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, 2000
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
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(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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
-----------------------------
Page No.
--------
Consolidated Balance Sheets 1
December 31, 1999 and June 30, 2000
Consolidated Statements of Operations 2
Three and Six Months Ended June 30, 1999 and 2000
Consolidated Statements of Cash Flows 3
Six Months Ended June 30, 1999 and 2000
Notes to Consolidated Financial Statements 4
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
(Audited) (Unaudited)
----------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 270,585 $ 734,687
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,119,300 in 1999 and $964,138 in 2000 .................................. 21,184,283 22,939,352
Inventory ................................................................. 5,375,775 6,571,719
Income tax receivable ..................................................... 2,827,423 2,611,239
Prepaid expenses and other current assets ................................. 1,070,989 887,074
Deferred income taxes ..................................................... 627,438 627,438
------------- -------------
Total current assets ................................................ 31,356,493 34,371,509
Property, plant and equipment, net .............................................. 81,942,743 76,116,839
Goodwill, net ................................................................... 24,905,065 23,449,823
Deferred financing costs, net ................................................... 4,171,005 3,910,821
Other assets .................................................................... 9,129,466 9,958,714
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Total assets ........................................................ $ 151,504,772 $ 147,807,706
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................. $ 45,684 $ 13,077
Accounts payable .......................................................... 13,154,518 11,975,533
Accrued expenses .......................................................... 7,944,589 8,081,730
------------- -------------
Total current liabilities ........................................... 21,144,791 20,070,340
10 3/8% Senior subordinated notes ............................................... 105,000,000 105,000,000
Revolving line of credit ........................................................ 9,264,053 10,931,486
MICRF Loan ...................................................................... -- 500,000
Notes payable ................................................................... 52,596 14,142
Deferred income taxes ........................................................... 3,572,711 61,775
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Total liabilities ................................................... 139,034,151 136,577,743
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Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, Class A, voting, par value $0.01 per share, authorized
20,000 shares, 14,560 issued shares, 11,100 outstanding share ....... 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
Retained earnings ......................................................... 12,250,195 10,990,837
Stock subscriptions receivable ............................................ (137,392) (118,692)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares . (1,769,230) (1,769,230)
------------- -------------
Total stockholders' equity .......................................... 12,470,621 11,229,963
------------- -------------
Total liabilities & stockholders' equity ............................ $ 151,504,772 $ 147,807,706
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1999 2000 1999 2000
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ................................... $ 35,860,929 $ 37,057,467 $ 69,164,774 $ 73,340,953
Cost of sales ............................... 26,771,962 29,141,035 52,447,753 57,314,887
------------ ------------ ------------ ------------
Gross profit ................................ 9,088,967 7,916,432 16,717,021 16,026,066
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing expenses ....... 1,098,620 2,012,096 3,017,993 3,676,521
General and administrative expenses .. 4,205,344 4,165,385 8,361,468 8,591,933
Loss on sale of assets ............... 229,025 2,006,702 229,025 2,098,416
------------ ------------ ------------ ------------
Total operating expenses .................... 5,532,989 8,184,183 11,608,486 14,366,870
------------ ------------ ------------ ------------
Income (loss) from operations ............... 3,555,978 (267,751) 5,108,535 1,659,196
Other expenses:
Interest expense ..................... 3,592,412 3,263,586 8,561,657 6,455,582
Other (income) expense ............... 29,348 (11,100) (210,102) (26,092)
------------ ------------ ------------ ------------
Loss before income taxes .................... (65,782) (3,520,237) (3,243,020) (4,770,294)
Income tax benefit .......................... (7,555) (2,590,894) (324,555) (3,510,936)
------------ ------------ ------------ ------------
Net loss .................................... $ (58,227) $ (929,343) $ (2,918,465) $ (1,259,358)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
(Unaudited) (Unaudited)
1999 2000
-------------- --------------
<S> <C> <C>
Operating activities
Net loss ...................................................................... $ (2,918,465) $ (1,259,358)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment ......... 5,954,234 6,007,033
Amortization of goodwill ............................................... 1,438,255 1,503,377
Amortization of deferred financing costs ............................... 1,371,846 260,184
Provision for uncollectible accounts ................................... 50,000 116,942
Deferred income taxes .................................................. -- (3,510,936)
Loss on disposal of assets ............................................. 229,025 2,098,416
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable .................................................... (4,973,126) (1,872,011)
