UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission Registration No. 333-50995
PHOENIX COLOR CORP.
----------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2269911
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 733-0018
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares of each of the Registrant's classes of
common stock, as of the latest practicable date: Not Applicable
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
Page No.
Consolidated Balance Sheets 1
December 31, 1998 and September 30, 1999
Consolidated Statements of Operations 2
Three and Nine Months Ended September 30, 1999
Consolidated Statements of Cash Flows 3
Nine Months Ended September 30, 1999
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
<TABLE>
<CAPTION>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 September 30, 1999
----------------- ------------------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $14,834,035 $230,369
Accounts receivable, net of allowance for doubtful
accounts 14,760,695 22,471,965
and rebates of $1,113,784 in 1998 and $692,973 in
1999..............................................
Inventory......................................... 3,875,398 5,395,040
Income tax receivable............................. 1,233,554 1,702,277
Prepaid expenses and other current assets......... 2,222,196 495,895
Deferred income taxes............................. 337,571 337,571
------------ ------------
Total current assets.... 37,263,449 30,633,117
------------ ------------
Property, plant and equipment, net................... 70,288,665 85,814,682
Goodwill, net........................................ 11,239,752 24,546,095
Deferred financing costs, net........................ 1,892,726 4,639,669
Other assets......................................... 11,754,763 4,222,260
------------ ------------
Total assets............ $132,439,355 $149,855,823
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities:
Senior credit facility............................ $ - $ 8,524,970
Accounts payable.................................. 13,619,972 14,467,760
Accrued expenses.................................. 3,483,445 4,919,499
------------ ------------
Total current liabilities 17,103,417 27,912,229
Notes payable........................................ 78,150,335 96,852
10 3/8% Senior subordinated notes.................... - 105,000,000
Revolving line of credit............................. 11,325,225 -
Obligations under capital leases..................... 5,971,609 -
Deferred income taxes................................ 2,606,257 2,804,048
------------ ------------
Total liabilities....... 115,156,843 135,813,129
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common Stock, Class A, voting, par value $0.01 per share, authorized 20,0,000
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 20,000 shares, 9,794
issued shares and 7,794 outstanding shares..... 98 98
Additional paid in capital........................ 2,126,804 2,126,804
Retained earnings................................. 17,094,486 13,830,368
Stock subscriptions receivable.................... 169,792) (145,492)
Treasury stock, at cost: Class A, 3,460 shares and
Class B, 2,000 shares.......................... (1,769,230) (1,769,230)
------------ ------------
Total stockholders' equity...... 17,282,512 14,042,694
------------ ------------
Total liabilities & stockholders'
equity......................... $132,439,355 $149,855,823
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales...................... $ 31,443,964 $ 36,266,441 $ 81,232,209 $105,431,215
Cost of sales.................. 20,791,748 28,147,120 59,908,852 80,594,873
------------ ------------ ------------ ------------
Gross profit.......... 10,652,216 8,119,321 21,323,357 24,836,342
Operating expenses:
Selling and marketing 1,443,113 1,136,243 4,126,775 4,154,236
expenses..................
General and administrative 4,132,896 4,111,612 9,289,870 12,473,080
expenses..................
------------ ------------ ------------ ------------
Total operating expenses....... 5,576,009 5,247,855 13,416,645 16,627,316
Income from operations......... 5,076,207 2,871,466 7,906,712 8,209,026
Other expenses:
Interest expense.......... 1,371,398 3,282,271 3,380,205 11,843,928
Other income.............. (148,637) (27,027) (291,247) (8,104)
------------ ------------ ------------ ------------
Income (loss) before income taxes 3,853,446 (383,778) 4,817,754 (3,626,798)
Income tax (expense) benefit... 2,146,015 (38,125) 2,585,317 (362,680)
------------ ------------ ------------ ------------
Net Income (loss).............. $ 1,707,431 $ (345,653) $ 2,232,437 $ (3,264,118)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Unaudited)
1998 1999
---- ----
<S> <C> <C>
Operating activities:
$ 2,232,437 $ (3,264,118)
Net Income (loss).................................................
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property, plant and 5,314,268 9,182,507
equipment.................................................
