UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 333-50995
December 31, 1999 Commission File Number
PHOENIX COLOR CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-2269911
(State of (I.R.S. Employer Identification No.)
incorporation)
540 Western Maryland Parkway
Hagerstown, Maryland 21740
(Address of principal executive offices) (Zip Code)
(301) 733-0018
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Not Applicable
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
-- --
As of December 31, 1999, the Registrant had no capital stock or other
securities registered under the Securities Exchange Act of 1934, as amended.
As of March 15, 2000, there were 11,100 shares of the Registrant's Class A
Common Stock issued and outstanding and 7,794 of the Registrant's Class B Common
Stock issued and outstanding.
<PAGE>
Documents Incorporated by Reference
None
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Item No. Name of Item Page No.
Part I
<S> <C> <C>
Item 1. Business..................................................... 1
Item 2. Properties................................................... 8
Item 3. Legal Proceedings............................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 9
Item 6. Selected Consolidated Financial Data......................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 16
Item 8. Financial Statements and Supplementary Data.................. 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 16
Part III
Item 10. Directors and Executive Officers of the Registrant........... 17
Item 11. Executive Compensation....................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 19
Item 13. Certain Relationships and Related Transactions............... 20
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 22
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Phoenix Color Corp. (the "Company" or "Phoenix Color") manufactures books
and book components, which include book jackets, paperback covers, pre-printed
case covers for hardcover books, illustrations, endpapers and inserts. The
Company generates revenues primarily through the sale of book components to book
publishers. The manufacture of book components requires high-quality, intricate
work and specialized equipment, materials and finishes. Book publishers
generally design book components to enhance the sales appeal of the books. As a
result, many leading publishers rely on specialty printers such as Phoenix Color
to supply high quality book components. The Company also produces book
components for its book manufacturing operations, which print thin books,
paperback books and print-on-demand books.
In developing and growing our business, we have emphasized:
o Technologically advanced prepress and manufacturing equipment and
efficient production techniques;
o Computer managed information systems that link all of our
facilities and customers and furnishes real time operating data;
o Fast turnaround times made possible by our state-of-the-art
manufacturing equipment, the strategic location of our five
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 Highly motivated and trained sales personnel.
History
Phoenix Color was founded in 1979 by a group of fifteen printing industry
veterans, including Louis LaSorsa, its Chairman, President and Chief Executive
Officer. Initially, the Company focused on supplying book components for the
higher education and professional reference markets. Then, in 1998, the Company
increased its services to include book components for the general interest,
religious and other markets of the book publishing industry, thin book and
paperback book manufacturing and on-demand printing. Early operations were
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conducted in a single production facility in Long Island City, New York. In
1993, the Company moved the major portion of its business to Hagerstown,
Maryland. We currently operate a total of five plants in the States of Maryland
and New Jersey and in the Commonwealth of Massachusetts.
The Company was incorporated in the State of New York in 1979 and
reincorporated by merger in the State of Delaware in 1996. The Company's
headquarters are at 540 Western Maryland Parkway, Hagerstown, Maryland 21740 and
its telephone number is (301) 733-0018.
Acquisitions
On January 4, 1999, the Company acquired Mid-City Lithographers, Inc., a
specialty book component printer that was located in Lake Forest, Illinois, for
a total purchase price of $12.5 million. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Mid-City sold book
components primarily to the elementary and high school textbook publishing
market, a market in which the Company had only a minor presence. As a result of
the acquisition, the Company currently serves the elementary and high school
textbook publishing market which tends to be more active during the first half
of the year. The other markets served by Phoenix Color tend to be more active
during the second half of the year.
On February 12, 1999, the Company acquired TechniGraphix, Inc., a producer
of print-on-demand books that was located in Sterling, Virginia, for a total
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The primary benefit
of the acquisition was to provide the Company access to expertise in the use of
high-speed digital printing equipment to reproduce book text, on demand,
directly from digitally stored files. On-demand printing technology is suitable
and cost-effective for small production runs. With on-demand printing, a
publisher's titles need never be considered out-of-print.
Manufacturing Operations and Technology
Order Processing.
Customer orders are received at the Company's various plant locations by
physical delivery or electronic file transfer. Once entered into the Company's
order processing system, a customer order is monitored on a real-time basis
throughout the entire manufacturing process. At the time orders are entered,
management allocates work orders among the Company's plants through the
Company's data network in order to maximize plant efficiency and minimize
operating cost.
