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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission File No. 333-50995
PHOENIX COLOR CORP.
(Exact name of Registrant as specified in its charter)
Delaware 22-2269911
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 733-0018
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of May 13, 2004, there were 11,100 shares of the Registrant's Class A
Common Stock issued and outstanding and 7,794 of the Registrant's Class B Common
Stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
Page No.
--------
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 1
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
March 31, 2004 2003
(Unaudited) (Audited)
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 92,373 $ 63,714
Accounts receivable, net of allowance for doubtful accounts
and rebates of $2,743,052 in 2004 and $2,345,715 in 2003 ...... 17,601,822 18,846,859
Inventory ........................................................ 6,195,931 5,642,108
Prepaid expenses and other current assets ........................ 3,010,837 3,045,703
------------- -------------
Total current assets ......................................... 26,900,963 27,598,384
Property, plant and equipment, net .................................... 55,482,374 57,799,341
Goodwill .............................................................. 13,302,809 13,302,809
Deferred financing costs, net ......................................... 2,318,406 2,443,698
Other assets .......................................................... 10,217,417 10,635,423
------------- -------------
Total assets ................................................. $ 108,221,969 $ 111,779,655
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable .................................................... $ 272,796 $ 409,194
Capital lease obligations ........................................ 855,433 831,169
Revolving line of credit ......................................... 7,661,240 6,827,929
Accounts payable ................................................. 7,870,051 8,556,760
Accrued expenses ................................................. 6,798,072 9,064,919
------------- -------------
Total current liabilities .................................... 23,457,592 25,689,971
10 3/8% Senior subordinated notes ..................................... 105,000,000 105,000,000
MICRF Loan ............................................................ 500,000 500,000
Capital lease obligations ............................................. 2,310,411 2,533,018
Other liabilities ..................................................... -- 105,447
------------- -------------
Total liabilities ............................................ 131,268,003 133,828,436
------------- -------------
Commitments and contingencies (Note 6)
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share,
20,000 authorized shares, 14,560 issued shares,
11,100 outstanding shares .................................... 146 146
Common Stock, Class B, non-voting, par value $0.01 per share,
200,000 authorized shares, 9,794 issued shares, 7,794
outstanding shares ........................................... 98 98
Additional paid in capital ....................................... 2,126,804 2,126,804
Accumulated deficit .............................................. (23,389,420) (22,392,167)
Stock subscriptions receivable ................................... (14,432) (14,432)
Treasury stock, at cost: Class A, 3,460 shares and Class B,
2,000 shares ................................................. (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit (23,046,034) (22,048,781)
------------- -------------
Total liabilities & stockholders' deficit .................... $ 108,221,969 $ 111,779,655
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
------------------------------
2004 2003
------------ ------------
Net sales .................................. $ 32,417,442 $ 33,822,319
Cost of sales .............................. 26,391,281 26,856,721
------------ ------------
Gross profit ............................... 6,026,161 6,965,598
------------ ------------
Operating expenses:
Selling and marketing expenses .......... 1,793,035 1,926,532
General and administrative expenses ..... 3,021,639 3,086,554
Loss (gain) on sale of equipment ........ 6,062 (72,490)
------------ ------------
Total operating expenses 4,820,736 4,940,596
------------ ------------
Income from operations ..................... 1,205,425 2,025,002
Other (income) expenses:
Interest expense, net ................... 2,250,062 3,074,145
Other income ............................ (47,384) (30,707)
------------ ------------
Loss before income taxes ................... (997,253) (1,018,436)
Income tax provision ....................... -- --
------------ ------------
Net loss ................................... $ (997,253) $ (1,018,436)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
2004 2003
----------- -----------
Operating activities
Net loss ............................................................ $ (997,253) $(1,018,436)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property, plant and
equipment ................................................... 2,724,223 2,526,780
Amortization of deferred financing costs ...................... 125,292 139,112
Provision for uncollectible accounts .......................... 167,618 136,121
Change in fair value of interest rate swap .................... (550,768) --
Loss (gain) on disposal of assets ............................. 6,062 (72,490)
Increase (decrease) in cash resulting from changes in assets
and liabilities:
Accounts receivable ........................................... 1,077,419 (1,346,621)
Inventory ..................................................... (553,823) 209,385
Prepaid expenses and other assets ............................. 885,641 839,858
Accounts payable .............................................. 247,119 (120,822)
Accrued expenses .............................................. (2,266,847) (2,373,456)
Income tax refund receivable .................................. -- (4,694)
----------- -----------
Net cash provided by (used in) operating activities ... 864,683 (1,085,263)
----------- -----------
Investing activities:
Capital expenditures .......................................... (1,334,594) (685,231)
Proceeds from sale of fixed assets ............................ -- 142,500
----------- -----------
Net cash used in investing activities ..................... (1,334,594) (542,731)
----------- -----------
Financing activities:
Net borrowings from revolving line of credit .................. 833,311 1,879,212
Principal payments on long term borrowings and capital
lease obligations ............................................. (334,741) (307,138)
Payment of stock subscription ................................. -- 3,600
----------- -----------
Net cash provided by financing activities ................. 498,570 1,575,674
----------- -----------
Net increase (decrease) in cash ........................... 28,659 (52,320)
Cash and cash equivalents at beginning of period .................... 63,714 109,297
----------- -----------
Cash and cash equivalents at end of period .......................... $ 92,373 $ 56,977
=========== ===========
Non-cash investing activities:
Equipment included in accounts payable .................... $ 1,056,244 $ 71,922
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
The accompanying interim financial statements of Phoenix Color Corp. and
its subsidiaries (the "Company") do not include all of the information and
disclosures generally required for annual financial statements and are
unaudited. In the opinion of management, the accompanying unaudited financial
statements contain all material adjustments (consisting of normal recurring
accruals), necessary to present fairly the Company's financial position as of
March 31, 2004, and the results of its operations for the three month periods
ended March 31, 2004 and 2003. The unaudited interim financial statements should
be read in conjunction with the Company's audited Consolidated Financial
Statements for the year ended December 31, 2003, included in the Company's
Annual Report filed on Form 10-K.
