stock options in the table is estimated by management to have a value
approximately equal to its exercise price.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
On August 16, 2002, Phoenix entered into individual employment agreements
(the "Executive Employment Agreements") with each of Messrs. LaSorsa, Lieberman
and Carbone (collectively, the "Executives"). The Executive Employment
Agreements have an initial term of October 1, 2002 through September 30, 2004
and will automatically continue after the initial term for successive one-year
terms, unless terminated by either party by sixty (60) days prior written
notice. In addition to the base salary amounts described below, the Executive
Employment Agreements provide that the Executives are entitled to participate in
any bonus and stock option plans, programs, arrangements and practices as may be
established from time to time by our Board of Directors. Each of the Executive
Employment Agreements also provides that the Executives are entitled to certain
fringe benefits, including the use of a Phoenix automobile.
24
The Executive Employment Agreement with Mr. LaSorsa provides that he shall
serve as our Chairman of the Board of Directors, Chief Executive Officer and
President and be paid an annual base salary of $494,000, subject to any
increases that may be determined by our Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Lieberman provides that he
shall serve as our Executive Vice President, Chief Financial Officer, and
Secretary and be paid an annual base salary of $343,500, subject to any
increases that may be determined by our Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Carbone provides that he
shall serve as our Executive Vice President and Chief Operating Officer/Book
Components and be paid an annual base salary of $253,800, subject to any
increases that may be determined by our Board of Directors based on periodic
reviews.
Restrictive Covenants
Each of the Executive Employment Agreements includes a non-competition and
non-solicitation covenant expiring three (3) years after the Executive ceases to
be employed by Phoenix.
Severance
Under the terms of the Executive Employment Agreements, Phoenix must pay
severance as follows:
Nonrenewal
If, upon expiration of its initial term, we terminate the Executive
Employment Agreement of an Executive and do not enter into a new employment
agreement or a consulting agreement with the Executive, then, for a period of
one (1) year, we must pay the Executive an amount equal to his annual base
salary and provide the Executive with benefits.
Termination of the Executive's Employment
If we terminate an Executive's employment without cause or materially
reduce an Executive's duties or compensation or relocate him outside of a
specified geographic area, then, for the greater of (i) one (1) year or the (ii)
the remainder of the term of the Executive Employment Agreement, we must pay the
Executive his annual base salary and provide the Executive with benefits.
Termination of the Executive's Employment Upon a Change of Control
If, within six (6) months following certain change of control events, we
terminate an Executive's employment with or without cause or materially reduce
an Executive's duties or compensation or relocate him outside of a specified
geographic area, we must (i) pay the Executive an amount equal to 2.9 times his
annual compensation and (ii) provide the Executive with benefits for three (3)
years. If the Internal Revenue Code would impose excise taxes on any portion of
these payments, the severance payments shall be reduced to an amount that will
not result in the imposition of such taxes.
In addition, prior to the occurrence of certain change of control events,
Phoenix must implement a supplemental executive retirement plan that provides
for a payment to each of the Executives, upon a change of control transaction
involving net proceeds, (after the repayment of debt), of at least $40 million,
to or available for distribution to stockholders, a lump sum that may not be
less than the actuarial equivalent of ten (10) times thirty-two and one-half
percent (32.5%) of the Executive's average annual compensation.
25
Employee Stock Bonus and Ownership Plan
Our Employee Stock Bonus and Ownership Plan (the "Stock Bonus Plan") was
established in 1980, initially as a profit-sharing, tax-qualified retirement
plan, and later as a stock bonus plan. Employees become participants on any June
30 or December 31 after they complete one year of service. Annual contributions
by us to the Stock Bonus Plan are discretionary, and have been made in the form
of our stock and cash. Contributions are allocated among all Stock Bonus Plan
participants, based on the proportion which each participant's eligible
compensation bears to the total compensation of all participants. Our
contributions for participants become vested for each participant in equal
installments over a six-year period of continuing service. The Trustees of the
Stock Bonus Plan are Louis LaSorsa and Edward Lieberman, and the Stock Bonus
Plan held 1,000 of our Class A Common Stock and 6,794 shares of our Class B
Common Stock as of December 31, 2003. The Class B Common Stock is non-voting
stock. See "Security Ownership of Certain Beneficial Owners and Management."
SHARES ALLOCATED TO EXECUTIVE EMPLOYEES
IN LAST FISCAL YEAR
Number of Shares, Units or Performance Or Other Period Until
Name Other Rights (1), (2) Maturation Or Payout(3)
Louis LaSorsa .......... 653 --
Edward Lieberman ....... 452 --
John Carbone ........... 242 --
(1) All shares awarded to participants under the Employee Stock Bonus and
Ownership Plan (the "Stock Bonus Plan") during the fiscal year ended
December 31, 2003 or otherwise are shares of Class A and Class B Common
Stock of Phoenix Color. Contributions of cash or stock by Phoenix to the
Stock Bonus Plan are allocated among all participants based on the
proportion to which each participant's eligible compensation bears to the
total compensation of all participants. Participants become vested in the
contributions to the Stock Bonus Plan in equal installments over a
six-year period of continuing service. For more information, see
"Executive Compensation--Employee Stock Bonus and Ownership Plan."
(2) The Stock Bonus Plan does not provide for threshold or maximum payouts (or
equivalent items) for participants.
(3) Each participant in the Stock Bonus Plan becomes eligible to receive a
payout of the vested portion of his or her account upon termination of the
participant's employment with Phoenix. A participant's account balance is
deemed 100% vested under the terms of the Stock Bonus Plan upon (a)
reaching age 55 or (b) participating in the Stock Bonus Plan for six
years, whichever is later. A participant may defer his or her benefit
payments under the Stock Bonus Plan by electing to continue his or her
participation beyond the deemed retirement date. No participant may
participate in contributions to the Stock Bonus Plan, however, unless he
or she is employed by Phoenix. Benefits under the Stock Bonus Plan are
paid in either shares of stock or one or more cash payments, whichever the
participant elects to receive.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SECURITIES MATTERS.
EQUITY COMPENSATION PLANS
The following table summarizes share and exercise price information about
our equity compensation plans as of December 31, 2003.
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and other rights warrants, and rights reflected in column (a))
------------- ------------------------- -------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders -- -- --
Equity compensation plans not
approved by security holders 657 661 2,178
See Note 10 to our Consolidated Financial Statements for description of material
features of stock option plan.
The following table sets forth information with respect to the beneficial
ownership of our Class A and Class B Common Stock as of March 15, 2004 by (i)
each person known by us to own beneficially more than five percent of the
outstanding Class A Common Stock and Class B Common Stock, (ii) each of our
directors, (iii) each of the named executive officers listed under "Executive
Compensation", and (iv) all executive officers and directors as a group. Except
as otherwise noted, the persons named in the table have sole voting and
investment powers with respect to all shares of Common Stock shown as
beneficially owned by them. Our capital stock is not registered under Section 12
of the Securities Exchange Act of 1934, as amended, and, as a result,
stockholders holding more than five percent of any class of our capital stock
are not required to file beneficial ownership reports with the Securities and
Exchange Commission.