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In order to limit the costs associated with maintaining inventory, many
book publishers have instituted inventory controls that limit the amount of
inventory held by them. As a result, specialty printers, such as the Company,
are under increasing pressure to process orders quickly and efficiently. By
investing in upgrades to the Company's printing equipment, digital
communications and information network, the Company has been able to respond
successfully to its clients' increasing demands. Further, the Company's printing
facilities operate on a 24-hour basis, seven days a week. As an additional
service, the Company provides real-time job status information to its customers
over the Internet.
Digital Prepress Services.
The Company provides a complete range of prepress services, including color
separations, high speed imaging, assembly, electronic retouching, archiving,
digital file transfer, color-accurate digital proofing and computer generated
platemaking. The Company's prepress services are available at each of its
plants, and are linked through a high speed telecommunications network. The
Company does not rely on any subcontractors for its prepress needs.
Printing and Finishing Services.
The Company manufactures book components, thin books, paperback books and
print-on-demand books. The Company manufactures book components by using 29
modern high-speed, sheet-feed offset lithographic printing presses capable of
printing up to eight colors in a single pass, some of which can print both sides
of the sheet at the same time, and some with inline coaters. The Company
protects manufactured book components by applying an ultraviolet liquid coating
or laminating different types of film such as polypropelene and mylar. In
connection with the manufacture of book components, the Company also offers a
complete array of in-house services, including foil stamping, selected and
overall embossing, selected and overall liquid coatings and die cutting.
The Company produces thin books in its manufacturing plant in New Jersey
which has two presses capable of printing up to ten colors on a single
side or five colors on each side during a single pass. These presses employ roll
stand technology which sheets the paper as it enters the press, thereby
eliminating the need to sheet paper off line and continually add paper to the
feeder system of the press. In connection with the manufacture of thin books,
the Company offers several varieties of binding styles including, smythe sewn,
side sewn and thread seal for hard cover books in addition to gluing for both
hard cover and soft cover books.
The Company prints paperback books in its manufacturing plant in Maryland
which has two single color web presses. The Company's workflow for the
production of paperback books is completely digital. In connection with the
manufacture of paperback books, the Company offers perfect binding and saddle
wire binding.
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The Company assembles print-on-demand books at a print facility in
Hagerstown, Maryland that has six sheet-feed digital presses and three web-feed
digital presses. The sheet-feed presses employ roll stand technology. The
Company provides on-demand printing which permits it to print book text at high
speed on digital presses directly from digitally stored files and permits it to
produce books and other documents with variable data. Such on-demand printing
technology is suitable and cost-effective for smaller production runs. With
on-demand printing, a publication need never be considered out-of-print. In
connection with the manufacture of print-on-demand books, the Company is capable
of producing a variety of finishing styles including saddle wire binding,
perfect binding, spiral wire and plastic binding, and hard cover flat back
binding.
Distribution and Logistics.
The Company operates its own tractor-trailers to deliver a majority of its
products. This enables the Company to reduce transportation costs and to save
one or more days of delivery time in fulfilling customer requirements. The
tractor-trailers are also used to distribute raw materials among the Company's
manufacturing plants.
Technology.
The Company continues to invest in new technology to ensure modern highly
efficient production capabilities. Quality and efficiency in conventional
printing is augmented by computer-to-plate technology, which permits the
creation of a printing plate directly from a digital file and eliminates the use
of negative film. The Company uses computer-to-plate technology on new jobs, and
maintains traditional platemaking equipment primarily for reorders of older jobs
originally produced using negative film. The Company archives negative film and
digital files to facilitate reorders.
Before printing, the Company provides its customer a proof of the job which
must be approved by the customer. The Company has developed the Phoenix
Colornet(R) system, a proprietary system that permits the electronic transfer of
digital files within the Company's facilities and to its customers who have been
provided with the Phoenix Colornet(R) system. Further, the Phoenix Colornet(R)
system provides more reliable, consistently color-accurate, digital proofs.
Virtually all of the Company's proofs are generated digitally through its
Phoenix Colornet(R) system. The Company may also transfer files by mechanical
transfer or through use of the Internet, in various formats, including PDF, HTML
and FTP, among others.