2. Inventory.
Inventory consists of the following:
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials ..................... $4,102,325 $4,121,000
Work in process ................... 2,093,606 1,521,108
---------- ----------
$6,195,931 $5,642,108
========== ==========
3. Other Assets.
Other assets at March 31, 2004 and December 31, 2003 include equipment
deposits of $1,857,309 and $1,869,861, respectively.
4. Accrued Expenses.
Accrued expenses at March 31, 2004 and December 31, 2003 include accrued
interest payable of $1,699,928 and $4,433,471, respectively.
5. Debt.
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 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. The
Indenture prohibits the Company from incurring more than $5 million of debt for
the acquisition of equipment unless the required
6
consolidated coverage ratio is achieved and contains other non-financial
covenants. As of March 31, 2004 and December 31, 2003 the Company failed to meet
the required consolidated coverage ratio. The Company has incurred $3.2 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 manage 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 interest rate swap's value is
recorded as a component of interest expense through the Company's consolidated
statement of operations. As of March 31, 2004 the fair value of the interest
rate swap was $445,321 which was included in other non-current assets on the
consolidated balance sheet. 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. Interest expense for the three months
ended March 31, 2004, has been reduced by $550,768 which represents the
difference between the valuation of the interest rate swap on March 31, 2004 and
December 31, 2003.
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 March 31,
2004, 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 March 31, 2004.
On September 30, 2003, the Company entered into an Amended and Restate
Loan and Security Agreement (the "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 $6.0 million as of March 31, 2004. The Senior
Credit Facility contains, without limitation, prohibitions against the payment
of dividends, distributions and the redemption of stock; limitations on sales of
assets, compensation of executives, and 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 the Company was in compliance with fixed coverage charge
ratio. As of March 31, 2004 the Company was not in compliance with the fixed
coverage charge ratio. On May 13, 2004, the commercial bank waived all instances
of noncompliance with respect to this covenant for quarter ended March 31, 2004.
7
6. Commitments and Contingencies.
The Company is not a party to any 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 of the claims or lawsuits described in this
paragraph individually or in the aggregate, will have a material adverse effect
on its business, financial condition, results of operations and cash flows for
any quarterly or annual period.
8. Guarantor Subsidiaries.
Phoenix Color Corp. ("Parent") currently has no independent operations and
the guarantees made by all of its subsidiaries, which are all 100% owned, are
full and unconditional and joint and several. The Company currently does not
have any direct or indirect non-guarantor subsidiaries. All consolidated amounts
in the Parent's financial statements would be representative of the combined
guarantors.
9. Income Taxes.
The Company did not record an income tax provision for the three months
ended March 31, 2004 and 2003 due to the uncertainty of the expected realization
of the benefit related to certain deferred tax assets.
10. Stock Options
The Company has one stock-based employee compensation plan, which was
established in 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. 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. Prior to August 2003,
no options were issued or outstanding. On August 16, 2003, options to purchase
an aggregate of 657 shares of the Company's Class A common stock were issued to
key executives of the Company. The options vest ratably over a three year
vesting period. As of March 31, 2004, none of the options are exercisable and
2,178 shares are available for future grants under the terms of the Company's
Amended and Restated Stock Incentive Plan.