Class Class
A(1) % B(2) % Total %
---- --- ---- --- ----- ---
Louis LaSorsa ....................................................... 1,084 9.8 569 7.3 1,653 8.7
Edward Lieberman .................................................... 1,058 9.5 394 5.1 1,452 7.7
John Biancolli ...................................................... 1,032 9.3 217 2.8 1,249 6.6
John Carbone ........................................................ 1,031 9.3 211 2.7 1,242 6.6
Thomas Newell ....................................................... 1,021 9.2 145 1.9 1,166 6.2
Dion von der Lieth .................................................. 1,007 9.1 45 0.6 1,052 5.6
Henry Burk .......................................................... 1,000 9.0 -- -- 1,000 5.3
Ronald Burk ......................................................... 1,000 9.0 -- -- 1,000 5.3
Anthony DiMartino ................................................... 1,063 9.6 425 5.5 1,488 7.9
Bruno Jung .......................................................... 1,045 9.4 309 4.0 1,354 7.2
Judith Lieberman .................................................... -- -- 1,000 12.8 1,000 5.3
David Rubin ......................................................... -- -- -- -- -- --
Earl S. Wellschlager ................................................ -- -- -- -- -- --
Louis LaSorsa and Edward Lieberman, as Trustees under the Stock Bonus
Plan (3) ......................................................... 1,000 9.0 6,794 87.2 7,794 41.3
All directors and executive officers as a group (5 persons) ........ 3,173 28.6 1,174 15.1 4,347 23.0
27
(1) For each individual identified in this table, 1,000 Class A voting shares
are held directly by such named individual, and the amount in excess of
1,000 shares represents Class A shares held by the Stock Bonus Plan and
for the benefit of the participants. Shares held by the Stock Bonus Plan
for the benefit of the individuals can only be voted by the trustees of
the Stock Bonus Plan.
(2) Indicates each named individual's vested interest in Class B non-voting
shares held in the Stock Bonus Plan, except for Judith Lieberman, whose
Class B shares are held directly.
(3) See "Directors and Executive Officers of the Registrant Employee Stock
Bonus and Ownership Plan."
The address of all stockholders listed in the above table is c/o Phoenix
Color Corp., 540 Western Maryland Parkway, Hagerstown, Maryland, 21740.
On September 30, 2003, we entered into a Senior Credit Facility with
Wachovia Bank N.A. In connection with our Senior Credit Facility, all of our
shareholders except Anthony DiMartino, Judith Lieberman, Dion von der Lieth and
the Stock Bonus Plan executed confirmations of a Stock Pledge Agreement executed
in September 1998, pursuant to which all of their respective shares of our stock
were pledged as security for our obligations under the loan agreement. The Stock
Pledge Agreement requires such shares to remain pledged during the term of the
Senior Credit Facility. For information regarding each of our shareholders, see
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Earl S. Wellschlager, a director of Phoenix is a partner in a law firm
that serves as counsel to Phoenix. We paid the law firm approximately $605,000,
$320,000 and $610,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. As of December 31, 2003 and 2002, no amounts were owed to the law
firm.
We utilize the services of a management consulting firm in which David
Rubin, a director of Phoenix, is also a partner. We paid the consulting firm
approximately $194,000, $289,000, and $143,000 for the years ended December 31,
2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002, $34,124 and
$24,264, respectively, was owed to the consulting firm and was included in
accounts payable.
We utilize the services of a prepress systems integration firm of which
Edward Lieberman and Louis LaSorsa each own 6.7%. We paid the firm approximately
$434,000, $541,000 and $501,000 for the years ended December 31, 2003, 2002 and
2001, respectively. Nothing was owed as of December 31, 2003 and $25,904 was
owed as of December 31, 2002 to the systems integration firm and was included in
accounts payable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees.
The principal accountant billed us an aggregate of $134,600 for 2003 and
$116,750 for 2002 for
28
professional services rendered by the principal accountant for the audit of our
annual financial statements and review of our financial statements included in
our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K or services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for such years.
Audit-Related Fees.
In addition to the amounts disclosed above, the principal accountant
billed us an aggregate of $30,540 for 2003 and $13,000 for 2002 for assurance
and related services by the principal accountant that are reasonably related to
the performance of the audit or review of our financial statements. Audit
services include the testing of our books and records so our accountants can
form an opinion that there are no material misstatements in the financial
statements and that both the annual and quarterly interim financial statements
have been prepared in accordance with generally accepted accounting principles.
Tax Fees.
The principal accountant billed us an aggregate of $77,006 for 2003 and
$69,787 for 2002 for professional services rendered by the principal accountant
for tax return preparation, tax advice related thereto and representation before
the Internal Revenue Service.
All Other Fees.
In addition to the amounts disclosed above, the principal accountant
billed us an aggregate of $3,745 for 2003 and $6,800 for 2002 for services
provided by the principal accountant for the evaluation and research related to
certain accounting matters.
Audit Committee Pre-Approval.
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by Phoenix's independent public accountants. These services
may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. Our Audit Committee pre-approved
our engagement of our principal accountant to provide the audit, audit-related
and tax services described above, which represented 98.5% and 96.7%, of the
total fees we paid our principal accountant in 2003 and 2002, respectively. Our
principal accountant performed all work only with its full time permanent
employees.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) The following consolidated financial statements of Phoenix are
included in Item 8 of the Form 10-K:
Index to Financial Statements.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 2003 and
December 31, 2002.
29
Consolidated Statements of Operations as of December 31, 2003,
December 31, 2002 and December 31, 2001.
Consolidated Statements of Changes in Stockholders' Deficit as of
December 31, 2003, December 31, 2002 and December 31, 2001.
Consolidated Statements of Cash Flows as of December 31, 2003,
December 31, 2002 and December 31, 2001.
Notes to Consolidated Financial Statements.
(2) Report of Independent Auditors on Financial Statement Schedule
Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted because
they are either not required or not applicable or because the
required information has been included elsewhere in the financial
statements or notes thereto.
(3) See Item 15(c) of this Form 10-K
(b) Reports on Form 8-K.
On November 13, 2003, we filed a Current Report on Form 8-K
attaching our third quarter 2003 earnings release.
(c) Exhibits.
Exhibit
Number Description
- ------ -----------
12.1 Statement re: calculation of ratio of earnings to fixed charges.
12.2 Statement re: computations of EBITDA.
14.1 Code of Ethics and Business Conduct.
21.1 Subsidiaries of Phoenix.
31.1 Certification of the Chief Executive Officer pursuant to Rule
13(a)-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13(a)-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Phoenix Color Corp. has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Hagerstown, State of Maryland, on March 26, 2004.
PHOENIX COLOR CORP.
By: /s/ Louis LaSorsa
------------------------------------
Louis LaSorsa
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/ Louis LaSorsa Chairman, Chief Executive Officer March 26, 2004
- -------------------------- and Director
Louis LaSorsa
/s/ Edward Lieberman Executive Vice President, Chief March 26, 2004
- -------------------------- Financial Officer, Secretary and Director
Edward Lieberman
/s/ John Carbone Executive Vice President, Chief Operating Officer March 26, 2004
- -------------------------- Book Component Manufacturing, and Director
John Carbone
/s/ Earl S. Wellschlager Director March 26, 2004
- --------------------------
Earl S. Wellschlager
/s/ David Rubin Director March 26, 2004
- --------------------------
David Rubin
31
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 as amended, by Registrants That
Have Not Registered Securities Pursuant to Section 12 of such Act
We have not provided any of our security holders a proxy statement, form
of proxy or other proxy soliciting material sent to more than ten of our
security holders with respect to any annual or other meeting of our security
holders. As of the date of this Annual Report on Form 10-K, we have not provided
to our security holders an annual report covering our last fiscal year.