Inventory .............................................................. (247,874) (1,195,944)
Prepaid expenses and other assets ...................................... 1,124,136 (150,350)
Accounts payable ....................................................... (367,470) (1,692,576)
Accrued expenses ....................................................... 4,303,384 137,141
Income tax refund receivable ........................................... (372,439) 216,184
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Net cash provided by operating activities .............................. 5,591,506 658,102
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Investing activities:
Proceeds from sale of equipment ........................................ 850,000 825,000
Capital expenditures ................................................... (2,558,616) (3,171,714)
(Increase) decrease in equipment deposits .............................. (14,627,423) 37,642
Purchase of businesses, net of cash acquired ........................... (17,617,055) --
------------- -------------
Net cash used in investing activities ........................... (33,953,094) (2,309,072)
------------- -------------
Financing activities:
Proceeds from issuance of senior subordinated notes .................... 105,000,000 --
Net (repayments) borrowings from revolving line of credit .............. (1,007,678) 1,667,433
Proceeds from MICRF loan ............................................... -- 500,000
Principal payments on long term borrowings ............................. (78,023,804) (71,061)
Principal payments on capital lease obligations ........................ (7,653,925) --
Debt financing costs ................................................... (4,135,123) --
Payment of stock subscription .......................................... 16,200 18,700
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Net cash provided by financing activities ....................... 14,195,670 2,115,072
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Net (decrease) increase in cash ................................. (14,165,918) 464,102
Cash and cash equivalents at beginning of period .............................. 14,834,035 270,585
------------- -------------
Cash and cash equivalents at end of period .................................... $ 668,117 $ 734,687
============= =============
Non-cash investing and financing activities:
Equipment included in accounts payable ................................. $ 3,287,341 $ 513,591
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<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
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, 2000, and the results of its operations for the three and six month
periods ended June 30, 2000 and 1999. The unaudited interim financial statements
should be read in conjunction with the Company's audited Consolidated Financial
Statements for the year ended December 31, 1999, included in the Company's
Annual Report filed on Form 10-K.
2. Inventory.
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
----------------- -------------
<S> <C> <C>
Raw materials .......... $3,943,701 $4,841,889
Work in process ........ 1,432,074 1,729,830
---------- ----------
$5,375,775 $6,571,719
========== ==========
</TABLE>
3. Other Assets.
Other assets at December 31, 1999 and June 30, 2000 include equipment deposits
of $5,196,228 and $5,158,586, respectively.
4. Accrued Expenses.
Accrued expenses at December 31, 1999 and June 30, 2000 include accrued
interest expense of $4,664,455 and $4,622,754, respectively.
<PAGE>
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 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. During the fourth quarter of 1999,
the Company decided to relocate the Mid-City facility to Hagerstown, Maryland
and completed the relocation in December 1999. On February 12, 1999, the Company
acquired all of the issued and outstanding capital stock of TechniGraphix, Inc.
("TechniGraphix"), a producer of print-on-demand books located in Sterling,
Virginia, for a purchase price of $7.3 million. During the fourth quarter of
1999, the Company decided to relocate the TechniGraphix facility to Hagerstown,
Maryland and completed the relocation in January 2000. These transactions were
accounted for as purchase business combinations.
6. Debt.
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
subject to certain financial covenants.
In September 1998, the Company entered into an Amended and Restated Loan
Agreement (the "Senior Credit Facility") with a commercial bank for a three year
$20,000,000 revolving credit facility. Borrowings under the 1998 Senior Credit
Facility are subject to a borrowing base as defined in the agreement and are
collateralized by all of the assets of the Company. The Senior Credit Facility
as amended in March 2000, 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 compliance with
certain financial covenants and ratios. The Company was not in compliance with
covenants regarding
<PAGE>
its total leverage, interest coverage and minimum EBITDA ratios contained in the
Senior Credit Facility for the compliance period ending June 30, 2000. The
Company has obtained a waiver from its lending bank for its noncompliance with
respect to these covenants for that period.
In May 2000 the Company entered into a five year $500,000 loan agreement
with Maryland Industrial and Commercial Redevelopment Fund (MICRF) with 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, 2000, the Company
employed over 650 people in the state of Maryland.
7. Income Taxes.
The effective income tax rate for the six month period ended June 30,
2000 and 1999, was a benefit of 73.6% compared to a provision of 17.7%. The
increase in the effective rate is primarily attributable to the proportion of
non-deductible amortization expense for goodwill resulting from a prior
acquisition to pre-tax income (loss).
8. Commitments and Contingencies.
In December 1998, 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 1999, the
Company removed the portion of the equipment actually delivered, 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
delivered. As of December 31, 1999, the Company has included in other
non-current assets a receivable from Krause of approximately $2.0 million.
