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, 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
-------- ----------
(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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
-----------------------------
Page No.
--------
Consolidated Balance Sheets 1
December 31, 1999 and September 30, 2000
Consolidated Statements of Operations 2
Three and Nine Months Ended September 30, 1999 and 2000
Consolidated Statements of Cash Flows 3
Nine Months Ended September 30, 1999 and 2000
Notes to Consolidated Financial Statements 4
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
(Audited) (Unaudited)
----------------- ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................... $ 270,585 $ 360,899
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,119,300 in 1999 and $1,231,172 in 2000 .................................. 21,184,283 26,305,030
Inventory ................................................................... 5,375,775 6,114,374
Income tax receivable ....................................................... 2,827,423 2,632,129
Prepaid expenses and other current assets ................................... 1,070,989 889,254
Deferred income taxes ....................................................... 627,438 627,438
------------- -------------
Total current assets .................................................. 31,356,493 36,929,124
Property, plant and equipment, net ................................................ 81,942,743 74,677,247
Goodwill, net ..................................................................... 24,905,065 16,654,379
Deferred financing costs, net ..................................................... 4,171,005 3,780,729
Deferred income taxes ............................................................. -- 2,044,218
Other assets ...................................................................... 9,129,466 8,036,308
------------- -------------
Total assets .......................................................... $ 151,504,772 $ 142,122,005
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................... $ 45,684 $ 13,077
Accounts payable ............................................................ 13,154,518 11,552,182
Accrued expenses ............................................................ 7,944,589 9,244,470
------------- -------------
Total current liabilities ............................................. 21,144,791 20,809,729
10 3/8% Senior subordinated notes ................................................. 105,000,000 105,000,000
Revolving line of credit .......................................................... 9,264,053 15,137,927
MICRF Loan ........................................................................ -- 500,000
Notes payable ..................................................................... 52,596 10,966
Deferred income taxes ............................................................. 3,572,711 --
------------- -------------
Total liabilities ..................................................... 139,034,151 141,458,622
------------- -------------
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 shares ....... 146 146
Common Stock, Class B, non-voting, par value $0.01 per share, authorized
200,000 shares, 9,794 issued shares, 7,794 outstanding shares ........ 98 98
Additional paid in capital .................................................. 2,126,804 2,126,804
Retained earnings ........................................................... 12,250,195 414,657
Stock subscriptions receivable .............................................. (137,392) (109,092)
Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares ... (1,769,230) (1,769,230)
------------- -------------
Total stockholders' equity ............................................ 12,470,621 663,383
------------- -------------
Total liabilities & stockholders' equity .............................. $ 151,504,772 $ 142,122,005
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 36,266,441 $ 40,631,522 $ 105,431,215 $ 113,972,475
Cost of sales ................................... 28,147,120 32,174,986 80,594,873 89,489,873
------------- ------------- ------------- -------------
Gross profit .................................... 8,119,321 8,456,536 24,836,342 24,482,602
------------- ------------- ------------- -------------
Operating expenses:
Selling and marketing expenses ......... 1,136,243 1,938,298 4,154,236 5,614,819
General and administrative expenses .... 4,111,612 4,585,477 12,473,080 13,177,410
Gain (loss) on sale of assets .......... (22,652) -- 206,373 2,098,416
Restructuring Charge ................... -- 11,425,000 -- 11,425,000
------------- ------------- ------------- -------------
Total operating expenses ........................ 5,225,203 17,948,775 16,833,689 32,315,645
------------- ------------- ------------- -------------
Income (loss) from operations ................... 2,894,118 (9,492,239) 8,002,653 (7,833,043)
Other expenses:
Interest expense ....................... 3,282,271 3,267,195 11,843,928 9,722,777
Other income ........................... (4,375) (77,261) (214,477) (103,353)
------------- ------------- ------------- -------------
Loss before income taxes ........................ (383,778) (12,682,173) (3,626,798) (17,452,467)
Income tax benefit .............................. (38,125) (2,105,993) (362,680) (5,616,929)
------------- ------------- ------------- -------------
Net loss ........................................ $ (345,653) $ (10,576,180) $ (3,264,118) $ (11,835,538)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Unaudited) (Unaudited)
1999 2000
-------------- --------------
<S> <C> <C>
Operating activities
Net loss ................................................................................ $ (3,264,118) $ (11,835,538)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of property, plant and equipment ................... 9,182,507 9,083,331
Amortization of goodwill ......................................................... 2,177,918 2,255,066
Amortization of deferred financing costs ......................................... 1,499,971 390,276
Provision for uncollectible accounts ............................................. 150,000 485,000
Deferred income taxes ............................................................ -- (5,616,929)
