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 Period ended June 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
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
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 issuer's classes of common
stock, as of the latest practicable date: Not Applicable
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Financial Statements
Page No.
--------
Consolidated Balance Sheets 1
December 31, 1998 and June 30, 1999
Consolidated Statements of Operations 2
Three and Six Months Ended June 30, 1999
Consolidated Statements of Cash Flows 3
Six Months Ended June 30, 1999
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
-2-
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 June 30, 1999
----------------- -------------
ASSETS (Audited) (Unaudited)
Current assets:
Cash and cash equivalents .................. $ 14,834,035 $ 668,117
Accounts receivable, net of
allowance for doubtful accounts and
rebates of $1,113,784 in 1998 and
$405,660 in 1999 ........................... 14,760,695 21,918,634
Inventory .................................. 3,875,398 5,209,243
Income tax receivable ...................... 1,233,554 1,600,416
Prepaid expenses and other current
assets ..................................... 2,222,196 679,197
Deferred income taxes ...................... 337,571 337,571
------------- -------------
Total current assets ................... 37,263,449 30,413,178
Property, plant and equipment, net ........... 70,288,665 70,040,239
Goodwill, net ................................ 11,239,752 25,283,126
Deferred financing costs, net ................ 1,892,726 4,736,003
Other assets ................................. 11,754,763 29,213,461
------------- -------------
Total assets ........................... $ 132,439,355 $ 159,686,007
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Senior Credit Facility ..................... $ -- $ 10,699,885
Accounts payable ........................... 13,619,972 18,501,050
Accrued expenses ........................... 3,483,445 8,174,246
------------- -------------
Total current liabilities .............. 17,103,417 37,375,181
10 3/8% Senior Subordinated Notes ............ -- 105,000,000
Other notes payable .......................... 78,150,335 126,531
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 ...................... 115,156,843 145,305,760
------------- -------------
Commitments and contingencies
Stockholders' equity
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
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 14,176,021
Stock subscriptions receivable ............. (169,792) (153,592)
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 14,380,247
Total liabilities & stockholders'
equity ............................... $ 132,439,355 $ 159,686,007
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Unaudited) (Unaudited)
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .......................................... $ 25,167,939 $ 35,860,929 $ 49,788,245 $ 69,164,774
Cost of sales ...................................... 19,143,343 26,771,962 39,117,104 52,447,753
------------ ------------ ------------ ------------
Gross profit ................................... 6,024,596 9,088,967 10,671,141 16,717,021
Operating expenses:
Selling and marketing expenses ................... 1,423,705 1,098,620 2,683,662 3,017,993
General and administrative expenses .............. 2,617,305 4,205,344 5,156,974 8,361,468
------------ ------------ ------------ ------------
Total operating expenses ....................... 4,041,010 5,303,964 7,840,636 11,379,461
Income from operations ............................. 1,983,586 3,785,003 2,830,505 5,337,560
Other expenses:
Interest expense ................................. 993,655 3,592,412 2,008,807 8,561,657
Other (income) expense ........................... (65,904) 258,373 (142,610) 18,923
------------ ------------ ------------ ------------
Income (loss) before income taxes .................. 1,055,835 (65,782) 964,308 (3,243,020)
Income tax expense (benefit) ....................... 486,045 (7,555) 439,302 (324,555)
------------ ------------ ------------ ------------
Net income (loss) .................................. $ 569,790 $ (58,227) $ 525,006 $ (2,918,465)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------
(Unaudited)
1998 1999
---- ----
Operating activities:
Net income (loss) ............................ $ 525,006 $ (2,918,465)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization of
property, plant and equipment ............ 3,500,814 5,954,234
Amortization of goodwill ................... 1,061,763 1,438,255
Amortization of deferred financing
costs and other .......................... 90,000 1,371,846
Provision for uncollectible accounts ....... 50,000
Loss (gain) on disposal of assets .......... (88,473) 229,025
Increase (decrease) in cash resulting
from changes in assets and liabilities:
Accounts receivable ........................ 3,799,484 (4,973,126)
Inventory .................................. 1,066,730 (247,874)
Prepaid expenses and other assets .......... (62,931) 1,124,136
Accounts payable ........................... (1,334,302) (367,470)
Accrued expenses ........................... (934,830) 4,303,384
Income tax refund receivable ............... 130,304 (372,439)
------------- -------------
Net cash provided by operating
activities ............................. 7,753,565 5,591,506
------------- -------------
Investing activities:
Proceeds from sale of equipment ............ 99,850 850,000
Capital expenditures ....................... (2,599,517) (2,558,616)
Increase in equipment deposits ............. (1,661,153) (14,627,423)
Purchases of businesses, net of cash