32
PHOENIX COLOR CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Changes in Stockholders' Deficit............ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-8
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Phoenix Color Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows present fairly, in all material respects, the financial position of
Phoenix Color Corp. and its subsidiaries (the "Company") as of December 31, 2003
and 2002 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully disclosed in Note 1, the 2002 consolidated financial statements
have been restated to classify the Revolving line of credit to a current
liability.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 27, 2004
F-2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2002
2003 As restated
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 63,714 $ 109,297
Accounts receivable, net of allowance for doubtful accounts and
rebates of $2,345,715 in 2003 and $1,524,631 in 2002 .............................. 18,846,859 18,343,018
Inventory ......................................................................... 5,642,108 6,198,822
Prepaid expenses and other current assets ......................................... 3,045,703 2,645,563
------------- -------------
Total current assets ........................................................... 27,598,384 27,296,700
Property, plant and equipment, net ..................................................... 57,799,341 62,254,886
Goodwill ............................................................................... 13,302,809 13,302,809
Deferred financing costs, net .......................................................... 2,443,698 2,885,048
Other assets ........................................................................... 10,635,423 13,304,922
------------- -------------
Total assets ................................................................... $ 111,779,655 $ 119,044,365
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable ..................................................................... $ 409,194 $ 545,592
Capital lease obligations ......................................................... 831,169 725,060
Revolving line of credit .......................................................... 6,827,929 9,082,100
Accounts payable .................................................................. 8,556,760 7,344,110
Accrued expenses .................................................................. 9,064,919 11,306,811
------------- -------------
Total current liabilities ...................................................... 25,689,971 29,003,673
10-3/8% Senior subordinated notes ...................................................... 105,000,000 105,000,000
MICRF Loan ............................................................................. 500,000 500,000
Notes Payable .......................................................................... -- 409,194
Capital lease obligations .............................................................. 2,533,018 3,364,187
Other liabilities ...................................................................... 105,447 --
------------- -------------
Total liabilities .............................................................. 133,828,436 138,277,054
------------- -------------
Commitments and contingencies
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share,
20,000 authorized shares, 14,560 issued shares and 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 and 7,794
outstanding shares ............................................................. 98 98
Additional paid in capital ........................................................ 2,126,804 2,126,804
Accumulated deficit ............................................................... (22,392,167) (19,561,675)
Stock subscriptions receivable .................................................... (14,432) (28,832)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares ........ (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit .................................................... (22,048,781) (19,232,689)
------------- -------------
Total liabilities & stockholders' deficit ...................................... $ 111,779,655 $ 119,044,365
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Sales ................................................... $ 136,675,957 $ 137,961,176 $ 132,260,064
Cost of sales ........................................... 108,917,124 107,556,491 107,589,769
------------- ------------- -------------
Gross profit ............................................ 27,758,833 30,404,685 24,670,295
------------- ------------- -------------
Operating expenses:
Selling and marketing expenses ..................... 6,632,742 7,651,865 7,721,743
General and administrative expenses ................ 13,454,850 12,172,332 15,619,292
Loss (gain) on disposal of assets .................. 613,877 (32,918) 121,782
Impairment charge .................................. -- 744,395 --
Lease termination charge ........................... -- 1,759,836 --
Restructuring credit ............................... (2,180,945) -- (303,881)
------------- ------------- -------------
Total operating expenses ................................ 18,520,524 22,295,510 23,158,936
------------- ------------- -------------
Income from operations ................................. 9,238,309 8,109,175 1,511,359
Other expenses:
Interest expense ................................... 12,066,393 12,674,946 12,374,252
Other expense (income) ............................. 2,408 344,659 (253,693)
------------- ------------- -------------
Loss before income taxes ................................ (2,830,492) (4,910,430) (10,609,200)
Income tax (benefit) provision .......................... -- (3,269,000) 4,399,661
------------- ------------- -------------
Net loss ................................................ $ (2,830,492) $ (1,641,430) $ (15,008,861)
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT)
Common Stock
------------------------------------------
Class A Class B Additional
-------------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
------ -------- ------ -------- ----------
Balance at December 31, 2000 ............... 14,560 $ 146 9,794 $ 98 $2,126,804
Payment of stock subscription .............. -- -- -- -- --
Net loss .................... .............. -- -- -- -- --
------ -------- ----- -------- ----------
Balance at December 31, 2001 ............... 14,560 146 9,794 98 2,126,804
Payment of stock subscription .............. -- -- -- -- --
Net loss .................... .............. -- -- -- -- --
------ -------- ----- -------- ----------
Balance at December 31, 2002 ............... 14,560 146 9,794 98 2,126,804
Payment of stock subscription .............. -- -- -- -- --
Net loss .................... .............. -- -- -- -- --
------ -------- ----- -------- ----------
Balance at December 31, 2003 ............... 14,560 $ 146 9,794 $ 98 $2,126,804
====== ======== ===== ======== ==========
Stock Treasury Stock Total
Accumulated Subscription ----------------------- Stockholders'
Deficit Receivable Shares Amount Deficit
------------ ------------ ------- ----------- -------------
Balance at December 31, 2000 ............... $ (2,911,384) $ (99,492) 5,460 $(1,769,230) $ (2,653,058
Payment of stock subscription .............. -- 38,400 -- -- 38,400
Net loss .................... .............. (15,008,861) -- -- -- (15,008,861)
------------ ---------- ------- ----------- ------------
Balance at December 31, 2001 ............... (17,920,245) (61,092) 5,460 (1,769,230) (17,623,519)
Payment of stock subscription .............. -- 32,260 -- -- 32,260
Net loss .................... .............. (1,641,430) -- -- -- (1,641,430)
------------ ---------- ------- ----------- ------------
Balance at December 31, 2002 ............... (19,561,675) (28,832) 5,460 (1,769,230) (19,232,689)
Payment of stock subscription .............. -- 14,400 -- -- 14,400
Net loss .................... .............. (2,830,492) -- -- -- (2,830,492)
------------ ---------- ------- ----------- ------------
Balance at December 31, 2003 ............... $(22,392,167) $ (14,432) 5,460 $(1,769,230) $(22,048,781)
============ ========== ======= =========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
------------ ------------ ------------
Operating activities:
Net loss ............................................................. $ (2,830,492) $ (1,641,430) $(15,008,861)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property, plant and equipment .... 10,630,696 10,330,505 11,274,079
Amortization of goodwill .......................................... -- -- 2,681,256
Amortization of deferred financing costs .......................... 542,625 549,912 528,701
Provision for uncollectible accounts .............................. 1,377,288 485,472 413,125
Deferred income taxes ............................................. -- (3,269,000) 5,025,118
Lease termination charge .......................................... -- 1,266,184 --