Amortization of goodwill.................................. 1,592,644 2,177,918
Amortization of deferred financing costs and other........ 210,000 1,499,971
Provision for uncollectible accounts...................... 100,000 150,000
Loss (Gain) on disposal of assets......................... (47,962) 206,373
Increase (decrease) in cash resulting from changes in assets
and liabilities:
Accounts receivable....................................... 615,446 (5,626,457)
Inventory................................................. 62,901 (433,671)
Prepaid expenses and other assets......................... (2,189,550) 1,232,828
Accounts payable.......................................... 1,819,784 (2,663,859)
Accrued expenses.......................................... 1,659,775 1,048,637
Income tax refund receivable.............................. 131,932 (468,723)
------------ ------------
Net cash provided by operating activities.......... 11,501,675 3,041,406
------------ ------------
Investing activities:
Proceeds from sale of equipment........................... 629,626 881,691
Capital expenditures...................................... (6,866,019) (12,908,884)
Increase in equipment deposits............................ (737,301) --
Purchases of businesses, net of cash acquired............. -- (17,617,055)
------------ ------------
Net cash used in investing activities.............. (6,973,694) (29,644,248)
------------ ------------
Financing activities:
Proceeds from issuance of senior subordinated notes....... -- 105,000,000
Net repayment on revolving line of credit................. (4,469,995) (3,056,062)
Proceeds from long term borrowings........................ 14,501,680 --
Principal payments on long term borrowings................ (10,756,525) (78,180,014)
Principal payments on capital lease obligations........... (2,894,774) (7,653,925)
Debt financing costs...................................... (1,055,000) (4,135,123)
Payment of stock subscription............................. 92,652 24,300
------------ ------------
Net cash (used in) provided by financing activities (4,581,962) 11,999,176
------------ ------------
Net increase (decrease) in cash.................... (53,981) (14,603,666)
Cash and cash equivalents at beginning of period.................. 1,044,966 14,834,035
------------ ------------
Cash and cash equivalents at end of period........................ $ 990,985 $ 230,369
============ ============
Non-cash investing and financing activities:
Equipment included in accounts payable............. $ 27,498,029 $ 1,550,440
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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
September 30, 1999, and the results of its operations for the three and
nine-month periods ended September 30, 1999 and 1998. The interim financial
statements should be read in conjunction with the Company's audited Consolidated
Financial Statements for the year ended December 31, 1998, included in the
Company's Registration Statement, on Form S-4, SEC File No. 333-50995, declared
effective on May 13, 1999.
2. Inventory.
Inventory consists of the following:
December 31, 1998 September 30, 1999
----------------- ------------------
Raw materials............... $3,031,744 $3,571,523
Work in process............. 843,654 1,823,517
---------- ----------
$3,875,398 $5,395,040
========== ==========
3. Other Assets.
Other assets at December 31, 1998 and September 30, 1999 include equipment
deposits of $9,786,031 and $1,624,017, respectively.
4. Accrued Expenses.
Accrued expenses at December 31, 1998 and September 30, 1999 include
accrued interest expense of $343,250 and $1,883,774, respectively.
5. Acquisitions.
On January 4, 1999, the Company acquired all of the issued and
outstanding capital stock of Mid-City Lithographers, Inc. ("Mid-City") and
certain assets of Viking Leasing Partnership, a related party of Mid-City, for
$10.8 million in cash and the assumption of $1.7 million of indebtedness.
Mid-City, located in Lake Forest, Illinois, supplies book components primarily
to the elementary and high school textbook segment of the book publishing
market. Mid-City was merged into the Company and does not exist as a subsidiary.
On February 12, 1999, the Company acquired all of the issued and outstanding
capital stock of TechniGraphix, Inc. ("TechniGraphix") for $6.8 million in cash
and the assumption of $500,000 of indebtedness. TechniGraphix, located in
Dulles, Virginia, is a producer of print-on-demand books. These transactions
have been accounted for as purchase business combinations.
The following unaudited pro forma information sets forth the
consolidated results of operations of the Company for the nine month periods
ended September 30, 1998 and 1999 had the acquisitions of Mid-City and
TechniGraphix occurred on January 1, 1998. This unaudited pro forma information
does not purport to be indicative of the actual results that would have occurred
if the combination had been in effect on January 1, 1998. In addition, this
information does not purport to be indicative of future results of operations of
the consolidated entities.