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 three month period ended March 31:
2004
Net loss, reported .............................................. $ (997,253)
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 ...................................... (10,777)
Pro forma net loss .............................................. $(1,008,030)
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Our results of operations for the quarter ended March 31, 2004 reflect the
fact that we continue to operate in an environment where our customers, book
publishers, are under intensely competitive pressure. Trade publishers, in
particular, are operating on razor thin margins, which has lead to industry
consolidation aimed at eliminating duplicate overhead. At the same time, small
and medium sized publishers have been expanding. All of the above have created
pricing pressures requiring publishers to reduce the cost of book and book
component manufacturing. Large publishers are using their size to force price
concessions, and smaller publishers do not have the financial resources to
utilize special effects in their book components.
During the first quarter we continued to look for ways to reduce costs of
manufacture and overhead to remain competitive in this highly aggressive
environment. Although our net sales decreased $1.4 million to $32.4 million for
the quarter ended March 31, 2004 from $33.8 million for the same period in 2003,
our net loss remained unchanged at $1.0 million for the quarters ended March 31,
2004 and 2003, due to decreased operating expenses and, in large part, an
$800,000 decrease in interest expense as a result of our interest rate swap. ]
Forward Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include 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 risk that we will not have the
funds we anticipated or will require more funds than we anticipated to finance
our current operations, remaining capital expenditures and internal growth for
the year 2004, (iii) the risk that any claims and lawsuits filed, threatened to
be filed or pending against us might have a material adverse effect on our
business or results of operations, and (iv) the risk that we will not receive
the net payments we anticipate after August 1, 2004 pursuant to our interest
rate swap or that we will incur a net liability pursuant to our interest rate
swap. You should not place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We expressly decline any obligation to
publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion and analysis should be read in conjunction with
our unaudited Consolidated Financial Statements and the Notes thereto included
elsewhere in this Form 10-Q.
Critical Accounting Policies
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 of America. 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,
9
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.
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 March
31, 2004, our accounts receivable balance, net of allowances for doubtful
accounts and rebates of $2.7 million, was $17.6 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 2004, 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.
10
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 March 31, 2004, we do not believe there was any impairment
to the value of our physical assets.
Deferred Tax Valuation Allowance
As of March 31, 2004, we recorded a valuation allowance of $6.4 million
against our total net deferred tax asset of $6.4 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.
Stock Based Compensation
The Company discloses information relating to stock-based compensation
awards in accordance with SFAS No.123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition
and Disclosure, and has elected to apply the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees to such
compensation awards. Under the Company's employee stock option plans, the
Company grants employee stock options at an exercise price equal to the fair
market value at the date of grant. No compensation expense has been recorded
with respect to such stock option grants.
Results of Operations
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations
(dollars in millions):
Three Months Ended March 31,
2004 % 2003 %
------ ------ ------ ------
Net sales .................... $ 32.4 100.0 $ 33.8 100.0
Cost of sales ................ 26.4 81.5 26.9 80.0
Gross profit ................. 6.0 18.5 6.9 20.0
Operating expenses ........... 4.8 14.8 4.9 14.5
Income from operations ....... 1.2 3.7 2.0 5.5
Interest expense ............. 2.2 6.8 3.0 8.8
Loss before income taxes ..... (1.0) (3.1) (1.0) (3.3)
Income tax provision ......... -- -- -- --
Net loss ..................... (1.0) (3.1) (1.0) (3.3)
11
Three Months Ended March 31, 2004 and 2003
Net sales decreased $1.4 million, or 4.1%, to $32.4 million for the three
months ended March 31, 2004, from $33.8 million for the same period in 2003.
Decreases occurred at all operating units but was most significant at our book
manufacturing facility located in Hagerstown, Maryland. This was due primarily
to a decrease in new orders of $1.0 million, partially offset by an increase in
reorders of $0.3 million.
Gross profit decreased $900,000, or 13.0%, to $6.0 million for the three
months ended March 31, 2004, from $6.9 million for the same period in 2003. This
decrease was primarily the result of decreased sales discussed above and
increased overhead costs of $0.5 million offset by lower material and labor
costs of $1.0 million. The gross profit margin declined 1.5% to 18.5% for the
three months ended March 31, 2004, from 20.0% for the same period in 2003,
primarily due to increased overhead costs as a percentage of sales offset by
decreased material and labor costs as a percentage sales.
Operating expenses decreased $100,000 or 2.0% to $4.8 million for the
three months ended March 31, 2004, from $4.9 million for the same period in
2003. The reduction is primarily attributed to decreases in selling related
expenses of $0.2 million due to a smaller sales force, offset by increases in
health care related costs of $0.1 million.
Interest expense decreased $800,000 to $2.2 million for the three months
ended March 31, 2004, from $3.0 million for the same period in 2003. The
decrease was primarily due to cash savings of $220,000 as a result of the
interest rate swap and a $550,000 non-cash change in the value of the interest
rate swap.