Krause has 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 has vigorously prosecuted its claims against Krause. On January 27,
2000, the court granted summary judgment in favor of the Company with respect to
the three machines previously delivered to the Company. Accordingly, the court
ordered that after the conclusion of the trial with respect to the machines not
delivered to the Company, Krause will be required to refund approximately $1.1
million to the Company, subject to Krause's right to appeal.
The Company has filed a complaint against Motion Technology Horizons,
Inc. in the Circuit Court for Washington County, Maryland to recover
approximately $300,000 in deposits made on equipment which failed to perform in
accordance with manufacturer's warranties, and $703,000 for the purchase of
substitute equipment. Motion Technology has counterclaimed for $250,000 for the
balance of the purchase price for the equipment, plus incidental charges. As of
June 30, 2000 the Company was in the early stages of discovery.
<PAGE>
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.
<PAGE>
9. Guarantor Subsidiaries.
The following summary sets forth information regarding the Company and
its subsidiaries as of December 31, 1999 and June 30, 2000 and for each of the
six month periods ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
Phoenix PCC
Color Express Technigraphix Phoenix (MD.)
Corp. Inc. Inc. Realty, LLC Eliminations Total
-------------- --------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance sheet information
June 30, 2000 (Unaudited)
Current assets ................. $ 39,374,226 $ 22,984 $ 1,535,556 $ -- $ (6,561,257) $ 34,371,509
Noncurrent assets .............. 113,173,386 132,522 6,935,289 2,038,789 (8,843,789) 113,436,197
Current liabilities ............ 18,838,286 635,435 7,071,025 -- (6,474,406) 20,070,340
Noncurrent liabilities ......... 116,493,261 -- 14,142 -- -- 116,507,403
December 31, 1999 (Audited)
Current assets ................. 33,854,573 14,197 1,476,905 -- (3,989,182) 31,356,493
Noncurrent assets .............. 119,729,718 181,652 7,041,909 2,038,789 (8,843,789) 120,148,279
Current liabilities ............ 19,956,706 636,407 4,516,055 -- (3,964,377) 21,144,791
Noncurrent liabilities ......... 117,836,764 -- 52,596 -- -- 117,889,360
Statement of operations information:
June 30, 2000 (Unaudited)
Sales .......................... 70,856,649 532,238 2,484,304 -- (532,238) 73,340,953
Gross profit (loss) ............ 17,317,574 (39,759) (1,214,158) -- (37,591) 16,026,066
Income (loss) from operations... 1,659,196 (39,207) (2,148,725) -- 2,187,932 1,659,196
Net (loss) income .............. (1,259,358) (39,372) (2,571,654) -- 2,611,026 (1,259,358)
June 30, 1999 (Unaudited)
Sales .......................... 66,726,684 514,715 2,438,090 -- (514,715) 69,164,774
Gross profit ................... 16,551,685 56,352 209,886 -- (100,902) 16,717,021
Income (loss) from operations... 5,108,535 54,014 (580,238) -- 526,224 5,108,535
Net (loss) income .............. (2,918,465) 54,014 (875,101) -- 821,087 (2,918,465)
</TABLE>
<PAGE>
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 June 30, Six Months Ended June 30,
------------------------------------- --------------------------------------
2000 % 1999 % 2000 % 1999 %
-------- ------ -------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales .............................. $ 37.0 100.0 $ 35.9 100.0 $ 73.3 100.0 $ 69.2 100.0
Cost of sales ...................... 29.1 78.6 26.8 74.7 57.3 78.2 52.5 75.9
Gross profit ....................... 7.9 21.4 9.1 25.3 16.0 21.8 16.7 24.1
Operating expenses ................. 8.2 22.2 5.5 15.3 14.4 19.6 11.6 16.8
Income from operations ............. (0.3) (0.8) 3.6 10.0 1.6 2.2 5.1 7.3
Interest ........................... 3.2 8.7 3.7 10.3 6.4 8.7 8.6 12.4
Other (Income) expense ............. -- -- -- -- -- -- (0.3) (0.5)
Income (loss) before income taxes... (3.5) (9.5) (0.1) (0.3) (4.8) (6.5) (3.2) (4.6)
Income tax provision ............... (2.6) (7.1) -- -- (3.5) (4.8) (0.3) (0.4)
Net income (loss) .................. (0.9) (2.4) (0.1) (0.3) (1.3) (1.8) (2.9) (4.2)
</TABLE>
<PAGE>
Three Months Ended June 30, 2000 and 1999
Net sales increased $1.1 million, or 3.1% to $37.0 million for the three
months ended June 30, 2000, from $35.9 million for the same period in 1999. The
increase was a result of higher sales at the Company's book manufacturing
facilities in the juvenile and educational markets.