Raw Materials, Purchasing and Inventory
The Company uses substantial quantities of paper, ink, laminating film,
foil and other materials in its operations. Management generally favors "single
sourcing" of its various raw materials purchases, believing that establishing
strong commercial relationships with a relatively
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small number of suppliers enables the Company to negotiate favorable prices and
to maintain reliable supplies of such materials. Nevertheless, the Company is
not party to any long-term supply agreements, is not dependent on any single
source for its raw materials and believes it could replace any individual
supplier without disruption to its business.
The Company generally obtains annual pricing commitments from its
suppliers, but such commitments are not legally binding. Nevertheless,
historically, the Company's vendors have complied with commitments made to the
Company. In the event of material price increases by vendors, the Company may
pass such increases through to its customers.
The Company uses centralized purchasing and storage for book components at
the Hagerstown, Maryland plants in order to control raw material costs. Further,
the Company purchases paper in large rolls and converts the paper, using its own
computerized sheeter, into sheets in the sizes required by its presses. By
converting in excess of 30 million pounds of paper in-house annually, the
Company is able to reduce paper costs, avoid delays in obtaining properly sized
sheets and minimize the need to maintain an inventory of specific sheet paper
sizes.
Markets
The Company sells book components, thin books, paperback books and
print-on-demand books to publishers in all segments of the book publishing
market. Various segments of the book publishing market may respond to different
economic and other factors, and declines in one or more segments in a given year
may be offset by improvements in other segments. Accordingly, management views
the Company's sales to a broad range of book publishing market segments as a
competitive strength.
Sales of book components by the Company represented 86.9% of the Company's
net sales in 1999 and almost 100% of net sales in 1998. Sales of book components
for use in general interest books accounted for 37.5% and 44.9% of the Company's
net sales in 1999 and 1998, respectively. Sales of book components to publishers
of educational materials accounted for 24.1% and 14.9% of net sales in 1999 and
1998, respectively, and sales to publishers of business-related books accounted
for 9.3% and 14.3% of net sales in 1999 and 1998, respectively. Sales of book
components to all other book publishers, including juvenile, computer and
religious, accounted for 29.1% and 25.9% of net sales in 1999 and 1998,
respectively.
The Company began selling thin books to publishers of juvenile books in the
fourth quarter of 1998. The Company is continuing to expand its customer base in
both juvenile and non-juvenile customers, and currently has 85 active customers
providing repetitive business.
The Company began to sell paperback books in July 1999. The sale of
paperback books represented 1.4% of the Company's net sales in 1999. Currently,
the Company primarily services the educational and juvenile segments of the book
publishing market but will continue
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to expand its customer base to include other book publishers whose requirements
the Company is capable of fulfilling. In 2000, the Company expects to lease two
additional presses and an additional binding line, which will permit it to
service other segments of the book publishing industry and permit it to
manufacture hard cover books.
In February 1999, the Company acquired TechniGraphix, Inc. As a result of
this acquisition, sales of print-on-demand books for 1999 represented 4.2% of
the Company's net sales. In addition to traditional book publishers such as
McGraw-Hill and Prentice Hall, the Company serves customers such as Research
Institute of America, Bureau of National Affairs, Cambridge Scientific
Abstracts, The Petroleum Institute, and other not for profit organizations. The
Company believes that digital print-on-demand will continue to expand as book
publishers seek to enhance controls on inventories and to ensure titles do not
go out of print.
Customers
The Company has a base of over 200 active customers, including many of the
leading publishing companies in the world. Among its largest customers are
HarperCollins, Pearson Publishing, Simon & Schuster, Random House, Holtzbrink
Publishers, McGraw-Hill, Time Warner, Thomson Learning, John Wiley & Sons,
Microsoft, Houghton Mifflin, Oxford University Press, Walt Disney, Harcourt
Brace and W.W. Norton, many of whom have been customers of the Company since its
inception in 1979. Many of these customers have decentralized operations in
which purchasing decisions are made by various divisions. HarperCollins
Publishers and Simon & Schuster accounted for 14.9% and 14.7%, respectively, of
the Company's net sales in 1998. Pearson Publishing and HarperCollins Publishers
accounted for 11.8% and 11.3%, respectively, of the Company's net sales in 1999.
Our ten largest customers accounted for approximately 69.4% of net sales in
1999.