Impairment charge ................................................. -- 744,395 --
Change in fair value of interest rate swap ........................ 105,447 -- --
Restructuring credit .............................................. (2,180,945) -- (303,881)
Loss (gain) on disposal of assets ................................. 613,877 (32,918) 386,179
Increase (decrease) in cash resulting from changes in assets and
liabilities:
Accounts receivable ............................................... (1,881,129) 777,697 276,700
Inventory ......................................................... 556,714 229,702 (926,980)
Prepaid expenses and other assets ................................. 1,125,763 (4,029,431) (3,416,082)
Accounts payable .................................................. 154,097 (4,472,197) 321,027
Accrued expenses .................................................. (60,947) 549,395 (138,830)
Income tax refund receivable ...................................... -- 3,536,004 57,763
------------ ------------ ------------
Net cash provided by operating activities ...................... 8,152,994 5,024,290 1,169,314
------------ ------------ ------------
Investing activities:
Proceeds from sale of equipment ................................... 252,644 128,250 391,500
Capital expenditures .............................................. (4,839,521) (1,502,103) (5,254,466)
------------ ------------ ------------
Net cash used in investing activities .......................... (4,586,877) (1,373,853) (4,862,966)
------------ ------------ ------------
Financing activities:
Net (payments) proceeds from revolving line of credit ............. (2,254,171) (3,312,841) 3,735,899
Proceeds from long term borrowings ................................ -- -- --
Principal payments on long term borrowings and capital leases ..... (1,270,652) (382,660) (13,388)
Debt financing costs .............................................. (101,277) -- (313,024)
Payment of stock subscription ..................................... 14,400 32,260 38,400
------------ ------------ ------------
Net cash provided by (used in) financing activities ............ (3,611,700) (3,663,241) 3,447,887
------------ ------------ ------------
Net decrease in cash ........................................... (45,583) (12,804) (245,765)
Cash and cash equivalents at beginning of year .................... 109,297 122,101 367,866
------------ ------------ ------------
Cash and cash equivalents at end of year .......................... $ 63,714 $ 109,297 $ 122,101
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
Year Ended December 31,
2003 2002 2001
----------- ------------ ------------
Supplemental cash flow disclosures:
Cash paid for interest ........................................ $11,645,202 $ 12,087,426 $ 11,928,179
Cash paid for income taxes, net of (refunds) received ......... $ -- $ (3,356,004) $ (683,220)
Non-cash investing and financing activities:
Equipment and deposits included in accounts payable .............. $ 1,990,072 $ 931,517 $ 74,109
Equipment financed through capital lease obligations ............. $ -- $ 4,328,091 $ --
Notes payable issued in connection with lease
termination ...................................................... $ -- $ 1,091,184 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Organization
Phoenix Color Corp. and its subsidiaries (the "Company") manufacture book
components, which include book jackets, paperback covers, pre-printed case
covers, inserts and endpapers, at its headquarters in Hagerstown, MD and
complete books at its facilities in Rockaway, NJ and Hagerstown, MD. Customers
consist of major publishing companies as well as smaller publishing companies
throughout the United States.
Restatement
During 2003, the Company determined that its revolving line of credit
should have been classified as a current liability. The 2002 consolidated
balance sheet has been restated to reflect this change, which had the impact of
increasing current liabilities by $9,082,100 at December 31, 2002.
2. Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market value, as determined
under the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation for all fixed
assets is provided on the straight-line method over the assets' estimated useful
lives. Depreciable lives range from 3-40 years: 5-40 years for buildings and
improvements, 3-10 years for machinery and equipment, and 3-5 years for
transportation equipment.
Periodically, the Company acquires equipment using capital leases to
finance the acquisition. In such instances, the Company capitalizes the
equipment and depreciates it over its useful life.
F-8
2. Significant Accounting Policies (Continued)
Expenditures for maintenance and repairs are charged to operations when
incurred. Expenditures determined to represent additions and betterments are
capitalized. Gains and losses from disposals, if any, are included in earnings.
The Company has purchased additional equipment, which is either on order
or in various stages of installation. Depreciation begins at the time
installation is completed.
Fair Value of Certain Financial Instruments
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable, and accrued expenses, approximates fair value, due to the relatively
short maturity of these instruments.
Concentration of Risk
Financial instruments that subject the Company to significant
concentration of credit risk consist primarily of accounts receivable. The
Company sells products to customers located throughout the United States without
requiring collateral. However, the Company assesses the financial strength of
its customers and provides allowances for anticipated losses when necessary. The
Company has not experienced any losses on its investments.
Customers that accounted for more than 10% of net sales are as follows:
Customer Customer
-------- --------
A B
-------- --------
Net Sales
2003 ........... 17% 15%
2002 ........... 14% 14%
2001 ........... 13% 12%
The Company currently purchases its paper and printing supplies from a
limited number of suppliers. There are a number of other suppliers of these
materials throughout the U.S., and management believes that these other
suppliers could provide similar printing supplies and paper on comparable terms.
A change in suppliers, however, could cause a delay in manufacturing, and a
possible loss of sales, which could adversely affect operating results.
Because the Company derives all of its revenues from customers in the book
publishing and book printing industries, the Company's business, financial
condition and results of operations could be adversely affected by changes which
have a negative impact on these industries.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of identifiable net tangible assets acquired. Goodwill consists of $4.7 million
associated with the 1996 acquisition of New England
F-9
Book Holding Corporation and $8.6 million associated with the 1999 acquisition
of Mid-City Lithographers, Inc., respectively.
The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002. Under the provisions of SFAS No. 142,
goodwill is no longer amortized. Prior to the start of 2002, the corporation
followed the provisions of APB Opinion No. 17, which required that goodwill be
amortized by systematic charges to income over the period expected to be
benefited. That period ranged from 8 to 20 years. SFAS No. 142 provides that
goodwill is no longer amortized and the value of an identifiable intangible
asset must be amortized over its useful life, unless the asset is determined to
have an indefinite useful life. Goodwill must be tested for impairment as of the
beginning of the fiscal year in which SFAS No 142 is adopted. The Company
annually evaluates the carrying value of goodwill and recognizes impairment
charges as required by SFAS 142. There was no impairment of goodwill upon
adoption of SFAS No. 142 in 2002 and the Company has determined that no
impairment exists as of and for the years ending December 31, 2003 and 2002,
respectively.
In order to permit the comparison of net income in 2003 and 2002 with that
of 2001, the following table presents those amounts adjusted to exclude
amortization expense related to goodwill had SFAS No. 142 been in effect for
2001.
Years Ended December 31
2003 2002 2001
---- ---- ----
Net loss reported ............. ($2,830,492) ($1,641,430) ($15,008,861)
Goodwill amortization ......... -- -- 2,681,256
----------- ----------- ------------
Adjusted net loss ............. ($2,830,492) ($1,641,430) ($12,327,605)
=========== =========== ============
Deferred Financing Costs
Deferred financing costs incurred in connection with the issuance of
10-3/8% Senior Subordinated Notes in February 1999 (see Note 5) are being
amortized using the straight-line method over a ten year period. Deferred
financing costs incurred during 2003 in connection the with the Company's
Amended and Restated Credit Agreement with Wachovia Bank, N.A. dated September
30, 2003 (the "Senior Credit Facility") are being amortized using the straight
line method over a three year period.