Gross profit decreased $1.2 million, or 13.2%, to $7.9 million for the
three months ended June 30, 2000 from $9.1 million for the same period in 1999.
This decrease is due to the operations of the Maryland book manufacturing and
the print-on-demand divisions offset by increased efficiencies in the component
manufacturing and juvenile book manufacturing divisions. The percentage of gross
profit relative to sales declined 3.9% to 21.4% from 25.3% primarily as a result
of inadequate sales and start up costs associated with the Maryland book
manufacturing facility.
Operating expenses increased $2.7 million, or 49.1%, to $8.2 million for
the three months ended June 30, 2000 from $5.5 million for the same period in
1999. Operating expenses increased as a percent of sales to 22.2% for the three
months ended June 30, 2000 from 15.3% for the same period in 1999. The increase
in operating expenses in 2000 is due principally to the loss on the sale of
certain assets. In addition, the Company incurred costs associated with
increased sales personnel and customer support services for Maryland book
manufacturing.
Interest expense decreased $500,000, or 8.3%, to $3.2 million for the
three months ended June 30, 2000, from $3.7 million for the same period in 1999.
The decrease is attributed to more effective cash management.
The Company's effective tax rate, on an annualized basis, for the
quarter ended June 30, 2000 was a benefit of 73.6% compared to a provision of
10.0% for the same period in 1999. The increase in the effective rate is
primarily attributable to the proportion of non-deductible amortization expense
for goodwill resulting from a prior acquisition to pre-tax income (loss).
Net loss increased $800,000 to a loss of $900,000 for the three months
ended June 30, 2000 from $100,000 for the same period in 1999. The change in net
loss was due to the factors described above.
<PAGE>
Six Months Ended June 30, 2000 and 1999
Net sales increased $4.1 million, or 5.9%, to $73.3 million for the
three months ended June 30, 2000, from $69.2 million for the same period in
1999. The increase was a result of higher sales at the Company's thin book
manufacturing and Maryland book manufacturing facilities.
Gross profit decreased $700,000, or 4.8%, to $16.0 million for the six
months ended June 30, 2000 from $16.7 million for the same period in 1999. The
decrease is due to the operations of the Maryland book manufacturing and
print-on-demand divisions offset by increased efficiencies in the component
manufacturing and juvenile book manufacturing divisions. The percentage of gross
profit relative to sales declined 2.3% to 21.8% from 24.1% primarily as a result
of lack of sales and start up costs associated with new equipment installations
at the Maryland book manufacturing facility.
Operating expenses increased $2.8 million or 24.1%, to $14.4 million for
the six months ended June 30, 2000 from $11.6 million for the same period in
1999. This increase is primarily attributable to losses incurred upon the sale
of certain assets. In addition, the Company incurred additional costs associated
with increased sales personnel, customer support personnel and other costs
associated with the Maryland book manufacturing division.
Interest expense decreased $2.2 million, or 25.6%, to $6.4 million for
the six months ended June 30, 2000, from $8.6 million for the same period in
1999. In the first quarter of 1999, the Company incurred one time charges of
$2.7 million associated with the write off of deferred financing costs and
prepayment premiums to repay equipment debt. If the one-time charges were
excluded, interest expense would have increased $600,000, or 10.2%, to $6.5
million for the six months ended June 30, 2000, from $5.9 million for the same
period 1999. This increase was primarily the result of six months of interest
expense for 2000 compared to five months for 1999 since the Company's $105
million bond offering was consummated on February 2, 1999.
The Company's effective tax rate, on an annualized basis, for the six
months ended June 30, 2000 was a benefit of 73.6% compared to a provision of
10.0% for the same period in 1999. The increase in the effective rate is
primarily attributable to the proportion of non-deductible amortization expense
for goodwill resulting from a prior acquisition to pre-tax income (loss).
Net loss decreased $1.6 million or 55.2% to a loss of $1.3 million for
the six months ended June 30, 2000 from $2.9 million for the same period in
1999. The change in net loss was due to the factors described above.
<PAGE>
Liquidity and Capital Resources
Cash flow during the first six months of 2000 was approximately
$500,000. Net cash from operating activities provided approximately $700,000,
which consisted principally of depreciation and amortization charges of $7.9
million, a non-cash loss on assets sold of $2.1 million offset by a net loss of
$1.3 million, a deferred tax benefit of $3.5 million, and $4.6 million
investment in additional working capital. Net cash from investing activities
used $2.3 million due to capital and equipment expenditures. Net cash provided
by financing activities was $2.1 million, which is primarily due to borrowings
on the revolver.