Sales
The Company has a direct sales force consisting of 40 sales representatives
located in offices throughout the U.S. The Company expanded its sales force in
1999 by 25% and will continue to expand it to provide superior service to
customers, to capture a greater share of the business from its existing
publishing customers, and to identify and solicit new customers, including
smaller regional publishers. The Company has established a new marketing
department apart from its sales department to promote its services including
participating in publishing industry trade shows.
In this new electronic age, printing has become more technology driven. To
remain competitive, the Company requires its new sales representatives to
participate in a three-month manufacturing and sales orientation program, which
includes spending at least two weeks at the Company's manufacturing plants. All
sales personnel are required to participate annually in the
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Company's continuing education program. Various programs by management are used
to monitor goals for individual sales representatives.
Backlog
The Company does not operate with any backlog. Both the Company and its
customers share the same goal: processing orders on demand in the shortest
possible time frame.
Competition
The printing industry in general, and the printing and manufacture of books
in particular, are extremely competitive. The Company faces competition from
other specialty printers, as well as from such large commercial printing firms
such as R.R. Donnelley Financial, Quebecor World and Banta Corporation, all of
whom offer book components printing services within the context of their
complete book manufacturing businesses, and all of whom have significantly
larger revenues and assets than the Company. Competitive factors in the printing
of book components and the manufacture of complete books include price, quality,
speed of production and delivery, use of technology and the ability to service
specialized customer needs on a consistent basis.
Employees
As of December 31, 1999, the Company had 780 employees, of whom 13 were
engaged in management, 60 in finance, administration and billing, 96 in sales,
sales support and customer service, 14 in information systems and technological
development, 13 in transportation and 584 in manufacturing. None of the
employees are represented by unions, and the Company believes it has
satisfactory relations with its workforce.
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ITEM 2. PROPERTIES
The Company's corporate and administrative offices are located in one of
its two adjacent manufacturing facilities in Hagerstown, Maryland. The Company
also leases various regional sales offices. A summary of the location, size and
nature of the principal facilities appears below:
<TABLE>
<CAPTION>
Leased/Owned; Square
Location Use Expiration Date Footage
- -------- --- ------------------ --------
<S> <C> <C> <C>
Hagerstown, MD ........... Corporate offices; printing, prepress and finishing for Owned 114,000
book components
Hagerstown, MD ........... Printing, prepress and finishing for book components Owned 86,000
Long Island City, NY ..... Prepress Leased; 12/31/06 54,000
Taunton, MA .............. Printing, prepress and finishing for book components Leased; 12/31/12 53,000
Rockaway, NJ ............. Printing, prepress and finishing for complete books Leased; 3/31/08 90,000
Hagerstown, MD ........... Printing, prepress and binding for complete books Owned 170,000
</TABLE>
ITEM 3. 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 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 judgement 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 March 15,
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No established public trading market exists for the Company's Class A
Common Stock or Class B Common Stock or any of its other securities. As of March
15, 2000, there were eleven holders of record of the Class A Common Stock and
two holders of record of the Class B Common Stock.
The Company did not declare or pay any dividends on its capital stock in
the past two years. The Company expects to retain future earnings, if any, to
finance the growth and development of its business. Thus, the Company does not
intend to declare or pay dividends on its capital stock for the foreseeable
future. Further, each of the Company's senior credit facility and the indenture
under which the Company has issued 10 3/8% Senior Subordinated Notes restricts
the payment of dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is selected consolidated financial information of the
Company and its subsidiaries as of December 31, 1995, 1996, 1997, 1998 and 1999
and for the years then ended. The following financial data as of December 31,
1995, 1996, 1997, 1998 and 1999 and for each of the years then ended have been
derived from the Company's Consolidated Financial Statements and related Notes
thereto as of such dates and with respect to such periods, which Consolidated
Financial Statements have been audited by PricewaterhouseCoopers LLP,
independent accountants. Such firm's report on the Company's Consolidated
Financial Statements as of December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999 is included in Item 8 of this Form
10-K. The selected consolidated financial information set forth below should be