Long-lived Assets
The Company evaluates quarterly the recoverability of the carrying value
of property and equipment and intangible assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The Company
considers historical performance and anticipated future results in its
evaluation of any potential impairment. Accordingly, when the indicators of
impairment are present, the Company evaluates the carrying value of these assets
in relation to the operating performance of the business and future undiscounted
cash flows expected to result from the use of these assets. Impairment losses
are recognized when the sum of the expected future cash flows is less than the
assets' carrying value. The Company has determined that no impairment exists as
of and for the year ending December 31, 2003.
2. Significant Accounting Policies (Continued)
F-10
Revenue Recognition
The Company recognizes revenue on product sales upon shipment on behalf of
or to the customer.
Shipping and Handling
The Company classifies shipping and handling costs invoiced to the
customer as revenues, and costs incurred relating to shipping and handling as
cost of sales.
Income Taxes
Deferred income taxes are recognized for the tax consequences in the
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
Valuation allowances are provided when necessary to reduce deferred tax assets
to the amount expected to be realized.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, compensation cost
is measured as the excess, if any, of the fair market value of the Company's
common stock at the date of the grant over the exercise price of the option
granted. Compensation cost is recognized over the vesting period.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure." SFAS No. 148 is effective
for fiscal years ending after December 15, 2002 and amends SFAS No. 123 to
provide for alternative methods of transition to a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has accounted for
stock-based employee compensation using the intrinsic value method under APB No.
25 and has adopted the amendments to the disclosure provisions of SFAS No. 148.
F-11
2. Significant Accounting Policies (Continued)
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of SFAS Statement No. 123,
"Accounting for Stock-Based Compensation" to stock-based employee compensation
for the year ended December 31:
2003
Net loss, reported ............................................................................... $(2,830,492)
Add: Stock-based employee compensation expense included in reported net loss, net
of related tax effects ........................................................................... --
Deduct: Total stock-based employee compensation expense determined under fair
value based methods for stock options, net of related tax effects ................................ (20,332)
Pro forma net loss ............................................................................... $(2,850,824)
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and contingent
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the period. Actual results could differ from these
estimates.
Guarantees and Indemnifications
In the ordinary course of business, the Company may enter into service
agreements with service providers in which it agrees to indemnify the service
provider against certain losses and liabilities arising from the service
provider's performance under the agreement. Generally, such indemnification
obligations do not apply in situations in which the service provider is grossly
negligent, engages in willful misconduct, or acts in bad faith. The Company was
not aware of any liability under such service agreements for the year ending
December 31, 2003.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Recent Accounting Standards
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." In December 2003, the FASB
revised FIN No. 46 to reflect decisions it made regarding a number of
implementation issues. FIN No. 46, as revised, requires that the primary
beneficiary of a variable interest entity consolidate the entity even if the
primary beneficiary does not have a majority voting interest. This
interpretation applies to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient
F-12
2. Significant Accounting Policies (Continued)
equity at risk for the entity to finance its activities without additional
subordinated financial support. This interpretation also identifies those
situations where a controlling financial interest may be achieved through
arrangements that do not involve voting interests. The interpretation also
establishes additional disclosures which are required regarding an enterprise's
involvement with a variable interest entity when it is not the primary
beneficiary. The requirements of this interpretation are required to be applied
for all new variable interest entities created or acquired after January 31,
2003. For variable interest entities defined as Special Purpose Entities
("SPE's") the provisions must be applied for the first interim or annual period
ending after December 15, 2003. For all other variable interest entities, the
provisions must be applied for the first interim or annual period ending after
March 15, 2004. We do not have any controlling interest, contractual
relationships or other business relationships with unconsolidated variable
interest entities which qualify as an SPE and therefore the adoption of this
standard for the year ending December 31, 2003 did not have any effect on our
financial position and results of operations. The Company does not have any
controlling interest, contractual relationships or other business relationships
with any other unconsolidated variable interest entities and therefore the
adoption of this standard in 2004 will not have any effect on the Company's
financial position and results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The statement requires that contracts with comparable characteristics
be accounted for similarly and clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except in certain circumstances, and for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a material impact on
the Company's financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which is effective for all financial instruments created or modified after May
31, 2003 and otherwise is effective July 1, 2003. SFAS No. 150 establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The adoption of this standard did not have any
effect on the Company's financial position and results of operations.
3. Inventory
Inventories consist of the following:
December 31,
----------------------------
2003 2002
---------- ----------
Raw Materials ............ $4,121,000 $4,477,238
Work in process .......... 1,521,108 1,721,584
---------- ----------
$5,642,108 $6,198,822
========== ==========
F-13
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following:
December 31,
------------------------------
2003 2002
------------ ------------
Land .................................................. $ 2,998,006 $ 2,998,006
Buildings and improvements ............................ 32,671,278 32,582,868
Machinery and equipment ............................... 84,301,595 81,977,170
Transportation equipment .............................. 3,628,091 3,361,751
------------ ------------
123,598,970 120,919,795
Less: Accumulated depreciation and amortization ...... 65,799,629 58,664,909
------------ ------------
$ 57,799,341 $ 62,254,886
============ ============
Included in other long-term assets are equipment deposits in the amount of
$1,869,861 and $2,988,457 as of December 31, 2003 and 2002, respectively.
At December 31, 2003 and 2002, machinery and equipment under capital
leases included in property plant and equipment totaled $3,411,172,400 and
$4,071,508, respectively, net of $916,919 and $256,503 of accumulated
depreciation, respectively.
5. Debt
At December 31, notes payable consisted of the following:
December 31,
Maturity -------------------------------
Notes Date 2003 2002
----- -------- ------------ ------------
Senior Subordinated Notes ............................. 2009 $105,000,000 $105,000,000
Revolving Line of Credit .............................. 2006 6,827,929 9,082,100
MICRF Loan ............................................ 2005 500,000 500,000
Equipment and Other Notes ............................. 2007 409,194 954,786
------------ ------------
Total ......................................... 112,737,123 115,536,886
Less current portion .......................... 7,237,123 9,627,692
------------ ------------
Long-term portion ............................. $105,500,000 $105,909,194
============ ============
Senior Subordinated Notes
The Company issued $105.0 million of 10-3/8% Senior Subordinated Notes due
2009 under an indenture (the "Indenture") in a private offering. The Senior
Subordinated Notes are uncollateralized senior subordinated obligations of the
Company with interest payable semiannually on February 1 and August 1 of each
year. Although not due until 2009, the Senior Subordinated Notes are redeemable,
at the option of the Company, on or after February 1, 2004, at declining
premiums through January 2007 and at their principal amount thereafter. If a
third party acquires control of the Company, the Senior Subordinated
F-14
5. Debt (Continued)
Note holders have the right to require the Company to repurchase the Senior
Subordinated Notes at a price equal to 101% of the principal amount of the notes
plus accrued and unpaid interest to the date of purchase. All current and future
"restricted subsidiaries," as defined in the Indenture, are guarantors of the
Senior Subordinated Notes on an uncollateralized senior subordinated basis (see
Note 12). The Indenture prohibits the Company from incurring more than $5
million of debt for the acquisition of equipment unless the required
consolidated coverage ratio is achieved. As of December 31, 2003 and 2002 the
Company failed to meet the required consolidated coverage ratio. The Company has
incurred $3.4 million of the $5 million permitted for equipment indebtedness
pursuant to the Indenture.