Working capital increased $4.1 million to $14.3 million at June 30, 2000
from $10.2 million at December 31, 1999. This increase is primarily attributable
to an increase in accounts receivable of $1.7 million, an increase in inventory
of $1.2 million, and a reduction in accounts payable of $1.2 million.
The Company historically has financed its operations with internally
generated funds, external short and long-term borrowings and operating leases.
The Company believes that funds generated from operations, together with
existing cash, available credit under the Senior Credit Facility and other
financial sources 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company has some exposure to market risk based upon interest rate
changes. Because approximately 91% of the Company's debt bears a fixed rate of
interest, the Company's exposure is immaterial.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 1998, 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 1999, the
Company removed the portion of the equipment actually delivered, and is seeking
recovery of
<PAGE>
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 delivered. As of
December 31, 1999, the Company has included in other non-current assets a
receivable from Krause of approximately $2.0 million. Krause has 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 has vigorously
prosecuted its claims against Krause. On January 27, 2000, the court granted
summary judgment in favor of the Company with respect to the three machines
previously delivered to the Company. Accordingly, the court ordered that after
the conclusion of the trial with respect to the machines not delivered to the
Company, Krause will be required to refund approximately $1.1 million to the
Company, subject to Krause's right to appeal.
The Company has filed a complaint against Motion Technology Horizons,
Inc. in the Circuit Court for Washington County, Maryland to recover
approximately $300,000 in deposits made on equipment which failed to perform in
accordance with manufacturer's warranties, and $703,000 for the purchase of
substitute equipment. Motion Technology has counterclaimed for $250,000 for the
balance of the purchase price for the equipment, plus incidental charges. As of
June 30, 2000, the Company was in the early stages of discovery.
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.
None.
Item 3. Defaults upon Senior Securities.
The Company was not in compliance with covenants regarding its total
leverage ratio, its interest coverage ratio and its minimum EBITDA (Earnings
before Interest, Taxes, Depreciation and Amortization) contained in the Senior
Credit Facility for the compliance period ending June 30, 2000. The Company has
obtained a waiver from its lending bank for its noncompliance with respect to
these covenants for the period.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<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)**
10.1 Employment Agreement dated as of February 12, 1999 between the Company and Jack L.
Tiner**
10.4(a) 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)**
10.4(b) First Amendment to Credit Agreement date March 31, 1999 by and among Phoenix Color
Corp. and its subsidiaries, and the lenders referenced therein and First Union National Bank
as issuer of letters of credit and agent.****
</TABLE>
<PAGE>
(a) Exhibits(continued).
<TABLE>
<CAPTION>
Exhibit
Number Description
------- --------------------------------------------------------------------------------------------
<S> <C>
10.4(c) Second Amendment to Credit Agreement date March 23, 2000 by and among Phoenix Color
Corp. and its subsidiaries, and the lenders referenced therein and First Union National Bank
as issuer of letters of credit and agent.****
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)***
10.7 Master Pledge Agreement dated as of September 15, 1998 executed by the stockholders of
the Company in favor of First Union National Bank, as Collateral Agent (schedules
omitted)**
10.8 Subsidiary Pledge Agreement dated as of September 15, 1998 executed by the Company
(schedules omitted)**
10.10 Lease Agreement dated as of March 20, 1998 between the Company and Maurice M. Weill,
Trustee Under Indenture Dated December 6, 1984 for the facility located at 40 Green Pond
Road, Rockaway, NJ 07866**
10.11 Lease Agreement dated as of March 31, 1997 between the Company and Constitution Realty
Company, LLC for the facility located at 555 Constitution Drive, Taunton, MA 02780**
10.12 Lease Agreement dated as of December 19, 1996 between the Company and CMC Factory
Holding Company, L.L.C. for the facility located at 47-07 30th Place, Long Island City, NY
11101**
27 Financial Data Schedule
</TABLE>
------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-50995), filed on April 24, 1998.
** Incorporated by reference to the Company's Amendment No. 1 on Form S-4 to
Registration Statement on Form S-1 (Reg. No. 333-50995), filed on March 8,
1999.
*** Incorporated by reference to the Company's Amendment No. 2 on Form S-4 to
Registration Statement on Form S-1 (Reg. No. 333-50995), filed on May 5,
1999.
**** Incorporated by reference to the Company's 1999 Annual Form 10-K (Reg. No.
333-50995), filed on March 30, 2000.
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the period reported upon.
<PAGE>
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 11, 2000
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
<PAGE>