read in conjunction with the Consolidated Financial Statements, the Notes
thereto and the other financial information contained elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1996(1) 1997 1998 1999
------- ------- -------- -------- --------
(dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $60,907 $95,262 $104,794 $107,491 $141,338
Cost of sales .................................. 45,129 71,116 73,722 80,627 109,357
Gross profit ................................... 15,778 24,146 31,072 26,864 31,981
Operating expenses:
Selling and marketing expenses ................. 3,036 6,089 5,881 6,278 5,688
General and administrative ..................... 4,505 8,920 12,265 12,934 17,168
Impairment loss (2) ............................ -- 1,268 -- -- --
Total operating expenses ....................... 7,541 16,277 18,146 19,212 22,856
Income from operations ......................... 8,237 7,869 12,926 7,652 9,125
Interest expense ............................... 1,827 4,937 4,484 5,076 14,939
Other (income) expense ......................... 10 (241) 62 (460) 75
Income (loss) before income taxes: ............. 6,400 3,173 8,380 3,036 (5,889)
Income tax (benefit) provision ................. 2,690 1,807 3,898 2,008 (1,045)
Net income (loss) .............................. $ 3,710 $ 1,366 $ 4,482 $ 1,028 ($4,844)
Balance Sheet Data (at year end):
Cash and cash equivalents ...................... $ 370 $ 158 $ 1,045 $ 14,834 $ 271
Total assets ................................... 50,038 76,113 84,993 132,440 151,505
Total debt (including capital lease obligations) 26,411 49,939 46,726 95,447 114,362
Total stockholders' equity ..................... 10,154 11,610 16,154 17,283 12,471
Other Financial Data:
Depreciation and amortization expense .......... $ 3,119 $ 8,389 $ 9,142 $ 10,834 $ 17,174
Capital expenditures (3) ....................... 17,841 11,052 15,131 48,168 17,871
EBITDA (4) ..................................... 11,346 16,499 22,005 18,946 26,224
EBITDA margin (5) .............................. 18.6% 17.3% 21.0% 17.6% 18.6%
Ratio of earnings to fixed charges (6) ......... 4.2x 1.6x 2.7x 1.5x 0.6x
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<FN>
(1) On February 1, 1996, the Company acquired New England Book Holding
Corporation ("NEBC"). See Note 7 of Notes to Consolidated Financial
Statements.
</FN>
<FN>
(2) Reflects the write-down of real estate assets held for sale to their
estimated net realizable value.
</FN>
<FN>
(3) Includes property and equipment financed through notes, deposits and
capital leases. See Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.
</FN>
<FN>
(4) EBITDA represents net income of the Company before interest, income taxes,
depreciation and amortization. EBITDA is not a measure of financial
performance under GAAP and may not be comparable to other similarly titled
measures by other companies. EBITDA does not represent income or cash flows
from operations as defined by GAAP and does not necessarily indicate that
cash flows will be sufficient to fund cash needs. As a result, EBITDA
should not be considered an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA is
included in this Form 10-K because it is a basis on which the Company
assesses its financial performance, and certain covenants in the Company's
borrowing agreements are tied to similar measurements. See Consolidated
Statements of Cash Flows and Note 2 in Notes to Consolidated Financial
Statements.
</FN>
<FN>
(5) EBITDA margin represents EBITDA divided by net sales. </FN>
<FN>
(6) In calculating the ratio of earnings to fixed charges, earnings consist of
earnings before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs), whether expensed or capitalized,
and that portion of rental expense estimated to be attributable to
interest.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the audited Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this Form
10-K.
Results of Operations
The following table sets forth for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
$ % $ % $ %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales .................................. 104,794 100.0 107,491 100.0 141,338 100.0
Cost of sales .............................. 73,722 70.3 80,627 75.0 109,357 77.4
Gross profit ............................... 31,072 29.7 26,864 25.0 31,981 22.6
Operating Expenses:
Selling and marketing expenses .......... 5,881 5.6 6,278 5.9 5,688 4.0
General and administrative expenses ..... 12,265 11.7 12,934 12.0 17,168 12.1
Total operating expenses ................... 18,146 17.3 19,212 17.9 22,856 16.2
Income from operations ..................... 12,926 12.4 7,652 7.1 9,125 6.4
Interest expense ........................... 4,484 4.3 5,076 4.7 14,939 10.6
Other (income) expense ..................... 62 0.1 (460) (.4) 75 0.1
Income (loss) before income taxes .......... 8,380 8.0 3,036 2.8 (5,889) (4.3)
Income tax (benefit) provision ............. 3,898 3.7 2,008 1.8 (1,045) (0.7)
Net income (loss) .......................... 4,482 4.3 1,028 1.0 (4,844) (3.6)
</TABLE>
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Net sales increased $33.8 million or 31.4% to $141.3 million for the year
ended December 31, 1999 from $107.5 million for the same period in 1998. This
increase was a result of higher unit volume in book component sales, book
manufacturing sales, and the Company's acquisitions of Mid-City Lithographers
and of TechniGraphix.