On October 27, 2003, the Company entered into an Interest Rate Swap
Agreement (the "Swap Agreement") to reduce interest rate costs relating to its
Senior Subordinated Notes. The Swap Agreement effectively converts $50 million
of the Company's $105 million of debt under the Senior Subordinated Notes into
variable rate debt. Pursuant to the Swap Agreement, the Company receives
payments based on a 10-3/8% rate and makes payments based on (i) a fixed rate of
8.64% until August 1, 2004 (representing LIBOR as of October 27, 2003 plus
7.42%) and (ii) a LIBOR-based variable rate plus 7.42% thereafter, adjusted
semiannually in arrears. The interest rate swap does not qualify for hedge
accounting and therefore any change in the Swap Agreement's future value will be
recorded as a component of interest expense through our consolidated statement
of operations. As of December 31, 2003 the fair value of the interest rate swap
was $105,447, which was included as a long term liability on the Company's
consolidated balance sheet and as an increase to our interest expense for the
year ended December 31, 2003.
MICRF Loan
In May 2000, the Company entered into a five year $500,000 loan agreement
with the Maryland Industrial and Commercial Redevelopment Fund (MICRF) bearing
interest at 4.38% per annum. Pursuant to its terms, if the Company employs 543
people in Maryland in each of the years of the loan, then the loan and all
accrued interest thereon shall be forgiven. If the Company does not meet the
employment requirements, it will be required to repay the loan and accrued
interest thereon in quarterly installments until repaid in full. As of December
31, 2003, the Company employed over 600 people in the State of Maryland. The
Company has included the principal amount of this loan in long term debt on the
consolidated balance sheet at December 31, 2003.
Revolving Line of Credit
On September 30, 2003, the Company entered into a Senior Credit Facility
with a commercial bank providing for the continuance of a $20,000,000 revolving
credit facility through August 31, 2006. Borrowings under the Senior Credit
Facility are subject to a borrowing base as defined in the agreement and are
collateralized by substantially all of the assets of the Company. The Company's
availability under the Senior Credit Facility was $10.3 million as of December
31, 2003. The Senior Credit Facility contains, without limitation, prohibitions
against the payment of dividends and distributions and the redemption of stock,
limitations on sales of assets, compensation of executives, and on additional
debt, and other financial and non-financial covenants including a requirement
that the Company maintain a defined fixed coverage charge ratio, as defined in
the Senior Credit Facility. As of December 31, 2003 and 2002, the Company was in
compliance with the fixed coverage charge ratio and other applicable financial
covenants.
F-15
5. Debt (Continued
As part of an existing 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.
The Senior Credit Facility provides for interest at a base rate plus an
applicable margin which varies depending on the Company's attaining certain
leverage ratios, or at the LIBOR rate plus an applicable margin which varies
depending on the Company attaining certain leverage ratios but only if the
Company is not in default of any of the covenants of the Senior Credit Facility.
At December 31, 2003 and 2002, the weighted average interest rates on the
Company's borrowings were 3.7% and 4.6%, respectively.
Included in accrued expenses is accrued interest for all Company debt in
the amount of $4,433,471 and $4,554,905 as of December 31, 2003 and 2002,
respectively.
Other Notes
During 2002, the Company entered into an agreement to terminate the
operating lease for its Taunton, Massachusetts 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 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.
Compliance with Debt Covenants
The Senior Credit Facility (amended and restated in September 2003)
requires the Company to maintain a defined fixed coverage charge ratio and
certain other reporting covenants. As of December 31, 2003 and 2002, the Company
was in compliance with all of its Senior Credit Facility covenants.
The Indenture contains limitations on the payment of dividends and
distributions, the redemption of stock, sale of assets and subsidiary stock, as
well as limitations on additional Company and subsidiary debt, and requires the
Company to maintain certain non-financial covenants. As of December 31, 2003 and
2002, the Company did not meet the consolidated coverage ratio target under the
Indenture and therefore, is unable to incur more than $5 million of additional
new indebtedness (of which $3.4 million was used) until the Company attains the
consolidated coverage ratio as defined in the Indenture.
Fair Value
The carrying value of the revolving line of credit, MICRF loan, equipment
and other notes approximated their fair value at December 31, 2003. The fair
value of the Indenture at December 31, 2003 was approximately $96,075,000 and
was estimated based on quoted market rate for instruments with similar terms and
remaining maturities.
F-16
5. Debt (Continued)
Debt Maturities
A summary of debt maturities for the next five years is as follows:
2004 .............................. $ 7,237,123
2005 .............................. 500,000
2006 .............................. --
2007 .............................. --
2008 .............................. --
Thereafter ........................ $105,000,000
------------
Total ............................. $112,737,123
============
6. Income Taxes
(Benefit) provision for income taxes is summarized as follows:
For the year December 31,
--------------------------------------------
2003 2002 2001
----------- ----------- ----------
Current:
Federal .......................................... $ -- $ -- $ 625,457
State ............................................ -- -- --
State payments (refunds) resulting from changes in
estimates on prior year returns ................ -- -- --
----------- ----------- ----------
-- -- 625,457
----------- ----------- ----------
Deferred:
Federal .......................................... -- (3,269,000) 4,221,691
State ............................................ -- -- 803,427
----------- ----------- ----------
-- (3,269,000) 5,025,118
----------- ----------- ----------
$ -- $(3,269,000) $4,399,661
=========== =========== ==========
The (benefit) provision for income taxes differed from the amount of
income tax determined by applying the applicable U.S. statutory rate to income
before taxes as a result of the following:
For the year ended December 31,
-------------------------------
2003 2002 2001
----- ----- -----
Statutory U.S. rate ........................... 34.0% 34.0% 34.0%
State taxes net of federal benefit ............ 4.0 4.2 3.3
Goodwill amortization ......................... -- -- (8.6)
Other permanent differences ................... (4.8) (3.2) (1.7)
Valuation allowance ........................... (33.2) 31.5 (68.5)
----- ----- -----
Effective tax rate ............................ --% 66.5% (41.5)%
===== ===== =====
F-17
6. Income Taxes (Continued)
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax asset (liability) are as follows:
December 31,
--------------------------------
2003 2002
------------ ------------
Deferred income tax assets:
Covenant not to compete ................................. $ 22,818 $ 26,040
Lease reserve ........................................... 141,116 --
Allowance for doubtful accounts ......................... 707,396 381,687
Accrued liabilities ..................................... 762,940 1,124,188
Inventory ............................................... 11,761 --
Contribution and loss carryforward ...................... 11,832,147 10,834,977
------------ ------------
Total deferred income tax assets ..................... 13,478,178 12,366,892
Valuation allowance ..................................... (6,058,975) (5,092,952)
------------ ------------
Net deferred tax assets .............................. 7,419,203 7,273,940
------------ ------------
Deferred income tax liabilities:
Property and equipment .................................. (7,419,203) (7,273,940)
------------ ------------
Total deferred income tax liabilities ................ (7,419,203) (7,273,940)
------------ ------------
Net deferred asset (liability) ....................... $ -- $ --
============ ============
During the year ended December 31, 2003, the Company increased the
valuation allowance. The increase in the valuation allowance in 2003 was due to
the uncertainty of the realization of the operating losses generated in 2003. On
March 9, 2002, the "Job Creation and Worker Assistance Act" (H.R. 3090), was
signed into law, which temporarily extended the general NOL carryback period to
five years for NOLs arising in taxable years ending in 2001 and 2002. As a
result of the law change, the Company realized a refund of approximately $3.5
million in 2002 and reversed $3.3 million of the valuation allowance associated
with net operating loss carryforwards. This decrease in the valuation allowance
was offset by an increase in the valuation allowance due to the uncertainty of
the realization of the net operating losses generated in 2002.