For the three months ended March 31, 2004 and 2003, we did not record an
income tax provision due to the uncertainty of the expected realization of the
benefit related to certain deferred tax assets.
Net loss remained unchanged at $1.0 million for the three months ended
March 31, 2004 and 2003, due to the factors described above.
Liquidity and Capital Resources
During the first three months of 2004, our cash increased by approximately
$29,000. Net cash provided by operating activities was approximately $0.9
million, which consisted principally of (i) a net loss of $1 million offset by
net non-cash expenses and credits of $2.5 million (consisting of $3.0 million in
non-cash expenses reduced by $0.5 million of non-cash income based on the change
in value of the interest rate swap), offset by (ii) investment in additional
working capital of $0.6 million. Net cash used in investing activities was $1.3
million due to capital and equipment expenditures. Net cash provided by
financing activities was $0.5 million, resulting primarily from borrowings under
the Senior Credit Facility offset by repayments of long term debt and capital
lease obligations.
Working capital increased $1.5 million to $3.4 million as of March 31,
2004, from $1.9 million at December 31, 2003. This increase is primarily
attributable to a decrease in accounts payable of $0.7 million and accrued
expenses of $2.3 million, offset by a decrease in accounts receivable of $1.1
million and an increase in borrowing under the Senior Credit Facility of $0.8
million.
12
We historically have financed our operations with internally generated
funds, external short and long-term borrowings and operating leases. We believe
that funds generated from operations, together with existing cash amounts,
available credit under the Senior Credit Facility ($6.0 million as of March 31,
2004) and other financial sources will be sufficient to finance our current
operations, remaining capital expenditure requirements and internal growth for
the year 2004. 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.
If we were to make any significant acquisitions for cash, it may be
necessary to obtain additional debt or equity financing. There can be no
assurance that such financing would be available on satisfactory terms or at
all. We have no current agreements with respect to any acquisitions.
The following is a summary of our future cash payments under contractual
obligations as of March 31, 2004. In the event of a default, many of the
contracts provide for acceleration of payments.
Payments Due by Period
(in thousands of dollars)
Less
Contractual Obligations than 1-3 4-5 After
Total 1 year years Years 5 years
Long-Term Debt (1) .................. $105,273 $ 273 $ -- $105,000 $ --
Capital Lease Obligations ............ 3,671 1,013 2,026 632 --
Operating Leases ..................... 25,422 6,529 13,739 5,154 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations ... $134,366 $ 7,815 $ 15,765 $110,786 $ --
======== ======== ======== ======== ========
(1) The amounts stated are the expected amounts of our commitments under the
10-3/8% Senior Subordinated Notes and assumes that no notes as tendered.
The following is a summary of our other commercial commitments by
commitment expiration date as of March 31, 2004:
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
Line of Credit (1) ................... $20,000 $ -- $20,000 $ -- $ --
------- ------- ------- ------- -------
Total Commercial Commitments ......... $20,000 $ -- $20,000 $ -- $ --
======= ======= ======= ======= =======
(1) The line of credit is the maximum we could borrow subject to borrowing
base limitations, and does not represent the amount of debt outstanding
under the line of credit.
13
Item 3. 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 $293,000 under the interest rate swap between April 1, 2004 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 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures, (as defined in 17 CRF 240.13(a) -
15(e) and 240.15(d) - 15(e)) are effective based upon their evaluation of these
controls and procedures as of the end of the period covered by this report.
There has been no change in our internal controls over financial reporting
that occurred during the first quarter of 2004 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any 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 of the claims and lawsuits described in this paragraph,
individually or in the aggregate, will have a material adverse effect on our
business, financial condition, results of operations and cash flows for any
quarterly or annual period.
Item 2. Change in Securities and Use of Proceeds.
None.
14
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders, held on February 28, 2004, the
following directors were re-elected to the Board of Directors:
John Carbone
Louis LaSorsa
Edward Lieberman
David Rubin
Earl S. Wellschlager
The following proposal was approved at our annual meeting of stockholders:
Number of Number of Number
Affirmative Votes Of
Votes Withheld Abstentions
Ratification of the selection of PricewaterhouseCoopers, 9,100 None None
LLP as independent auditors for the fiscal year ending
December 31, 2004.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. Exhibits filed as part of this report are listed below:
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.
(b) Reports on Form 8-K
Current Report on Form 8-K filed April 6, 2004, and furnishing under
Item 15, our financial results for the year ended December 31, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: May 13, 2004
PHOENIX COLOR CORP.
By: /s/ Louis LaSorsa
-----------------------------
Louis LaSorsa, Chairman
and Chief Executive Officer
By: /s/ Edward Lieberman
-----------------------------
Edward Lieberman
Chief Financial Officer
and Chief Accounting Officer
16