UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 X 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 X whether the Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes |_| No |X|
As of August 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
June 30, 2004 and December 31, 2003 1
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2004 and 2003 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
June 30, 2004 2003
(Unaudited) (Audited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 72,820 $ 63,714
Accounts receivable, net of allowance for doubtful accounts and rebates of
$3,178,526 in 2004 and $2,345,715 in 2003 ........................................ 16,493,242 18,846,859
Inventory ......................................................................... 6,155,724 5,642,108
Assets held for sale .............................................................. 909,270 --
Prepaid expenses and other current assets ......................................... 2,974,957 3,045,703
------------- -------------
Total current assets .......................................................... 26,606,013 27,598,384
Property, plant and equipment, net ..................................................... 52,883,816 57,799,341
Goodwill ............................................................................... 13,302,809 13,302,809
Deferred financing costs, net .......................................................... 2,193,113 2,443,698
Other assets ........................................................................... 9,344,037 10,635,423
------------- -------------
Total assets
$ 104,329,788 $ 111,779,655
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable ..................................................................... $ 136,398 $ 409,194
Capital lease obligations ......................................................... 878,500 831,169
Revolving line of credit .......................................................... 4,401,713 6,827,929
Accounts payable .................................................................. 7,584,999 8,556,760
Accrued expenses .................................................................. 8,579,569 9,064,919
------------- -------------
Total current liabilities ..................................................... 21,581,179 25,689,971
10 3/8% Senior subordinated notes ...................................................... 105,000,000 105,000,000
MICRF Loan ............................................................................. 500,000 500,000
Capital lease obligations .............................................................. 2,082,533 2,533,018
Other liabilities ...................................................................... 1,042,578 105,447
------------- -------------
Total liabilities ............................................................. $ 130,206,290 $ 133,828,436
------------- -------------
Commitments and contingencies (Note 7)
Stockholders' deficit
Common Stock, Class A, voting, par value $0.01 per share, authorized
20,000 shares, 14,560 issued shares, 11,100 outstanding shares ................ 146 146
Common Stock, Class B, non-voting, par value $0.01 per share, authorized
200,000 shares, 9,794 issued shares, 7,794 outstanding shares ................. 98 98
Additional paid in capital ........................................................ 2,126,804 2,126,804
Accumulated deficit ............................................................... (26,219,888) (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 ................................................... (25,876,502) (22,048,781)
------------- -------------
Total liabilities & stockholders' deficit ..................................... $ 104,329,788 $ 111,779,655
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales .............................................. $ 33,313,179 $ 34,068,154 $ 65,730,621 $ 67,890,473
Cost of sales ...................................... 27,235,868 27,773,963 53,627,149 54,630,684
------------ ------------ ------------ ------------
Gross profit ....................................... 6,077,311 6,294,191 12,103,472 13,259,789
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing expenses ............... 1,813,660 1,820,283 3,606,695 3,746,815
General and administrative expenses .......... 2,833,730 3,134,547 5,855,369 6,221,101
Loss on sale of assets ....................... 4,949 91,848 11,011 19,358
------------ ------------ ------------ ------------
Total operating expenses ........................... 4,652,339 5,046,678 9,473,075 9,987,274
------------ ------------ ------------ ------------
Income from operations ............................. 1,424,972 1,247,513 2,630,397 3,272,515
Other expenses:
Interest expense ............................. 4,268,905 3,059,822 6,518,967 6,133,967
Other income ................................. (13,464) (25,615) (60,848) (56,322)
------------ ------------ ------------ ------------
Loss before income taxes ........................... (2,830,469) (1,786,694) (3,827,722) (2,805,130)
Income tax benefit ................................. -- -- -- --
------------ ------------ ------------ ------------
Net loss ........................................... ($ 2,830,469) ($ 1,786,694) ($ 3,827,722) ($ 2,805,130)
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Unaudited) (Unaudited)
2004 2003
----------- -----------
Operating activities
Net loss ................................................................................ ($3,827,722) ($2,805,130)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment ........................ 5,490,596 5,093,705
Amortization of deferred financing costs .............................................. 250,585 278,224
Provision for uncollectible accounts .................................................. 329,346 279,324
Change in fair value of interest rate swap ............................................ 937,131
Loss on disposal of assets ............................................................ 11,011 19,358
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable ................................................................... 2,024,271 (2,601,626)
Inventory ............................................................................. (513,616) (582,895)
Prepaid expenses and other assets ..................................................... 1,224,370 1,332,639
Accounts payable ...................................................................... 809,855 600,529
Accrued expenses ...................................................................... (485,341) 572,349
----------- -----------
Net cash provided by operating activities ........................................... 6,250,486 2,186,477