1998 1999
---- ----
Net sales........................... $97,491,000 $106,000,000
Net income (loss)................... $ 3,297,000 $ (3,996,000)
6. Notes Payable.
On February 2, 1999, the Company issued $105.0 million of 10 3/8% Senior
Subordinated Notes due 2009 ("Senior Subordinated Notes") in a private offering
under Rule 144A of the Securities and Exchange Commission. The Senior
Subordinated Notes were issued under an indenture and are uncollateralized
senior subordinated obligations of the Company with interest payable
semiannually on February 1 and August 1 of each year. Net proceeds of
approximately $101.0 million from the Senior Subordinated Notes were used to
repay substantially all outstanding short-term and long-term debt and capital
leases existing at December 31, 1998, to fund the acquisition of TechniGraphix
(see Note 5) and for working capital requirements. All of the Company's current
and future "restricted subsidiaries," as defined in the Senior Subordinated
Notes indenture, are guarantors of the Senior Subordinated Notes on an
uncollateralized senior subordinated basis. During March 1999, in connection
with the issuance of the Senior Subordinated Notes, approximately $1,140,000 of
deferred financing costs incurred in connection with a 1998 financing was
written off. The Senior Subordinated Notes indenture contains limitations on the
payment of dividends, the distribution or redemption of stock, sales of assets
and subsidiary stock, limitations on additional Company and subsidiary debt and
require the Company to maintain certain financial and non-financial covenants,
the most restrictive of which requires the Company to maintain certain defined
coverage ratios. The Company was not in compliance with its interest coverage
ratio contained in the Senior Credit Facility for the compliance period ending
September 30, 1999. The Company has obtained a waiver from its lending bank for
its noncompliance with respect to this covenant for that period.
On May 13, 1999, the Company's Registration Statement covering an
exchange offer for the Senior Subordinated Notes was declared effective by the
Securities and Exchange Commission. The Company has, pursuant to the
Registration Statement, completed the exchange of new registered 10 3/8% Senior
Subordinated Notes for the original notes. The new notes are similar to the
original notes in all material respects.
7. Income Taxes.
The effective income tax rate for the nine month period ended September
30, 1999 of 10.0% differed from the 1998 year end rate of 66.1% primarily due to
the loss for the first nine months of 1999 offset by the increase in the impact
of non-deductible goodwill amortization resulting from the acquisitions (see
Note 5) in the first quarter of 1999.
8. Commitments and Contingencies.
The Company filed a complaint against Krause Biagosch GmbH and Krause
America ("Krause"), which is pending in the United States District Court for the
District of Maryland, based on breach of contract and statutory warranties on
certain pre-press equipment which the Company had agreed to purchase from
Krause. The Company attempted to operate the equipment, and contends that the
equipment has failed to perform as warranted. During 1998, the Company removed
the portion of the equipment actually received, and is seeking recovery of
approximately $2.0 million paid to date on this equipment, which includes an
amount for deposits on the balance of the equipment not yet received. As of
December 31, 1998 and September 30, 1999, the Company has included in other
non-current assets a receivable from Krause of approximately $1.6 million.
Krause has recently counterclaimed for $1.5 million for the balance of the
purchase price for all the equipment (whether or not delivered), plus incidental
charges. The Company intends to vigorously pursue its claims against Krause and
contest Krause's counterclaims. If Krause were nevertheless to prevail, the
Company may be required to pay Krause's actual lost profit on the equipment.
While such lost profit is not presently determinable, the amount the Company
might be required to pay if Krause prevailed would in no event exceed the unpaid
balance of the purchase price, claimed by Krause to be $1.5 million and by the
Company to be $1.2 million. Also, in that event, if the Company were to attempt
to resell the equipment in its possession, assuming a market existed, and the
price received from such resale were less than the price it had paid Krause, the
Company would incur a loss.