acquired ................................. -- (17,617,055)
------------- -------------
Net cash used in investing activities .... (4,160,820) (33,953,094)
------------- -------------
Financing activities:
Proceeds from issuance of senior
subordinated notes ....................... -- 105,000,000
Net repayment on revolving line of
credit ................................... (4,603,330) (1,007,678)
Proceeds from long term borrowings ......... 2,992,744 --
Principal payments on long term
borrowings ............................... -- (78,023,804)
Principal payments on capital lease
obligations .............................. (1,910,068) (7,653,925)
Debt financing costs ....................... -- (4,135,123)
Payment of stock subscription .............. 84,552 16,200
------------- -------------
Net cash (used in) provided by
financing activities ................... (3,436,102) 14,195,670
------------- -------------
Net increase (decrease) in cash .......... 156,643 (14,165,918)
Cash and cash equivalents at
beginning of period ........................ 1,044,966 14,834,035
------------- -------------
Cash and cash equivalents at end
of period .................................. $ 1,201,609 $ 668,117
============= =============
Non-cash investing and financing
activities:
Equipment included in accounts payable ..... $ 11,877,353 $ 3,287,341
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim financial statements of Phoenix Color Corp. and
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, 1999, and the results of its operations for the three and six-month
period ended June 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, effective May 13, 1999.
2. Inventory
Inventory consists of the following:
December 31, 1998 June 30, 1999
----------------- -------------
Raw Materials........................ $3,031,744 $3,709,096
Work in process...................... 843,654 1,500,147
---------- ----------
$3,875,398 $5,209,243
========== ==========
3. Other Assets
Other assets at December 31, 1998 and June 30, 1999 include equipment
deposits of $9,786,031 and $26,649,828 respectively.
4. Accrued Expenses
Accrued expenses at December 31, 1998 and June 30, 1999 include accrued
interest expense of $343,250 and $4,625,938 respectively.
-6-
<PAGE>
5. Acquisitions
On January 4, 1999, the Company acquired the 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 the outstanding capital stock of TechniGraphix, Inc. ("TechniGraphix")
for a purchase price of $7.3 million. TechniGraphix is a producer of
print-on-demand books located in Dulles, Virginia. 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 six month periods ended June 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............................ $60,638,000 $69,734,000
Net income (loss).................... 482,000 (2,851,000)
6. Notes Payable
Senior Subordinated Notes
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 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.
-7-
<PAGE>
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 six month period ended June 30, 1999
of 10% differed from the 1998 year end rate of 66.1% primarily due to the loss
for the first six 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 prepress 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 $1.6 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 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.
-8-
<PAGE>
9. Guarantor Subsidiaries
The following summary sets forth the information regarding the Company and
its subsidiaries as of December 31, 1998 and June 30, 1999 and for each of the
six months in the periods ended June 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
June 30, 1999 (Unaudited)
Current assets $ 30,832,148 $ 22,448 $ 1,162,098 $ -- $ (1,603,516) $ 30,413,178
Noncurrent assets 128,649,582 317,248 7,110,999 2,038,789 (8,843,789) 129,272,829
Current liabilities 36,046,783 716,717 2,215,197 -- (1,603,516) 37,375,181
Noncurrent liabilities 107,804,048 -- 126,531 -- -- 107,930,579
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:
June 30, 1999 (Unaudited)
Sales $ 66,726,684 $ 514,715 $ 2,438,090 $ -- $ (514,715) $ 69,164,774
Gross profit (loss) 16,551,685 56,352 209,886 -- (100,902) 16,717,021
Income (loss) from
operations 5,863,784 54,014 (580,238) -- -- 5,337,560
Net (loss) income (2,097,378) 54,014 (875,101) -- -- (2,918,465)
June 30, 1998
Sales (Unaudited) $ 49,788,245 $ 469,845 $ -- $ -- $ (469,845) $ 49,788,245
Gross profit (loss) 10,759,686 (88,545) -- -- 88,545 10,671,141
Income (loss) from
operations 2,925,693 (95,188) -- -- -- 2,830,505
Net (loss) income 620,194 (95,188) -- -- -- 525,006
</TABLE>
-9-
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Phoenix Color Corp. and its subsidiaries ("Phoenix Color,"the "Company" or
"we ") believes it is the largest North American independent printer of book
components, which we supply to publishers and book manufacturers. Our book
components primarily include book jackets, paperback covers and pre-printed case
covers which are glued to hardboard and used for hardcover books. We also
produce book components such as illustrations, endpapers and inserts. We
recently expanded our capabilities and now produce complete books manufactured
on printing press equipment for the juvenile and educational markets not being
serviced by our principal book manufacturing customers, and we also produce
books using on-demand digital printing technology across a variety of market
segments. We serve over 200 customers, including some of the largest firms in
publishing and book printing, such as Simon & Schuster, HarperCollins, Penguin
Putnam, Random House, McGraw-Hill, Time Warner, Microsoft, Walt Disney and R.R.