----------- -----------
Investing activities:
Proceeds from sale of equipment ....................................................... 29,500 153,500
Capital expenditures .................................................................. (3,168,714) (1,379,775)
----------- -----------
Net cash used in investing activities ............................................... (3,139,214) (1,226,275)
----------- -----------
Financing activities:
Net payments from revolving line of credit ............................................ (2,426,216) (372,757)
Principal payments on long term borrowings and capital leases ......................... (675,950) (621,369)
Payment of stock subscription ......................................................... -- 7,200
----------- -----------
Net cash used in financing activities ............................................... (3,102,166) (986,926)
----------- -----------
Net increase (decrease) in cash ..................................................... 9,106 (26,724)
Cash and cash equivalents at beginning of period ........................................ 63,714 109,297
----------- -----------
Cash and cash equivalents at end of period .............................................. $ 72,820 $ 82,573
=========== ===========
Non-cash investing activities:
Equipment included in accounts payable ................................................ $ 208,456 $ 190,795
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
The accompanying interim financial statements of Phoenix Color Corp. and
its subsidiaries (the "Company") do not include all of the information and
disclosures generally required for annual financial statements and are
unaudited. In the opinion of management, the accompanying unaudited financial
statements contain all material adjustments (consisting of normal recurring
accruals), necessary to present fairly the Company's financial position as of
June 30, 2004, and the results of its operations for the three month and six
month periods ended June 30, 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:
June 30, 2004 December 31, 2003
------------- -----------------
Raw materials ........... $4,623,931 $4,121,000
Work in process ......... 1,531,793 1,521,108
---------- ----------
$6,155,724 $5,642,108
========== ==========
3. Assets Held For Sale
An asset held for sale consists of transportation equipment with a
depreciated basis of $909,000 which was sold in July 2004, for $1,018,000, net
of commissions and expenses.
4. Other Assets.
Other assets at June 30, 2004 and December 31, 2003 include equipment
deposits of $1,732,099 and $1,869,861, respectively.
5. Accrued Expenses.
Accrued expenses at June 30, 2004 and December 31, 2003 include accrued
interest payable of $4,210,292 and $4,433,471, respectively.
6. 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
4
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 consolidated coverage ratio is achieved and contains other
non-financial covenants. As of June 30, 2004 and December 31, 2003 the Company
failed to meet the required consolidated coverage ratio. The Company has
incurred $3.0 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% (representing LIBOR as of October 27, 2003 plus 7.42%) until August 1,
2004 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 on the Company's Consolidated
Statement of Operations. As of June 30, 2004, the fair value of the interest
rate swap was ($1,042,578), which was included in other liabilities on the
Consolidated Balance Sheet. As of December 31, 2003, the fair value of the
interest rate swap was ($105,447), which was included in other liabilities on
the Company's Consolidated Balance Sheet. Interest expense for the three month
period ended June 30, 2004, has been increased by $1,487,899, which represents
the difference between the valuation of the interest rate swap on June 30, 2004
and March 31, 2004. Interest expense for the six month period ended June 30,
2004, has been increased by $937,131, which represents the difference between
the valuation of the interest rate swap on June 30, 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 June 30,
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
Company's Consolidated Balance Sheet at June 30, 2004.
On September 30, 2003, the Company entered into an Amended and Restated
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 $7.7 million as of June 30, 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 June 30, 2004, the Company was not in compliance with the fixed
coverage charge
5
ratio. On August 12, 2004, the commercial bank waived all instances of
noncompliance with respect to this covenant for six months ended June 30, 2004.
7. 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 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 or six
months ended June 30, 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 June 30, 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.
6
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," as amended by SFAS No. 148 to
stock-based employee compensation for the three and six month periods ended June
30:
Three Months Ended June 30 Six Months Ended June 30
--------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------
Net loss, reported .................................. ($2,830,469) ($1,786,694) ($3,827,722) ($2,805,130)
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) -- ($21,554) --
--------------------------------------------------------------
Pro forma net loss .................................. ($2,841,246) ($1,786,694) ($3,849,276) ($2,805,130)
--------------------------------------------------------------
The effect of applying SFAS No. 123 on the six month period ended June 30,
2004 pro forma net loss, as stated above, is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(i) the vesting period of the stock options and (ii) the fair value of
additional stock grants in future years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Our results of operations for the three and six months ended June 30, 2004
reflect the fact that we continue to operate in an environment where our
customers, book publishers, are under intensely competitive pressure. While
trade publishers have experienced an increase in sales in the current year,
educational publishers in elementary, secondary and higher education have
experienced declines and are under intense pressure to reduce costs. Small and
medium sized publishers have been expanding but do not have the budgets or
capitalization to use special effects on their book components. This has caused
publishers to seek price concessions from their vendors, and over capacity in
manufacturing has resulted in lower prices.