The Company is not a party to any other legal proceedings, other than
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
9. Guarantor Subsidiaries.
The following summary sets forth the information regarding the Company
and its subsidiaries as of December 31, 1998 and September 30, 1999 and for each
of the nine months in the periods ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Phoenix PCC Techni- Phoenix
Color Express, Graphix, (MD)
Corp. Inc. Inc. Realty, LLC Eliminations Total
----- ---- ---- ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet information:
September 30, 1999 (Unaudited)
Current assets........... $ 31,503,674 $ 14,305 $ 1,425,974 $ -- $(2,310,836) $ 30,633,117
Noncurrent assets........ 118,744,168 272,698 7,010,840 2,038,789 (8,843,789) 119,222,706
Current liabilities...... 26,395,419 643,967 3,173,405 -- (2,300,562) 27,912,229
Noncurrent liabilities... 107,804,048 -- 96,852 -- -- 107,900,900
December 31, 1998 (Audited)
Current assets........... $ 38,030,305 $ 14,036 $ -- $ -- $ (780,892) $ 37,263,449
Noncurrent assets........ 94,837,998 342,908 -- 2,038,789 (2,043,789) 95,175,906
Current liabilities...... 17,071,415 787,147 -- -- (755,145) 17,103,417
Noncurrent liabilities... 98,053,426 -- -- -- -- 98,053,426
Statement of operations
information:
September 30, 1999 (Unaudited)
Sales ................... $101,214,184 $ 744,340 $ 4,217,031 $ -- $ (744,340) $105,431,215
Gross profit (loss)...... 24,736,709 75,992 (188,733) -- (165,092) 24,836,342
Income (loss) from operations.. 9,297,395 73,240 (1,161,609) -- -- 8,209,026
Net (loss) income........ (1,703,912) 73,240 (1,633,446) -- -- (3,264,118)
September 30, 1998 (Unaudited)
Sales.................... $ 81,232,209 $ 689,945 $ -- $ -- $ (689,945) $ 81,232,209
Gross profit (loss)...... 21,139,280 (141,129) -- -- 325,206 21,32,357
Income (loss) from operations.. 8,061,030 (154,318) -- -- -- 7,906,712
Net (loss) income........ 2,386,755 (154,318) -- -- -- 2,232,437
</TABLE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
The statements in this report that relate to future plans, expectations,
events or performance, or which use forward-looking terminology such as
"estimate" or "anticipate", contain forward-looking information. Actual results,
events or performance may differ materially from such forward-looking
statements, due to a variety of factors, including the risk factors and other
information presented in the Company's Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission (the "SEC") File
No. 333-50995, and which became effective on May 13, 1999. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result 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.
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):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 % 1998 % 1999 % 1998 %
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... $36.3 100.0 $31.4 100.0 $105.4 100.0 $81.2 100.0
Cost of sales.................. 28.2 77.6 20.8 66.2 80.6 76.4 59.9 73.8
----- ----- ----- ----- ------ ----- ----- -----
Gross profit................... 8.1 22.4 10.6 33.8 24.8 23.6 21.3 26.2
Operating expenses............. 5.2 14.5 5.5 17.5 16.6 15.8 13.4 16.5
----- ----- ----- ----- ------ ----- ----- -----
Income from operations......... 2.9 7.9 5.1 16.3 8.2 7.8 7.9 9.7
Interest....................... 3.3 9.1 1.4 4.5 11.8 11.2 3.4 4.2
Other (Income) expense......... - 0.1 (0.1) (0.3) - - (0.3) (0.4)
----- ----- ----- ----- ------ ----- ----- -----
Income (loss) before income taxes (0.4) (1.1) 3.8 12.1 (3.6) (3.4) 4.8 5.9
Income tax provision........... (0.1) (0.1) 2.1 6.7 (0.4) (0.3) 2.6 .2
----- ----- ----- ----- ------ ----- ----- -----
Net income (loss).............. $(0.3) (1.0) $ 1.7 5.4 $ (3.2) (3.1) $2.2 2.7
===== ===== ===== ===== ====== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1999 and 1998
Net sales increased $4.9 million, or 15.6%, to $36.3 million for the
quarter ended September 30, 1999, from $31.4 million for the same period in
1998. The increase was a result of higher unit volume, additional sales from the
two new book manufacturing divisions amounting to $3.1 million, and sales from
the February acquisition of TechniGraphix, Inc. ("TechniGraphix") amounting to
$1.8 million. The new book manufacturing divisions were formed by the Company in
September 1998 in New Jersey and in July 1999 in Maryland. For comparison
purposes, if the Company's net sales for the third quarter of 1998 had included
companies acquired in 1999, third quarter net sales for 1999 would have shown a
decrease of $.06 million, or 1.6%, to $36.3 million from $36.9 million.