Gross profit increased $5.1 million or 19.0% to $32.0 million for the year
ended December 31, 1999, from $26.9 million for the same period in 1998, but the
gross profit margin decreased to 22.6% for the year ended December 31, 1999 from
25.0% for the same period in 1998. The decline in gross profit margin resulted
primarily from the operations of the Company's new thin book manufacturing
facility in New Jersey, which opened in September 1998, and by the Company's new
paperback book manufacturing facility in Maryland which opened in July 1999. The
thin book facility incurred $12.4 million of costs, of which $2.4
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million represented depreciation, with sales of $10.6 million. The paperback
book facility incurred $4.0 million of costs, including approximately $2.0
million excess capacity and start up costs with offsetting sales of $2.0
million. The Company estimates that the thin book facility has the capacity to
produce a sufficient amount of books to generate $30.0 million in sales with its
current equipment, and the paperback book facility has the capacity to produce a
sufficient amount of books to generate $20.0 million in sales with its current
equipment.
Operating expenses increased $3.7 million or 19.3% to $22.9 million for the
year ended December 31, 1999, from $19.2 million for the same period in 1998.
This increase was attributable to expenses at the Mid-City and TechniGraphix
locations as well as the Company's new book manufacturing facilities in New
Jersey and Maryland. Operating expenses decreased 1.7% as a percentage of sales
to 16.2% for the year ended December 31, 1999 from 17.9% for the same period in
1998. In the fourth quarter of 1999, because of over capacity, the Company
decided, to close the Mid-City facility and consolidate the Company's book
components operations. The facility was closed by December 31, 1999 without
incurring any significant exit costs. The Company also decided in the fourth
quarter of 1999, to consolidate the operations of TechniGraphix to provide for
greater efficiencies and reduce overhead. The TechniGraphix facility was closed
by January 31, 2000 without incurring significant exit costs. The Company has
sublet the facility on the same terms and conditions as the prime lease. The
operations of Mid-City and TechniGraphix were relocated to Company facilities in
Hagerstown, Maryland. The Company estimates that the closing of these facilities
will save the Company in excess of $2.0 million a year.
Interest expense increased $9.8 million or 192.2% to $14.9 million for the
year ended December 31, 1999 from $5.1 million for the same period in 1998. The
increase was due to the Company's issuance of $105.0 million in 10 3/8% Senior
Subordinated Notes and includes a one time charge of $1.1 million associated
with finance costs on the 1998 bridge note with First Union National Bank (the
"Bridge Note") and prepayment premiums of $1.6 million incurred in connection
with the early repayment of equipment debt.
During the year ended December 31, 1999, the Company had non-operating
expense of $75,000 compared with non-operating income of $460,000 for the same
period in 1998. The non-operating expense in 1999 resulted primarily from the
sale of certain assets.
The Company's effective tax rate was 17.7% and 66.1% for the years ended
December 31, 1999 and 1998, respectively. The change in the effective rate is
primarily attributable to the net loss in 1999 and the proportion of
non-deductible amortization expense for goodwill resulting from certain
acquisitions.
Net income declined $5.8 million to a negative $4.8 million for the year
ended December 31, 1999 from $1.0 million for the same period in 1998. The
decrease was due to the factors above described.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net sales increased $2.7 million or 2.6% to $107.5 million for the year
ended December 31, 1998 from $104.8 million for the same period in 1997. These
increases were a result of higher unit volume in the general interest, juvenile
and religious segments of the book publishing market.
Gross profit declined $4.2 million or 13.5% to $26.9 million for the year
ended December 31, 1998, from $31.1 million for the same period in 1997,
decreasing the gross profit margin to 25.0% for the year ended December 31, 1998
from 29.7% for the same period in 1997. This decline resulted primarily from the
13
<PAGE>
opening in September 1998 of the Company's new thin book manufacturing facility
in New Jersey, for which the Company incurred approximately $2.4 million of
costs, with offsetting sales of approximately $388,000. Additionally, the
Company incurred costs and expenses during the first quarter of 1998 in
connection with the distribution of a former facility's activities to various
other facilities, including establishing a prepress department in New York, and
the relocation of the Hingham, Massachusetts facility to Taunton, Massachusetts.