During the year ended December 31, 2001, the Company established against
its deferred tax assets a valuation allowance of $7.3 million. The valuation
allowance was established against substantially all of the Company's net
operating loss carryforwards due to the uncertainty of their realizability. As
of December 31, 2003, the Company had net operating loss carryforwards of $31.1
million, which begins to expire in 2018, and a charitable contribution
carryforward of $178,000, which begins to expire in 2004.
7. Restructuring
During 2000, the Company announced a plan to restructure its operations,
which resulted in its closing a subsidiary operation and the Taunton,
Massachusetts facility. The Company negotiated settlements with respect to
certain operating leases for equipment previously included in the restructuring
F-18
7. Restructuring (Continued)
provision, which resulted in a reduction of $304,000 and $2,181,000 in the years
2001 and 2003, respectively.
The following table displays the activity and balances of the
restructuring accrual account from January 1, 2001 to December 31, 2003:
Lease
Termination Facility
Costs Closing Totals
----------- ---------- -----------
Balance January 1, 2001 .......................... $ 3,656,000 $ -- $ 3,656,000
Reductions ....................................... 304,000 -- 304,000
Payments ......................................... 378,000 -- 378,000
----------- ---------- -----------
Balance December 31, 2001 ........................ 2,974,000 -- 2,974,000
Payments ......................................... 377,000 -- 377,000
----------- ---------- -----------
Balance December 31, 2002 ........................ 2,597,000 -- 2,597,000
Reductions ....................................... 2,181,000 -- 2,181,000
Payments ......................................... 416,000 -- 416,000
----------- ---------- -----------
Balance December 31, 2003 ........................ $ -- $ -- $ --
=========== ========== ===========
F-19
8. Commitments and Contingencies
Operating and Capital Leases
The Company leases certain office, manufacturing facilities and equipment
under operating and capital leases. Lease terms generally range from 1 to 10
years with options to renew at varying terms. The leases generally provide for
the lessee to pay taxes, maintenance, insurance and other operating costs of the
leased property. Rent expense under all leases is recognized ratably over the
lease terms. Rent expense under all operating leases was approximately
$6,861,669, $6,647,058 and $6,414,062 for the years ending December 31, 2003,
2002, and 2001, respectively.
Future minimum lease payments under operating and capital leases as of
December 31, 2003 are as follows:
Operating Capital
----------- ----------
2004 ............................................. $ 7,028,162 $1,010,555
2005 ............................................. 7,098,963 1,010,555
2006 ............................................. 6,616,862 1,010,555
2007 ............................................. 4,796,311 629,569
2008 ............................................. 835,497 --
Thereafter ....................................... 594,408 --
----------- ----------
$26,970,203 $3,661,234
===========
Amounts representing interest .................... 297,047
----------
Present value of minimum lease payments .......... 3,364,187
Current portion .................................. 831,169
----------
Long term capital lease obligations .............. $2,533,018
==========
Legal Contingencies
On May 20, 2002, Xerox filed a complaint against Phoenix Color Corp.
("Phoenix") in the 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 plans in
September 2000. On July 19, 2002, Xerox filed an amended complaint naming
Phoenix and TechniGraphix as defendants and alleging that Phoenix had an account
due and owing of $2.7 million and that Phoenix and TechniGraphix were jointly
liable for an account due and owing of $.5 million. The parties engaged in
discovery and filed cross motions for summary judgment, resulting in Xerox's
claims against Phoenix being reduced to $1.9 million. On October 3, 2003, the
parties mediated and entered into a preliminary settlement agreement. The
parties notified the court of settlement and, on October 21, 2003, the court
dismissed the case.
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 claims and lawsuits against the Company can not be accurately
predicted, the Company does not believe that any potential claims and lawsuits
existing as of the date of the Annual Report on Form 10-K, will individually or
in the aggregate, have a material adverse effect on its business, financial
condition, results of operations and cash flows for any quarterly or annual
period.
F-20
9. Related Party Transactions
Earl S. Wellschlager, director of the Company, is a partner in a law firm
that serves as counsel to the Company. The Company paid the law firm
approximately $605,000, $320,000 and $610,000 for the years ended December 31,
2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002, no amounts
were owed to the law firm.
The Company utilizes the services of a management consulting firm in which
David Rubin, a director of the Company, is also a partner. The Company paid the
consulting firm approximately $194,000, $289,000, and $143,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. As of December 31, 2003
and 2002, $34,124 and $24,264, respectively, was owed to the consulting firm and
was included in accounts payable.
The Company utilizes the services of a prepress systems integration firm
of which Edward Lieberman and Louis LaSorsa each own 6.7%. The Company paid the
firm approximately $434,000, $541,000 and $501,000 for the years ended December
31, 2003, 2002 and 2001, respectively. Nothing was owed as of December 31, 2003
and $25,904 was owed as of December 31, 2002 to the systems integration firm and
was included in accounts payable.
10. Employment Agreements and Employee Benefits
Employment Contracts
On August 16, 2002, the Company entered into individual employment
agreements (the "Executive Employment Agreements") with each of Messrs. LaSorsa,
Lieberman and Carbone (collectively, the "Executives"). The Executive Employment
Agreements have an initial term of October 1, 2002 through September 30, 2004
and will automatically continue after the initial term for successive one-year
terms, unless terminated by either party by sixty (60) days prior written
notice. In addition to the base salary amounts described below, the Executive
Employment Agreements provide that the Executives are entitled to participate in
any bonus and stock option plans, programs, arrangements and practices as may be
established from time to time by our Board of Directors. Each of the Executive
Employment Agreements also provides that the Executives are entitled to certain
fringe benefits, including the use of a Company automobile. Each of the
Executive Employment Agreements includes a non-competition and non-solicitation
covenant expiring three (3) years after the Executive ceases to be employed by
the Company.
The Executive Employment Agreement with Mr. LaSorsa provides that he shall
serve as the Company's Chairman of the Board of Directors, Chief Executive
Officer and President and be paid an annual base salary of $494,000, subject to
any increases that may be determined by the Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Lieberman provides that he
shall serve as the Company's Executive Vice President, Chief Financial Officer,
and Secretary and be paid an annual base salary of $343,500, subject to any
increases that may be determined by the Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Carbone provides that he
shall serve as the Company's Executive Vice President and Chief Operating
Officer/Book Components and be paid an annual base salary of $253,800, subject
to any increases that may be determined by the Board of Directors based on
periodic reviews.