Gross profit for the quarter ended September 30, 1999 decreased $2.5
million, or 23.6%, to $8.1 million from $10.6 million for the same period in
1996, decreasing the gross profit margin to 22.4% from 33.8% over the same
period. This decrease resulted from increased costs primarily associated with
start up costs of approximately $1.0 million attributable to the new book
manufacturing facility in Maryland and other manufacturing overhead costs. The
increase in manufacturing overhead costs were due principally to increases in
depreciation.
Operating expenses decreased $0.3 million, or 5.5%, to $5.2 million for
the quarter ended September 30, 1999, from $5.5 million for the same period in
1998. Operating expenses decreased as a percent of net sales to 14.5% for the
quarter ended September 30, 1999 from 17.5% for the same period in 1998. The
percentage decrease was primarily attributable to sales increasing by 15.6% and
operating expenses decreasing by 5.8% Net freight costs contributed to the
income of the Company, but were offset by increases in selling, general and
administrative expenses.
Interest expense increased $1.9 million, or 135.7%, to $3.3 million for
the quarter ended September 30, 1999, from $1.4 million for the same period in
1998. The increase was primarily attributable to higher interest expense
incurred as a result of the Company's $105 million Senior Subordinated Notes
offering consummated on February 2, 1999.
For the quarter ended September 30, 1999 the Company realized a gain on
disposition of equipment of $27,000 compared with a gain of $149,000 for the
same period in 1998.
The Company's effective tax rate, on an annualized basis, for the
quarter ended September 30, 1999 was 10.0% compared to 46.0% for the same period
in 1998. The decrease was primarily attributable to the difference in taxable
income or loss and the proportion of non-deductible goodwill expense to pretax
income or loss.
Net income (loss) decreased $2.0 million to a loss of $346,000 for the
quarter ended September 30, 1999 from net income of $1.7 million for the same
period in 1998. The change in net income (loss) was due to the factors described
above.
Nine Months Ended September 30, 1999 and 1998
Net sales increased $24.2 million, or 29.8%, to $105.4 million for the
nine months ended September 30, 1999, from $81.2 million for the same period in
1998. The increase was a result of higher unit volume, additional sales from the
January acquisition of Mid-City Lithographers, Inc. ("Mid-City"), sales from the
two new book manufacturing divisions amounting to $7.5 million, and sales from
the February acquisition of TechniGraphix amounting to $4.2 million. For
comparison purposes, if the Company's net sales for the nine months ended
September 30, 1998 had included companies acquired in 1999, net sales for the
nine months ended September 30, 1999 would have shown an increase of $8.5
million, or 8.7%, to $106.0 million from $97.5 million.
Gross profit for the nine months ended September 30, 1999 increased $3.5
million, or 16.4%, to $24.8 million from $21.3 million for the same period of
1998, decreasing the gross profit margin to 23.6% from 26.2% over the same
period. This decrease resulted from increased costs primarily associated with
start up costs of approximately $1.0 million attributable to the new book
manufacturing facility in Maryland and other manufacturing overhead costs, which
were partially offset by reduced costs of material consumed and direct labor as
a percent of sales. The increase in manufacturing overhead costs were due
principally to increases in depreciation. In the comparable period in 1998, the
Company incurred unusual costs associated with the closing of its Connecticut
facility and the relocation of its Massachusetts facility from Hingham to
Taunton.
Operating expenses increased $3.2 million, or 23.9%, to $16.6 million
for the nine months ended September 30, 1999, from $13.4 million for the same
period in 1998. Operating expenses decreased as a percent of net sales to 15.8%
for the nine months ended September 30, 1999 from 16.5% for the same period in
1998. The percentage decrease was primarily attributable to reduced freight
costs and lower increases in overhead costs in relation to sales increases.
Interest expense increased $8.4 million to $11.8 million for the nine
months ended September 30, 1999, from $3.4 million for the same period in 1998.
The increase was primarily attributable to a one-time charge associated with the
write off of deferred financing costs of $1.1 million and prepayment premiums of
$1.6 million incurred in connection with the early repayment of equipment debt,
together with higher interest expense incurred as a result of the Company's $105
million Senior Subordinated Note offering consummated on February 2, 1999.
The Company's effective tax rate, on an annualized basis, for the nine
months ended September 30, 1999 was 10.0% compared to 46.0% for the same period
in 1998. The decrease was primarily attributable to the difference in taxable
income or loss and the proportion of non-deductible goodwill expense to pretax
income or loss.