Operating expenses increased $1.1 million or 6.1% to $19.2 million for the
year ended December 31, 1998, from $18.1 million for the same period in 1997.
This increase was attributable to expenses incurred to provide for our expanded
operations in the sale of book components and in book manufacturing, including
promotional costs, expanded sales force, sales staff support, telecommunications
and freight costs. Operating expenses increased 0.6% as a percentage of sales to
17.9% for the year ended December 31, 1998 from 17.3% for the same period in
1997.
Interest expense increased $592,000 or 13.2% to $5.1 million for the
year ended December 31, 1998 from $4.5 million for the same period in 1997. The
increase was due to additions of certain term debt for equipment, the write-off
of the balance of deferred financing costs for the acquisition of NEBC and
interest incurred in connection with the Bridge Notes.
During the year ended December 31, 1998, the Company had non-operating
income of $460,000 compared with a non-operating expense of $62,000 for the same
period in 1997. The non-operating income or expense was primarily a result of
gain and losses from the sale of certain assets.
The Company's effective tax rate was 66.1% and 46.5% for the years ended
December 31, 1998 and 1997 respectively. The increase in the effective rate is
primarily attributable to the proportion of non-deductible amortization expense
for goodwill resulting from the NEBC acquisition to pretax income.
Net income declined $3.5 million to $1.0 million for the year ended
December 31, 1998 from $4.5 million for 1997, a decrease of 77.8%. The decrease
was due to the factors above described.
Liquidity and Capital Resources
The Company historically has financed its operations with internally
generated funds, external short and long-term borrowings and capital and
operating leases. Cash flows from operating activities amounted to $18.2 million
for 1997, $14.2 million for 1998 and $6.6 million for 1999.
On September 15, 1998, the Company entered into a three year $20.0 million
revolving credit facility with First Union National Bank (the "Senior Credit
Facility"). As of December 31, 1999, the outstanding aggregate principal of the
senior credit facility was $9.3 million, bearing interest at the rate of 10% per
annum. The Company's borrowings under the Senior Credit Facility are secured by
substantially all of the Company's assets. The Senior Credit Facility contains
limitations on the payment of dividends, the distribution or redemption of
stock, sales of assets and subsidiary stock, limitations on additional Company
and subsidiary debt and require the Company to maintain certain financial and
non-financial covenants, the most restrictive of which requires the Company to
maintain certain interest coverage and leverage ratios as defined in the Senior
Credit Facility. The Company was not in compliance with its interest coverage
ratio contained in the Senior Credit Facility for the compliance period ending
December 31, 1999. On March 23, 2000, the Company and its lender amended the
Senior Credit Facility effective December 31, 1999, which
14
<PAGE>
redefined the interest coverage ratio and brought the Company into compliance
with the 1998 Senior Credit Facility as of December 31, 1999.
On February 2, 1999, the Company issued $105.0 million in 10 3/8% Senior
Subordinated Notes (the "Old Notes"), maturing on February 2, 2009, in a private
placement. The proceeds from the issuance of the Old Notes were used to repay
substantially all existing debt of the Company including capital leases, and to
invest in the expansion of the Company. In May 1999, the Company exchanged the
Old Notes for notes registered with the Securities and Exchange Commission under
the Securities Act of 1933, as amended. The terms of the registered notes are
equivalent to those of the Old Notes in all material respects.
The Company has operating lease arrangements for printing equipment. Rental
expense related to such leases was approximately $480,000 for 1997, $540,000 for
1998 and $3.2 million for 1999.
Capital expenditures totaled $15.1 million for 1997, $48.2 million for 1998
and $16.5 million for 1999. The Company has traditionally invested in facilities
and equipment to increase capacity, improve efficiency, maintain high levels of
productivity and meet customer needs. Capital expenditures primarily have been
for prepress, pressroom and finishing equipment and plant construction.