Loss on disposal of assets ....................................................... 206,373 2,098,416
Impairment loss on restructuring ................................................. -- 7,461,307
Increase (decrease) in cash resulting from changes in assets and
liabilities:
Accounts receivable ................................................................ (5,626,457) (5,605,747)
Inventory .......................................................................... (433,671) (738,599)
Prepaid expenses and other assets .................................................. 1,232,828 (564,887)
Accounts payable ................................................................... (2,663,859) (2,078,351)
Accrued expenses ................................................................... 1,048,637 (2,663,812)
Accrual of expenses for restructuring charge ....................................... -- 3,963,693
Income refund receivable ........................................................... (468,723) 195,294
------------- -------------
Net cash provided by (used in) operating activities ................................ 3,041,406 (3,171,480)
------------- -------------
Investing activities:
Proceeds from sale of equipment .................................................. 881,691 825,000
Capital expenditures ............................................................. (12,908,884) (5,355,684)
Decrease in equipment deposits ................................................... -- 1,464,541
Purchase of businesses, net of cash acquired ..................................... (17,617,055) --
------------- -------------
Net cash used in investing activities ..................................... (29,644,248) (3,066,143)
------------- -------------
Financing activities:
Proceeds from issuance of senior subordinated notes .............................. 105,000,000 --
Net (repayments) borrowings from revolving line of credit ........................ (3,056,062) 5,873,874
Proceeds from MICRF Loan ......................................................... -- 500,000
Principal payments on long term borrowings ....................................... (78,180,014) (74,237)
Principal payments on capital lease obligations .................................. (7,653,925) --
Debt financing costs ............................................................. (4,135,123) --
Payment of stock subscription .................................................... 24,300 28,300
------------- -------------
Net cash provided by financing activities ................................. 11,999,176 6,327,937
------------- -------------
Net (decrease) increase in cash ........................................... (14,603,666) 90,314
Cash and cash equivalents at beginning of period ........................................ 14,834,035 270,585
------------- -------------
Cash and cash equivalents at end of period .............................................. $ 230,369 $ 360,899
============= =============
Non-cash investing and financing activities:
Equipment included in accounts payable ........................................... $ 1,550,440 $ 476,017
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<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
September 30, 2000, and the results of its operations for the three and nine
month periods ended September 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 September 30, 2000
----------------- ------------------
<S> <C> <C>
Raw materials............... $3,943,701 $3,818,674
Work in process............. 1,432,074 2,295,700
---------- ----------
$5,375,775 $6,114,374
========== ==========
</TABLE>
3. Other Assets.
Other assets at December 31, 1999 and September 30, 2000 include
equipment deposits of $5,196,228 and $3,504,785, respectively.
4. Accrued Expenses.
Accrued expenses at December 31, 1999 and September 30, 2000 include
accrued interest expense of $4,664,455 and $1,950,871, respectively.
4
<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. Restructuring
In September 2000, the Company announced a plan to restructure its
operations, which resulted in the Company recording a one-time operating expense
totaling $11.4 million. The restructuring plan involves the closing of
Technigraphix, Inc. and the Company's Taunton, Massachusetts facility in order
to reduce costs and improve productivity.
The following table displays the activity and balances of the
restructuring accrual account from January 1, 2000 to September 30, 2000:
<TABLE>
<CAPTION>
January 1, September 30,
2000 2000
Type of Cost Balance Additions Deductions Balance
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Lease termination costs -- $3,639,000 -- $3,639,000
Facility closings ..... -- 325,000 -- 325,000
---------- ---------- ---------- ----------
Total
-- $3,964,000 -- $3,964,000
========== ========== ========== ==========
</TABLE>
Also included in restructuring and exit costs for the nine months ended
September 30, 2000 were impairment charges of approximately $7.5 million related
to the write-down of unrecoverable assets and goodwill in TechniGraphix and the
Taunton, Massachusetts facility in which the carrying value is no longer
supported by future cash flows.
5
<PAGE>
The following information sets forth the results of operations of
TechniGraphix, Inc. for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .... $ 1,778,941 $ 966,450 $ 4,217,031 $ 3,479,435
Net Loss ..... $ (673,753) $(7,935,188) $(1,452,135) $(9,673,908)
</TABLE>
7. 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 Act of 1933. 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. As of September 30, 2000
the Company was not in compliance with covenants regarding its total leverage
and interest coverage ratios and minimum EBITDA. On November 13, 2000, the
Company and its lender amended the Senior Credit Facility effective September
30, 2000, which redefined the financial covenants to which the Company is
subject, and brought the Company into compliance with these covenants as of
September 30, 2000.
6
<PAGE>
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 September
30, 2000, the Company employed over 650 people in the state of Maryland.
8. Income Taxes.
The effective income tax rate for the nine-month period ended September
30, 2000 and 1999, was a benefit of 32.2% compared to a benefit of 11.1%. 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 loss.