Net income (loss) decreased $5.4 million to a loss of $3.2 million for
the nine months ended September 30, 1999 from net income of $2.2 million for the
same period in 1998. The change in net income (loss) was due to the factors
described above.
Liquidity and Capital Resources
On February 2, 1999, the Company issued $105.0 million of 10 3/8% Senior
Subordinated Notes. Net proceeds of approximately $101.0 million were used to
repay existing indebtedness, including its then outstanding borrowings under its
revolving senior credit facility.
The Company entered into a three-year $20.0 million revolving senior
credit facility ("Senior Credit Facility") with First Union National Bank in
September 1998. The Senior Credit Facility is collateralized by substantially
all of the Company's assets and refinanced the Company's prior revolving senior
indebtedness. As of September 30, 1999, the interest rate on borrowings under
the Senior Credit Facility was 9.75%. The Company was not in compliance with its
interest coverage ratio contained in the Senior Credit Facility for the
compliance period ending September 30, 1999. The Company has obtained a waiver
from its lending bank for its noncompliance with respect to this covenant for
that period. In addition to the Senior Credit Facility, the Company has
available to it approved credit facilities with various financial institutions
to finance, at the election of the Company, the purchase of equipment.
In connection with the acquisitions of Med-City and TechniGraphix in the
first quarter of 1999, the Company assumed various equipment operating leases.
Rental expense related to such leases was approximately $1.9 million and
$405,000 for the nine month periods ended September 30, 1999 and 1998,
respectively.
Cash flow during the first nine months of 1999 was a net use of cash of
approximately $14.6 million. Net cash flows from operating activities provided
$3.0 million which consisted of depreciation and amortization charges of $12.9
million offset by a net loss of $3.3 million and net uses of working capital of
$6.6 million. Net cash flows from investing activities used $29.6 million, which
primarily related to the acquisition of Mid-City and TechniGraphix for an
aggregate cash price of $17.6 million and capital and equipment expenditures of
approximately $12.9 million. Net cash provided by financing activities of $12.0
million includes the $105.0 million of proceeds from the issuance of the Senior
Subordinated Notes, offset by the related $4.1 million in financing costs, which
was used to repay the previously outstanding debt and capital leases.
Working capital as of September 30, 1999 was $2.7 million, which
represents a $17.5 million decrease from working capital of $20.2 million at
December 31, 1998. This decrease was primarily the result of continued
investment in equipment and the use of cash in the acquisitions of Mid-City and
TechniGraphix.
The Company's capital expenditures for 1999 are currently estimated to
total approximately $15.9 million, allocated primarily for the completion of the
paperback book manufacturing facility in Hagerstown, Maryland. Of this amount,
$12.9 million has been expended during the nine months ended September 30, 1999.
The Company historically has financed its operations with internally
generated funds, external short and long-term borrowings and capital and
operating leases. The Company believes that funds generated from operations,
together with existing cash and available credit under the Senior Credit
Facility ($10.4 million as of September 30, 1999) will be sufficient to finance
its current operations, remaining capital expenditure requirements and internal
growth over the next twelve months.
If the Company were to make any significant acquisitions for cash, it
may be necessary to obtain additional debt or equity financing. There
can be no assurance that such financing will be available on satisfactory terms
or at all. The Company has no current commitments or agreements with
respect to any acquisitions.
Year 2000 Compliance
The Company's digital communications and information network has been
continually upgraded with the newest equipment available, all of which, the
Company has been informed by the manufacturers, is Year 2000 compliant. The
Company's information systems consist of local and wide area networks, and the
Company's file servers use the most recent versions of Novell and Microsoft NT
software, which are represented by the manufacturers to be Year 2000 compliant.
In 1998, the Company rewrote all of its information system programs, including
its manufacturing and financial software, in conjunction with a company-wide
systems upgrade and, as a result, believes that all of its internal Year 2000
issues have been addressed. Incidental to such upgrade were measures taken to
insure that the new software would be Year 2000 compliant, but no separate costs
were assigned to such Year 2000 compliance aspects and, if such costs could be
measured, they would not be material.