Donnelley.
Producing complete books requires both the printing of text and the
manufacture of book components. Publishers often demand high-quality, intricate
book covers. Specialized equipment, materials and finishes are needed to produce
these covers, and many leading publishers rely on specialty printers such as
Phoenix Color to supply book components, and use other commercial printers to
print text and assemble books.
In developing our business, we have emphasized:
o Technologically advanced prepress and manufacturing equipment and
efficient production techniques;
o A computerized management information system which links all of our
facilities and customers and furnishes immediately available
operating data;
o Fast turnaround times made possible by our state-of-the-art
manufacturing equipment, strategic location of our seven plants near
major delivery points and the use of our own delivery trucks;
o Long-term relationships with suppliers of important raw materials
such as paper, laminating film and ink; and
o A highly motivated sales force which emphasizes customer training
and educational programs.
We currently operate a total of eight plants in Illinois, Maryland,
Massachusetts, New York, New Jersey and Virginia.
-10-
<PAGE>
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 % 1998 % 1999 % 1998 %
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $35.9 100.0 $25.2 100.0 $69.2 100.0 $49.8 100.0
Cost of sales 26.8 74.7 19.1 75.8 52.4 75.7 39.1 78.5
----- ----- ----- ----- ----- ----- ----- -----
Gross Profit 9.1 25.3 6.1 24.2 16.8 24.3 10.7 21.5
Operating expenses 5.3 14.8 4.1 16.3 11.4 16.5 7.8 15.7
----- ----- ----- ----- ----- ----- ----- -----
Income From Operations 3.8 10.5 2.0 7.9 5.4 7.8 2.9 5.8
Interest 3.6 10.0 1.0 4.0 8.6 12.4 2.0 4.0
Other (Income) expense 0.3 0.8 (0.1) (0.4) -- -- (0.1) (0.2)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes (0.1) (0.3) 1.1 4.3 (3.2) (4.6) 1.0 2.0
Income Tax Provision -- -- 0.5 2.0 (0.3) (0.4) 0.4 0.8
===== ===== ===== ===== ===== ===== ===== =====
Net income or (loss) $(0.1) (0.3) $ 0.6 2.3 $(2.9) (4.2) $ 0.6 1.2
</TABLE>
Three Months Ended June 30, 1999 and 1998
Net sales increased $10.7 million, or 42.5%, to $35.9 million for the
quarter ended June 30, 1999, from $25.2 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, sales of the new book manufacturing division amounting
to $2.5 million, and sales from the February acquisition of TechniGraphix
amounting to $1.6 million. For comparison purposes, if the Company's net sales
for the 1998 second quarter had included Mid-City and TechniGraphix, second
quarter net sales for 1999 would have shown an increase of $5.0 million, or
16.2%, to $35.9 million from $30.9 million for the same period in 1998.
Gross profit for the quarter increased $3.0 million, or 49.2%, to $9.1
million from $6.1 million for the second quarter of 1998, increasing the gross
profit margin to 25.3% from 24.2% in 1998. This improvement resulted from
increased sales and reductions, due to manufacturing efficiencies, in the cost
of material consumed as a percentage of sales of 1.1% and in the cost of direct
labor as a percentage of sales of 0.6%. This improvement was partially offset by
an increase in overhead costs 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 $1.2 million, or 29.3%, to $5.3 million for
the quarter ended June 30, 1999, from $4.1 million for the same period in 1998.