9. Commitments and Contingencies.
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH and Krause America, Inc. ("Krause"), which was tried in October 2000 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 contended that the equipment failed to perform as warranted.
During 1999, the Company removed the portion of the equipment actually
delivered, and sought recovery of the approximately $2.0 million paid on this
equipment, which included amounts for deposits on the balance of the equipment
not yet delivered. As of December 31, 1999, and September 30, 2000 the Company
included in other non-current assets a receivable from Krause of approximately
$2.0 million. 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. On October 26, 2000, a jury rendered a verdict in favor of the Company
on all but one of the pieces of equipment. A judgment has been entered against
Krause America, Inc. 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 paid in deposits, which are included in other non-current
assets on the accompanying balance sheet, 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 September 30, 2000 the Company was in the early stages
of discovery.
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 for any quarterly or
annual period.
7
<PAGE>
10. Guarantor Subsidiaries.
Phoenix Color Corp. ("Parent") currently has no independent operations
and the guarantees made by all of its subsidiaries, which are all 100% owned,
are full and unconditional and joint and several. The Company currently does not
have any direct or indirect non-guarantor subsidiaries. All consolidated amounts
in the Parent's financial statements would be representative of the combined
guarantors.
11. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial
Statements." The SEC delayed the date by which registrants must apply the
accounting and disclosures described in SAB No. 101 until the fourth quarter of
2000. The Company is currently assessing the impact of SAB No. 101 on its
results of operations.
In June 1998, the FASB issued Statement No. 133 (SFAS 133) "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instrument embedded in other contracts or hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not hold derivatives and as such, SFAS 133 will not have an
impact.
8
<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 September 30, Nine Months Ended September 30,
----------------------------------- --------------------------------------
2000 % 1999 % 2000 % 1999 %
------- ------ ------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales .......................... $ 40.6 100.0 $ 36.3 100.0 $ 114.0 100.0 $ 105.4 100.0
Cost of sales .................. 32.1 79.2 28.2 77.6 89.5 78.5 80.6 76.4
Gross profit ................... 8.5 20.8 8.1 22.4 24.5 21.5 24.8 23.6
Operating expenses ............. 18.0 44.2 5.2 14.5 32.3 28.4 16.8 15.9
Income (loss) from operations... (9.5) (23.4) 2.9 7.9 (7.8) (6.9) 8.0 7.7
Interest expense ............... 3.3 8.0 3.3 9.1 9.7 8.5 11.8 11.2
Other Income ................... (0.1) (0.2) -- -- (0.1) (0.1) (0.2) (0.1)
Loss before income taxes ....... (12.7) (31.2) (0.4) (1.2) (17.4) (15.3) (3.6) (3.4)
Income tax benefit ............. (2.1) (5.2) (0.1) (0.2) (5.6) (4.9) (0.4) (0.3)
Net loss ....................... (10.6) (26.0) (0.3) (1.0) (11.8) (10.4) (3.2) (3.1)
</TABLE>
9
<PAGE>
Three Months Ended September 30, 2000 and 1999
Net sales increased $4.3 million, or 11.8% to $40.6 million for the
three months ended September 30, 2000, from $36.3 million for the same period in
1999. The increase was a result of higher sales at the Company's book
manufacturing facilities.
Gross profit increased $400,000, or 4.9%, to $8.5 million for the three
months ended September 30, 2000 from $8.1 million for the same period in 1999.
This increase is due to efficiencies in operations in component and thin book
manufacturing operations offset by the Maryland book manufacturing and the
print-on-demand operations. The percentage of gross profit relative to sales
declined 1.6% to 20.8% from 22.4% primarily as a result of inadequate sales and
manufacturing dislocations associated with the Maryland book manufacturing
facility.
Operating expenses increased $12.8 million, or 246.2%, to $18.0 million
for the three months ended September 30, 2000 from $5.2 million for the same
period in 1999. Operating expenses increased as a percent of sales to 44.2% for
the three months ended September 30, 2000 from 14.5% for the same period in
1999. The increase in operating expenses of $1.0 million is due principally to
costs of additional sales and customer service personnel associated with
Maryland book manufacturing and increased delivery expenses. The Company closed
its print-on-demand operations effective September 30, 2000, incurring a charge
to operating expense of $10.3 million, consisting of a non-cash charge of $6.7
million for the write-down of goodwill and impairment of physical assets and an
accrual of approximately $3.6 million for exit costs. The Company is also
closing operations of it component facility in Taunton, Massachusetts effective
December 1, 2000 and has recorded a charge to operating expenses of $1.1
million, consisting of a non-cash charge of $800,000 for physical asset
impairment and an accrual of $300,000 for exit costs.
The restructuring provision is not projected to yield a net cash
savings in the year 2000, but is expected to yield annual cash savings of
approximately $2.0 million in subsequent years. These savings will primarily be
realized in manufacturing overhead, selling, general and administrative
expenses.