The Company uses modern, highly sophisticated computer imaging and image
management equipment in its pre-press department, state-of-the-art printing
presses, finishing equipment, foil stamping and other postpress equipment. As
part of its Year 2000 compliance program, and in order to minimize potential
disruptions caused by the Year 2000, the Company investigated Year 2000
compliance by its suppliers, including the manufacturers of such equipment. The
Company has inquired of these suppliers, through publicly available information
and direct correspondence, as to the status of their Year 2000 compliance,
including any potential for disruption caused by embedded chips used in such
equipment. Based on the responses received, the Company believes that it will
not experience a disruption in its manufacturing processes from equipment
currently owned. The Company is substantially complete in its independent
verification of Company's system compliance with respect to Year 2000 issues.
The Company also requested information from its major suppliers of
consumable products used in manufacturing, including paper, ink, and finishing
materials, as to their ability to deliver product without interruption. These
suppliers have indicated they do not anticipate any Year 2000 disruption in the
delivery of product. The Company has no control over the suppliers and services
used by third parties with which it interfaces, and accordingly, there can be no
assurance that all key business partners will successfully resolve their Year
2000 compliance issues.
Based on the actions taken with respect to internal systems, and
responses received from vendors, management does not reasonably anticipate that
the Company will be subject to a material disruption in its information systems,
or in its ability to manufacture products or receive necessary raw materials
from vendors due to computer calendaring and date change problems associated
with the Year 2000. The Company is continuing to monitor all aspects of its
communication and information systems, and does not foresee that any material
costs will be incurred to continue its evaluation or to take any additional
remedial action, should any such additional action be indicated.
If, despite measures taken by the Company, a Year 2000 malfunction
should result in an interruption of operations at one or more Company
facilities, the Company has contingency plans to shift production operations on
an interim basis to its other facilities. Also, the Company's principal
suppliers generally maintain, at public warehouses, a 30-day inventory of raw
materials usually purchased from them by the Company. In the event Year 2000
problems were to interrupt supply operations, the Company could, in the first
instance, access such inventories through the use of the suppliers' trucks or
the Company's own trucks. Additionally, if a principal supplier were unable to
function because of a Year 2000 interruption, the Company could purchase raw
materials from a number of alternate suppliers.
Although the Company has taken what it believes is prudent action to
eliminate disruption which may be caused by the Year 2000, there can be no
assurance that the Company will not be affected by dislocations caused by the
Year 2000. It is possible that issues arising out of the Year 2000 problem could
result in interruption in the Company's business, loss of customers or payments
to vendors and personnel, and claims for damages. Any or all of these events
could result in a material adverse effect on the Company's business, financial
conditions and results of operations. Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
The Company's principal market risk results from changes in floating
interest rates on short-term debt. The Company does not use interest rate swap
agreements to mitigate the risk of adverse changes in the prime interest rate.
However, the impact of a 100 basis point change in interest rates affecting the
Company's short-term debt would not be material to the net income (loss), cash
flow or working capital. The Company does not hold long-term interest sensitive
assets and therefore is not exposed to interest rate fluctuations for its
assets. The Company does not hold or purchase any derivative financial
instruments for trading purposes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As indicated in the Registration Statement, the Company filed a
complaint against Krause Biagosch GmbH and Krause America ("Krause"), which is
pending in the United States District Court for the District of Maryland, based
on breach of contract and statutory warranties on certain pre-press equipment
which the Company had agreed to purchase from Krause. The Company attempted to
operate the equipment, and contends that the equipment has failed to perform as
warranted. During 1998, the Company removed the portion of the equipment
actually received, and is seeking recovery of the approximately $2.0 million
paid to date on this equipment, which includes an amount for deposits on the
balance of the equipment not yet received. As of December 31, 1998 and June 30,
1999, the Company has included in other non-current assets a receivable from
Krause of approximately $1.6 million. Krause has recently counter claimed for
$1.5 million for the balance of the purchase price for all the equipment
(whether or not delivered), plus incidental charges. The Company intends to
vigorously pursue its claims against Krause and contest Krause's counterclaims.
If Krause were nevertheless to prevail, the Company may be required to pay
Krause's actual lost profit on the equipment. While such lost profit is not
presently determinable, the amount the Company might be required to pay if
Krause prevailed would in no event exceed the unpaid balance of the purchase
price, claimed by Krause to be $1.5 million and by the Company to be $1.2
million. Also, in that event, if the Company were to attempt to resell the
equipment in its possession, assuming a market existed, and the price received
from such resale were less than the price it had paid Krause, the Company would
incur a loss.