Operating expenses decreased as a
-11-
<PAGE>
percent of net sales to 14.8% in 1999 from 16.3% in 1998. The percentage
decrease was primarily attributable to sales increasing by 42.5% and operating
expenses increasing by 29.3% Selling expenses and freight declined but were
offset by increases in general and administrative expenses.
Interest expense increased $2.6 million or 260.0% to $3.6 million for the
quarter ended June 30, 1999, from $1.0 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 Note offering
consummated on February 2, 1999.
For the quarter ended June 30, 1999 the Company realized a loss on
disposition of equipment of $258,000 compared with a gain of $65,000 for the
same period in 1998.
The Company's effective tax rate for the quarter ended June 30, 1999 was
10% 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 decreased $700,000 to a loss of $100,000 for the quarter ended
June 30, 1999 from $600,000 net income for the same period in 1998. The decrease
was due to the factors described above.
Six Months ended June 30, 1999 and 1998
Net sales increased $19.4 million, or 39.0%, to $69.2 million for the
quarter ended June 30, 1999, from $49.8 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, sales of the new book manufacturing division amounting
to $4.4 million, and sales from the February acquisition of TechniGraphix
amounting to $2.4. For comparison purposes, if the Company's net sales for the
six months ended June 30, 1998 had included Mid-City and TechniGraphix, net
sales for 1999 would have shown an increase of $9.2 million, or 15.2%, to $69.8
million from $60.6 million for the same period in 1998.
Gross profit for the six months increased $6.1 million, or 57.0%, to $16.8
million from $10.7 million for the same period of 1998, increasing the gross
profit margin to 24.3% from 21.5% in 1998. This improvement resulted from
increased sales and reductions, due to manufacturing efficiencies, in the cost
of material consumed as a percentage of sale of 1.8% and in the cost of direct
labor as a percentage of sales of 1.9%. This improvement was partially offset by
an increase in overhead costs 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 $3.6 million, or 46.2%, to $11.4 million for
the six months ended June 30, 1999, from $7.8 million for the same period in
1998. Operating expenses increased
-12-
<PAGE>
as a percent of net sales to 16.5% in 1999 from 15.7% in 1998. The increase was
primarily attributable to increased freight costs, compensation and other
administrative costs.
Interest expense increased $6.6 million to $8.6 million for the six months
ended June 30, 1999, from $2.0 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 for the quarter ended June 30, 1999 was
10.0% compared to 40.0% 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 loss increased $3.5 million to $2.9 million for the six months ended
June 30, 1999 from $600,000 net income for the same period in 1998. The increase
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 has entered into a three-year $20.0 million revolving senior
credit facility ("Senior Credit Facility") with First Union National Bank. The
Senior Credit Facility is collateralized by the Company's assets and refinanced
the Company's prior revolving senior indebtedness. As of June 30, 1999, the
interest rate on borrowings under the Senior Credit Facility was 9.25%. 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.
The Company has assumed various equipment operating leases as a result of
its acquisitions. Rental expense related to such leases was approximately
$895,000 and $273,000 for the six month periods ended June 30, 1998 and 1999,
respectively.
Cash flow during the first six months of 1999 was a net use of cash of
approximately $14.2 million. Net cash flows from operating activities provided
$5.6 million which consisted of depreciation and amortization charges of $9.0
million offset by a loss of $2.9 million and a $0.5 million investment in
additional working capital. Net cash flows from investing activities used $34.0
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 $16.4 million. Net cash provided by
financing activities of $14.2 million includes the $105.0 million
-13-
<PAGE>
of proceeds from the issuance of the Senior Subordinated Notes, offset by the
related $3.9 million in financing costs, which was used to repay the previously
outstanding debt and capital leases.
Working capital as of June 30, 1999 was negative $6.9 million, which
represents a $27.1 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 a use of cash in the acquisitions of Mid-City and
TechniGraphix.
The Company's capital expenditures for 1999 are currently estimated to
total approximately $25.5 million, allocated primarily for the completion of the
paperback book manufacturing facility in Hagerstown, Maryland, and the equipment
being installed therein. Of this amount, $22.1 million has been expended during
the six months ended June 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 ($6.2 million as of June 30, 1999) will be sufficient to finance its
current operations, remaining capital expenditure requirements and internal
growth for the remainder of 1999.
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 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 Year 2000 issues have been addressed.