Interest expense remained unchanged at $3.3 million for the three
months ended September 30, 2000, and 1999 respectively.
The Company's effective tax rate, on an annualized basis, for the
quarter ended September 30, 2000 was a benefit of 16.5% compared to a benefit of
25.0% for the same period in 1999. The decrease 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 loss.
Net loss increased $10.3 million to $10.6 million for the three months
ended September 30, 2000 from $300,000 for the same period in 1999. The change
in net loss was due to the factors described above.
10
<PAGE>
Nine Months Ended September 30, 2000 and 1999
Net sales increased $8.6 million, or 8.2%, to $114.0 million for the
nine months ended September 30, 2000, from $105.4 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 $300,000, or 1.2%, to $24.5 million for the nine
months ended September 30, 2000 from $24.8 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 thin book manufacturing divisions. The percentage of gross
profit relative to sales declined 2.1% to 21.5% from 23.6% primarily as a result
of lack of sales and operating costs at the Maryland book manufacturing facility
and print-on-demand operations.
Operating expenses increased $15.5 million or 92.26%, to $32.3 million
for the nine months ended September 30, 2000 from $16.8 million for the same
period in 1999. This increase is primarily attributable to losses incurred upon
the sale of certain assets and additional costs associated with increased sales
personnel, customer support personnel and other costs. Operating costs also
include a charge to income of $11.4 million for the closing of the Company's
print-on-demand operations and the closing of the Taunton, Massachusetts
component manufacturing facility as discussed above in Managements Discussion
and Analysis for the three months ended September 30, 2000 and 1999.
Interest expense decreased $2.1 million, or 17.8%, to $9.7 million for
the nine months ended September 30, 2000, from $11.8 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 6.6%, to $9.7
million for the nine months ended September 30, 2000, from $9.1 million for the
same period in 1999. This increase was primarily the result of nine months of
interest expense for 2000 compared to eight months for 1999 due to the Company
consummating its $105 million bond offering on February 2, 1999.
The Company's effective tax rate, on an annualized basis, for the nine
months ended September 30, 2000 was a benefit of 32.2% compared to a benefit of
11.1% 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 loss.
Net loss increased $8.6 million or 268.8% to $11.8 million for the nine
months ended September 30, 2000 from $3.2 million for the same period in 1999.
The change in net loss was due to the factors described above.
11
<PAGE>
Liquidity and Capital Resources
Cash flow during the first nine months of 2000 was approximately $100,000.
Net cash from operating activities used approximately $3.2 million, which
consisted principally of a net loss of $11.8 million, investment in additional
working capital of $7.5 million, a deferred tax benefit of $5.6 million offset
by depreciation and amortization charges of $11.7 million, a non-cash loss on
assets sold of $2.1 million, and a non-cash restructuring charge of $7.5
million. Net cash from investing activities used $3.1 million due to capital and
equipment expenditures. Net cash provided by financing activities was $6.3
million, which is primarily due to borrowings on the Senior Credit Facility.
Working capital increased $5.8 million to $16.1 million at September 30,
2000 from $10.3 million at December 31, 1999. This increase is primarily
attributable to an increase in accounts receivable of $5.1 million, an increase
in inventory of $700,000, a reduction in accounts payable of $1.6 million,
offset by an increase in accrued liabilities of $1.3 million, which is primarily
associated with restructuring costs.
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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 1998, the Company filed a complaint against Krause Biagosch
GmbH and Krause America, Inc. ("Krause"), which was tried in October 2000 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 contended that the equipment failed to perform as warranted.
During 1999, the Company removed the portion of the equipment actually
delivered, and sought recovery of the approximately $2.0 million paid on this
equipment, which included amounts for deposits on the balance of the equipment
not yet delivered. As of December 31, 1999, and September 30, 2000 the Company
included in other non-current assets a receivable from Krause of approximately
$2.0 million. 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. On October 26, 2000, a jury rendered a verdict in favor of the Company
on all but one of the pieces of equipment. A judgment has been entered against
Krause America, Inc. 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 paid in deposits, which are included in other non-current
assets on the accompanying balance sheet, 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 September 30, 2000 the Company was in the early stages
of discovery.
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 for any quarterly or
annual period.
Item 2. Change in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None
13
<PAGE>
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.
<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
</TABLE>
14
<PAGE>
(a) Exhibits(continued).
<TABLE>
<CAPTION>
Exhibit
Number Description
------- --------------------------------------------------------------------------------------------
<S> <C>
Color Corp. and its subsidiaries, and the lenders referenced therein and First Union National Bank
as issuer of letters of credit and agent.****
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.****
10.4(d) Third Amendment to Credit Agreement date November 13, 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, filed on
March 30, 2000.
15
<PAGE>
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the period reported upon.
16
<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: November 13, 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
17
<PAGE>