During the six month period ended June 30, 2004, 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 $2.2 million to
$65.7 million for the six months ended June 30, 2004 from $67.9 million for the
same period in 2003, our income from operations, declined $0.7 million to $2.6
million from $3.3 million for the six months ended June 30, 2004 and 2003,
respectively.
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,"
7
"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, (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, (v) the risk that
our allowance for doubtful accounts and rebates will not be adequate and (vi)
the risk that there has been an impairment in the value of our physical assets.
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, 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.
8
Allowance for Doubtful Accounts and Rebates
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. We also
provide rebates to certain customers if they attain certain sales levels. The
rebates are in the form of a credit, which is established as an allowance
against accounts receivable. As of June 30, 2004, our accounts receivable
balance, net of allowances for doubtful accounts and rebates of $3.2 million,
was $16.5 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. In January 2002, we adopted the Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets".
We test 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.
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 June 30, 2004, we do not believe there was any impairment to
the value of our physical assets.
Deferred Tax Valuation Allowance
As of June 30, 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,
9
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 June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
2004 % 2003 % 2004 % 2003 %
----- ----- ----- ----- ----- ----- ----- -----
Net sales ..................... $33.3 100.0 $34.1 100.0 $65.7 100.0 $67.9 100.0
Cost of sales ................. 27.2 81.7 27.8 81.5 53.6 81.6 54.6 80.4
Gross profit .................. 6.1 18.3 6.3 18.5 12.1 18.4 13.3 19.6
Operating expenses ............ 4.7 14.1 5.0 14.7 9.5 14.5 10.0 14.7
Income from operations ........ 1.4 4.2 1.3 3.8 2.6 3.9 3.3 4.9
Interest ...................... 4.2 12.6 3.1 9.1 6.5 9.9 6.1 9.0
Other expense ................. -- -- -- -- 0.1 0.2 -- --
Loss before income taxes ...... (2.8) (8.4) (1.8) (5.3) (3.8) (5.8) (2.8) (4.1)
Income tax provision .......... -- -- -- -- -- -- -- --
Net loss ...................... (2.8) (8.4) (1.8) (5.3) (3.8) (5.8) (2.8) (4.1)
Three Months Ended June 30, 2004 and 2003
Net sales decreased $0.8 million, or 2.3%, to $33.3 million for the three
months ended June 30, 2004, from $34.1 million for the same period in 2003. The
decrease occurred primarily as a result of decreased sales volume in the book
manufacturing business units, with sales marginally increasing in the book
component business unit. The decreased sales volume in the book manufacturing
units is a result of weakness in the publishing industry serviced by those
units.
Gross profit decreased $0.2 million, or 3.2%, to $6.1 million for the
three months ended June 30, 2004, from $6.3 million for the same period in 2003.
This decrease was primarily the result of decreased sales discussed above. The
gross profit margin declined 0.2% to 18.3% for the three months ended June 30,
2004, from 18.5% for the same period in 2003, primarily due to increased labor
and overhead costs as a percentage of sales offset by decreased material costs
as a percentage sales.
Operating expenses decreased $0.3 million or 6.0% to $4.7 million for the
three months ended June 30, 2004, from $5.0 million for the same period in 2003.
The decrease in expenses is primarily due to staff reductions at the various
business units and reduction of transportation expenses and professional
services.
10
Interest expense increased $1.1 million to $4.2 million for the three
months ended June 30, 2004, from $3.1 million for the same period in 2003. This
increase was the result of the non-cash charge resulting from the change of $1.5
million in fair market value of our interest rate swap during the quarter ended
June 30, 2004. Excluding the this non-cash charge, our interest expense
decreased $0.4 million for the three months ended June 30, 2004 for the same
period in 2003. This decrease was due to lower borrowing under our revolving
line of credit combined with the difference between the interest paid under our
Senior Subordinated Notes and the interest received from the interest rate swap.