F-21
10. Employment Agreements and Employee Benefits (Continued)
Under the terms of the Executive Employment Agreements, the Company must
pay severance as follows:
Nonrenewal
If, upon expiration of its initial term, the Company terminates the
Executive Employment Agreement of an Executive and does not enter into a new
employment agreement or a consulting agreement with the Executive, then, for a
period of one (1) year, the Company must pay the Executive an amount equal to
his annual base salary and provide the Executive with benefits.
Termination of the Executive's Employment
If the Company terminates an Executive's employment without cause or
materially reduces an Executive's duties or compensation or relocates him
outside of a specified geographic area, then, for the greater of (i) one (1)
year or the (ii) the remainder of the term of the Executive Employment
Agreement, the Company must pay the Executive his annual base salary and provide
the Executive with benefits.
Termination of the Executive's Employment Upon a Change of Control
If, within six (6) months following certain change of control events, the
Company terminates an Executive's employment with or without cause or materially
reduces an Executive's duties or compensation or relocates him outside of a
specified geographic area, the Company must (i) pay the Executive an amount
equal to 2.9 times his annual compensation and (ii) provide the Executive with
benefits for three (3) years. If the Internal Revenue Code would impose excise
taxes on any portion of these payments, the severance payments shall be reduced
to an amount that will not result in the imposition of such taxes.
In addition, prior to the occurrence of certain change of control events,
the Company must implement a supplemental executive retirement plan that
provides for a payment to each of the Executives, upon a change of control, a
lump sum that may not be less than the actuarial equivalent of ten (10) times
thirty-two and one-half percent (32.5%) of the Executive's average annual
compensation.
2002 Stock Incentive Plan
The Company implemented the 2002 Stock Incentive Plan (as amended, the
"Plan") in August 2002. The Company accounts for the plan under the recognition
and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations. Prior to August 2003 no options were
issued and outstanding. On August 16, 2003, 657 options were issued to key
executives of the Company to purchase shares of the Company's Class A Common
Stock, with an exercise price of $661 and a term of ten years. No stock-based
employee compensation cost was reflected for the year ended December 31, 2003,
as all options granted under the Plan had an exercise price equal to the market
value of the underlying Class A Common Stock on the date of grant. The options
vest ratably over a three year period. None of the options were exercisable as
of December 31, 2003.
The weighted average fair value of each option granted during the year
ended December 31, 2003 was $136. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
F-22
10. Employment Agreements and Employee Benefits (Continued)
12/31/2003
Risk-free interest 3.85%
Expected life 6 years
Expected volatility --
Expected dividend yield --
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, existing models, including the
Black-Scholes option-pricing model, do not necessarily provide a reliable single
measure of the fair value of employee stock options.
Employee Retirement Benefit Plans
Phoenix's Employee Stock Bonus and Ownership Plan (the "Plan") is the
primary retirement program of the Company. Contributions to the Plan are made at
the discretion of management. For the years ended December 31, 2003 and 2002,
the Board of Directors authorized a contribution to the Plan of $600,000 and
$500,000, respectively. No amounts are owed to the Plan as of December 31, 2003.
No contributions were made to the Plan for the year ended December 31, 2001.
The Company offers a 401(k) Employee Savings and Investment Plan to all
employees of the Company who have completed at least one year of service (1,000
hours) during the plan year. The Company may, at its discretion, make
contributions to the plan. No contributions were made to the plan for the years
ended December 31, 2003, 2002 and 2001, respectively.
F-23
11. Unaudited Quarterly Financial Data
Quarterly Financial Information
First Second Third Fourth Total
-----------------------------------------------------------------------------------
2003
Net sales ............................... 33,822,319 34,068,154 38,091,952 30,693,532 136,675,957
Cost of sales ........................... 26,856,721 27,773,963 28,961,597 25,324,843 108,917,124
Income (loss) from operations ........... 2,025,002 1,247,513 6,369,037 (403,243) 9,238,309
Net loss ................................ (1,018,436) (1,786,694) 3,342,469 3,367,831) 2,830,492)
2002
Net sales ............................... 30,221,841 35,844,237 40,016,755 31,878,343 137,961,176
Cost of sales ........................... 25,423,288 27,258,654 29,039,110 25,835,439 107,556,491
Income (loss) from operations ........... (435,087) 2,573,457 5,934,552 36,253 8,109,175
Net loss ................................ (244,581) (862,525) 2,580,688 (3,115,012) (1,641,430)
2001
Net sales ............................... 32,832,445 33,097,402 36,028,778 30,301,439 132,260,064
Cost of sales ........................... 26,274,846 26,997,817 28,635,395 25,681,711 107,589,769
Income (loss) from operations ........... 533,149 386,768 1,771,963 (1,180,521) 1,511,359
Net loss ................................ (1,249,749) (3,637,395) (6,059,360) (4,062,357) (15,008,861)
12. Guarantor Subsidiaries:
Phoenix 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 Phoenix's
financial statements would be representative of the combined guarantors.
F-24
Report of Independent Auditors on
Financial Statement Schedule
To the Board of Directors of
Phoenix Color Corp.
Our audits of the consolidated financial statements referred to in our report
dated February 27, 2004 included in this Annual Report on Form 10-K also
included an audit of the financial statement schedule, Valuation and Qualifying
Accounts, for each of the three fiscal years in the period ended December 31,
2003, which is also included in this Form 10-K. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 27, 2004
S-1
Schedule II - Valuation and Qualifying Accounts
For Each of the Three Years in the Period Ended December 31, 2003
(in thousands)
Additions
---------
Balance Charged to Balance
at Costs Rebates at
Beginning and Charged to End
of Year Expenses Sales Deductions of Year
------- -------- ----- ---------- -------
Description
Allowance for Doubtful Accounts Receivable and Rebates
Year ended December 31, 2003 ................................ $ 1,525 $ 1,377 $ 516 $ 1,072 $ 2,346
==================================================================
Year ended December 31, 2002 ................................ $ 1,781 $ 485 $ 552 $ 1,293 $ 1,525
==================================================================
Year ended December 31, 2001 ................................ $ 1,085 $ 414 $ 888 $ 606 $ 1,781
==================================================================
Restructuring Reserve
Year ended December 31, 2003 ................................ $ 2,597 $ 2,181 $ -- $ 416 $ --
==================================================================
Year ended December 31, 2002 ................................ $ 2,974 $ -- $ -- $ 377 $ 2,597
==================================================================
Year ended December 31, 2001 ................................ $ 3,656 $ (304) $ -- $ 378 $ 2,974
==================================================================
Tax Valuation Allowance
Year ended December 31, 2003 ................................ $ 5,093 $ 966 $ -- $ -- $ 6,059
==================================================================
Year ended December 31, 2002 ................................ $ 7,266 $ 1,096 $ -- $ 3,269 $ 5,093
==================================================================
Year ended December 31, 2001 ................................ $ -- $ 7,266 $ -- $ -- $ 7,266
==================================================================
S-2