The Company is not a party to any legal proceedings, other than claims
previously disclosed in its reports filed under the Securities Exchange Act of
1934, as amended, and claims arising in the normal course of the Company's
business. The Company does not believe that such claims and lawsuits,
individually or in the aggregate, will have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
Item 2. Change in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults upon Senior Securities.
The Company was not in compliance with its interest coverage ratio
contained in the Senior Credit Facility for the compliance period ending
September 30, 1999. The Company has obtained a waiver from its lending bank for
its noncompliance with respect to this covenant for that period. 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.
The Company hereby incorporates by reference, in accordance with
Rule12b-32 of the S EC, all of the exhibits filed with the Company's
Registration Statement, File No. 333-50995, effective on May 13, 1999, which
exhibits are designated in the following list:
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
2.1 Acquisition Agreement dated as of November 30, 1998 among the Company, Carl E.
Carlson, Wayne L. Sorensen, Donald Davis, Margaret Davis and Viking Leasing
Partnership (schedules and exhibits omitted)
2.2 Acquisition Agreement dated as of February 3, 1999 among the
Company, TechniGraphix, Inc., Debra A. Barry and Jack L. Tiner
(schedules and exhibits omitted)
2.3 Stock Purchase Agreement dated as of December 27, 1995 among
the Company and various stockholders of New England Book
Holding Corporation
2.4 Plan and Agreement of Merger of Phoenix Color Corp. (New York) into Phoenix
Merger Corp. (Delaware)
3.1 Certificate of Incorporation of the Company
3.2 By-Laws of the Company
4.1 Note Purchase Agreement dated January 28, 1999 among the Company, the
Guarantors and the Initial Purchasers
4.2 Indenture dated as of February 2, 1999 among the Company, the Guarantors and
Chase Manhattan Trust Company, National Association, Trustee
4.3 Registration Rights Agreement dated as of February 2, 1999 among the Company,
the Guarantors and the Initial Purchasers
4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2)
4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit 4.2)
4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2)
4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit 4.2)
5.1 Opinion letter of Bresler Goodman & Unterman,
10.1 LLP Employment Agreement dated as of February 12, 1999 between the Company and
Jack L. Tiner
10.2 Employment Agreement dated as of January 4, 1999 between the Company and Carl
E. Carlson
10.3 Non-Competition Agreement dated as of January 4, 1999 between the Company and
Wayne L. Sorensen
10.4 Credit Agreement dated as of September 15, 1998 among the Company, the
Guarantors and First Union National Bank as Agent, as Issuer and as Lender
(schedules omitted)
10.5 Revolving Credit Note dated as of September 15, 1998 executed by the Company
and the Guarantors
10.6 Master Security Agreement dated as of September 15, 1998 among the Company,
the Guarantors and First Union National Bank as Collateral Agent (schedules
omitted)
</TABLE>
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the period reported upon.
SIGNATURES
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 13, 1999
PHOENIX COLOR CORP.
(Registrant)
By: /s/ Louis LaSorsa
Louis LaSorsa, Chairman
and Chief Executive Officer
By: /s/ Edward Lieberman
Edward Lieberman
Chief Financial Officer
and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 230,369
<SECURITIES> 0
<RECEIVABLES> 23,164,938
<ALLOWANCES> 692,973
<INVENTORY> 5,395,040
<CURRENT-ASSETS> 30,633,117
<PP&E> 132,407,773
<DEPRECIATION> 46,593,091
<TOTAL-ASSETS> 149,855,823
<CURRENT-LIABILITIES> 27,912,229
<BONDS> 105,000,000
0
0
<COMMON> 244
<OTHER-SE> 14,042,450
<TOTAL-LIABILITY-AND-EQUITY> 149,855,823
<SALES> 105,431,215
<TOTAL-REVENUES> 105,431,215
<CGS> 80,594,873
<TOTAL-COSTS> 97,222,189
<OTHER-EXPENSES> (8,104)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,843,928
<INCOME-PRETAX> (3,626,798)
<INCOME-TAX> (362,680)
<INCOME-CONTINUING> (3,264,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,264,118)
<EPS-BASIC> 0
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