For the three months ended June 30, 2004and 2003, we did not record a tax
benefit due to the uncertainty of our realizing our deferred tax asset.
Net loss increased $1.0 million or 55.6% to $2.8 million for the three
months ended June 30, 2004, from $1.8 million for the same period in 2003. The
change in net loss was due primarily to the change in valuation of the interest
rate swap and to the other factors described above.
Six Months Ended June 30, 2004 and 2003
Net sales decreased $2.2 million, or 3.2%, to $65.7 million for the six
months ended June 30, 2004, from $67.9 million for the same period in 2003. The
decrease occurred in all business units. Sales declined as a result of softness
in the book publishing industry combined with severe pricing pressures due to
over capacity of book and book component manufacturing.
Gross profit decreased $1.2 million, or 9.0%, to $12.1 million for the six
months ended June 30, 2004, from $13.3 million for the same period in 2003. The
decrease was primarily the result of increases in overhead costs associated with
the depreciation and employee health care costs. The gross profit margin
declined 1.2% to 18.4% for the six months ended June 30, 2004, from 19.6% for
the same period in 2003, primarily due to increased labor and overhead costs as
a percentage of sales offset by decreased material costs as a percentage sales.
Operating expenses decreased $0.5 million or 5.0% to $9.5 million for the
six months ended June 30, 2004, from $10.0 million for the same period in 2003.
The decrease was primarily the result of staff reductions at the various
business units combined with reductions in professional fees and selling
expenses.
Interest expense increased $0.4 million to $6.5 million for the six months
ended June 30, 2004, from $6.1 million for the same period in 2003. This
increase was the result of the non-cash charge resulting from the change of $0.9
million in fair market value of our interest rate swap during the quarter ended
June 30, 2004. Excluding this non-cash charge, our interest decreased $0.5
million for the six months ended June 30, 2004 for the same period in 2003. This
decrease was due to lower borrowing under our revolving line of credit combined
with the difference between the interest paid under our Senior Subordinated
Notes and the interest received from the interest rate swap.
For the six months ended June 30, 2004and 2003, we did not record a tax
benefit due to the uncertainty of our realizing our deferred tax asset.
Net loss increased $1.0 million or 35.7% to $3.8 million for the six
months ended June 30, 2004, from $2.8 million for the same period in 2003. The
change in net loss was due to the factors described above.
11
Liquidity and Capital Resources
During the first six months of 2004, our cash increased by approximately
$9,000. Net cash provided by operating activities was approximately $6.2
million, which consisted principally of (i) a net loss of $3.8 million offset by
net non-cash expenses of $7.0 million, and increased by (ii) reduction of
investment in additional working capital of $3.0 million. Net cash used in
investing activities was $3.1 million due to capital and equipment expenditures.
Net cash used for financing activities was $3.1 million, resulting primarily
from reduction in borrowings under the Senior Credit Facility of $2.4 million
and by repayments of long term debt and capital lease obligations.
Working capital increased $3.1 million to $5.0 million as of June 30,
2004, from $1.9 million at December 31, 2003. This increase is primarily
attributable to a decrease in accounts receivable of $2.0 million, a decrease in
accounts payable of $0.8 million, offset by a decrease in accrued expenses and
an increase in inventory.
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 ($7.7 million as of June 30,
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 June 30, 2004. 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) ............................. $105,136 $ 136 $ -- $105,000 $ --
Capital Lease Obligations ..................... 3,418 1,013 2,026 379 --
Operating Leases .............................. 23,325 6,847 15,326 1,152 --
------------------------------------------------------
Total Contractual Cash Obligations ............ $131,879 $7,996 $17,352 $106,531 $ --
======================================================
(1) The amounts stated are the expected amounts of our commitments under the
10-3/8% Senior Subordinated Notes and assumes that no notes are tendered.
12
The following is a summary of our other commercial commitments by
commitment expiration date as of June 30, 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.
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% (representing LIBOR as of October 27, 2003 plus 7.42%) until
August 1, 2004 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 $74,000 under the interest rate swap between July 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 second quarter of 2004 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
13
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 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.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. Exhibits filed as part of this report are listed below:
10.1 First Amendment to the Amended and Restated Loan and Security Agreement
dated as of September 30, 2003 by and among Phoenix Color Corp. and its
subsidiaries, and the lenders referenced therein and Wachovia Bank,
National Association as issuer and agent.
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 May 14, 2004, and furnishing under
Item 15, our financial results for the three months ended March 31, 2004.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 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
15