Incidental to such upgrade were measures taken to insure 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 prepress 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
-14-
<PAGE>
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 does not believe it will experience a disruption in its
manufacturing processes from equipment currently owned. It is the Company's
intention to independently verify the 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. For example, paper is manufactured for the Company by its
vendors, who maintain a 30-day inventory which is held in a warehouse located
near the Company for delivery upon request by the Company. In the event of an
emergency, the paper could be delivered to the Company using the Company's own
trucks.
Based on the actions taken with respect to internal systems, and responses
received from vendors, management does not 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 once or more Company facilities, the
Company would be able 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, and, 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 beyond its control, such as disruptions which could affect public
utilities or financial institutions.
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
-15-
<PAGE>
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.
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 prepress 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 $1.6 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 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.
Item 2. Change in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
-16-
<PAGE>
The Company conducted an annual meeting of stockholders on February 27,
1999, at which the following persons were elected as directors for the ensuing
year and until the next annual meeting of stockholders:
Louis LaSorsa
Edward Lieberman
Dion von der Lieth
John Carbone
David Rubin
The Company is privately held and does not conduct proxy solicitations.
Directors were elected by the unanimous vote of the Company's Class A
stockholders, which includes the management of the Company.
Item 5. Other Information
Acquisitions
On January 4, 1999, the Company acquired the outstanding capital stock of
Mid-City Lithographers, Inc. ("Mid-City"), a specialty component printer located
in Lake Forest, Illinois, and certain assets of Viking Leasing Partnership, a
related party of Mid-City, for a total purchase price of $12.5 million. Mid-City
supplies components primarily to the elementary and high school textbook segment
of the book publishing market. We believe the Mid-City acquisition will be
complementary to our core business by adding a significant customer base in the
elementary and high school textbook market. This market tends to be more active
during the first half of the year while other market segments serviced by
Phoenix Color are more active in the second half. Mid-City, which was merged
into the Company, has been fully assimilated into the Company. Jobs and
personnel have been moved between various production locations in order to
maximize efficiencies in manufacturing.
On February 12, 1999, the Company acquired the outstanding capital stock
of TechniGraphix, Inc. ("TechniGraphix") for a purchase price of $7.3 million.
TechniGraphix is a producer of print-on-demand books located in Dulles,
Virginia. Instead of using offset or other press equipment requiring inked
plates and set-up time to manufacture books, TechniGraphix uses high-speed
digital printing equipment to reproduce book text directly from digitally stored
files. On-demand printing technology is suitable and cost-effective for smaller
book production runs. With on-demand printing, a publisher's titles need never
be considered "out-of-print."
Recent Financing
As described in Note 4 to the Consolidated Financial Statements, on
February 2, 1999, the Company issued $105.0 million of its 10 3/8% Senior
Subordinated Notes due 2009 in a private placement, and used portions of the
proceeds to repay earlier financing. 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.
-17-
<PAGE>
New Plant
The Company's new book manufacturing facility in Hagerstown, Maryland
began operations in mid June 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Company hereby incorporates by reference, in accordance with Rule
12b-32 of the Securities and Exchange Commission, all of the exhibits filed with
the Company's Registration Statement, Commission file no. 333-50995, effective
May 13, 1999, which exhibits are designated in the following list:
Exhibit
Number Description
- ------ -----------
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, LLP
10.1 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)
-18-
<PAGE>
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the period reported upon.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 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
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 668,117
<SECURITIES> 0
<RECEIVABLES> 22,324,294
<ALLOWANCES> 405,660
<INVENTORY> 5,209,243
<CURRENT-ASSETS> 2,617,184
<PP&E> 113,776,345
<DEPRECIATION> 43,736,106
<TOTAL-ASSETS> 159,686,007
<CURRENT-LIABILITIES> 37,375,181
<BONDS> 105,000,000
0
0
<COMMON> 244
<OTHER-SE> 14,380,003
<TOTAL-LIABILITY-AND-EQUITY> 159,686,007
<SALES> 69,164,774
<TOTAL-REVENUES> 69,164,774
<CGS> 52,447,753
<TOTAL-COSTS> 63,827,214
<OTHER-EXPENSES> 18,923
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,561,657
<INCOME-PRETAX> (3,243,020)
<INCOME-TAX> (324,555)
<INCOME-CONTINUING> (2,918,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,918,465)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