The Company's capital expenditures for 2000 are currently estimated to
total approximately $7.0 million. The expenditures are principally for the
replacement of existing equipment including printing presses, finishing
equipment and prepress equipment. The Company also intends to acquire through
operating leases, $13.0 million of presses and bindery equipment for its book
manufacturing facility in Hagerstown, Maryland. The Company has in place the
necessary commitments for financing the operating leases. The Company believes
that in 2000 funds generated from operations and funds available under the
Senior Credit Facility will be sufficient to complete its capital expenditures
and service its debt. As of December 31, 1999, the Company had not met the
required consolidated coverage ratio under the Senior Notes and therefore, is
unable to incur more than $5 million additional indebtedness for capital
expenditures until the Company attains the consolidated coverage ratio as
defined in the Senior Note agreement.
Year 2000 Compliance
In 1999 the Company undertook to ensure its digital and manufacturing
infrastructure would not experience any major problems associated with the
change in the calendar to the year 2000. The Company did not experience any
problems associated with the change of the calendar.
In 1999, the Company verified that its vendors were also year 2000 ready.
The Company did not experience any problems associated with the delivery of
material or services from any of its vendors as a result of the change in the
calendar to the year 2000.
Although the Company has not incurred any disruptions in its systems or in
receipt of material from suppliers to date, there can be no assurance that the
Company will not incur dislocations at some time later in the year.
Forward Looking Statements
The statements in this report that relate to future plans, expectations,
events or performance, or which use forward-
15
<PAGE>
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has some exposure to market risk based upon interest rate
changes. Because approximately 93% of the Company's debt bears a fixed rate of
interest, the Company's exposure is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are included as part of this Form 10-K on pages F-1 through
F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants or disagreements on any matter of accounting
principles or financial statement disclosures have occurred within the last two
years.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors is composed of seven members, of which
there are now six incumbents and one vacancy. Directors generally serve for
one-year terms and until their successors are duly elected and qualified.
The following table sets forth certain information regarding the Company's
current directors and executive officers:
<TABLE>
<CAPTION>
Directors and Executive Officers Age Positions
- -------------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Louis LaSorsa.................. 53 Chairman, Chief Executive Officer and Director
Edward Lieberman............... 57 Executive Vice President, Chief Financial Officer, Secretary and Director
Dion von der Lieth............. 56 Senior Vice President, Sales and Marketing
John Carbone................... 41 Vice President, Manufacturing, Book Components, and Director
David Rubin.................... 43 Director
Thomas Newell.................. 56 Chief Information Officer
Earl S. Wellschlager........... 53 Director
Mitchell Weiss................. 37 Vice President, Manufacturing, Commercial Print/Book Manufacturing
</TABLE>
Louis LaSorsa has been with the Company since its inception in 1979, when he
became Vice President, Sales and Marketing. Mr. LaSorsa has been President of
the Company since 1982, was elected Chairman and Chief Executive Officer in
1996, and is involved in the management of all areas of the Company's
operations, planning and growth.
Edward Lieberman joined the Company in 1981, has been Executive Vice President,
Chief Financial Officer and Secretary since February 1988, and is responsible
for financial information, general financing, legal matters, human resources and
benefits. From 1967 to 1981, Mr. Lieberman, a certified public accountant, was a
principal of Louis Lieberman & Company, an independent public accounting firm.
Dion von der Lieth has been Senior Vice President, Sales and Marketing, since
November 1993, directing the sales and marketing efforts of the Company. Prior
to joining the Company, Mr. von der Lieth was President of the Book Group of
Quebec or Printing Inc., a major commercial printing company, and prior thereto,
was Vice President of Manufacturing and Inventory Control for McGraw Hill.
John Carbone joined the Company in 1981, has been Vice President, Manufacturing,
for the Book Component Divisions since December 1997, and is responsible for all
component printing operations. Mr. Carbone was Vice President of
Manufacturing/Hagerstown from June 1996 to December 1997, Vice President of
Operations/New York from 1993 to 1996 and Vice President of Sales from 1990 to
1993.
David Rubin was elected a director of the Company in February 1998, and is
Corporate Vice President and a director of Don Aux Associates, a privately-held
management consulting firm which services a wide range of manufacturing,
distribution and service-oriented client companies. Mr. Rubin has been employed
by Don Aux Associates since 1984, and has served as Director of Corporate
Analysis and Director of Consulting Services.
17
<PAGE>
Thomas Newell has been Chief Information Officer since May 1988 and is
responsible for developing, implementing and managing the Company's digital
communications and information network.
Earl S. Wellschlager has served as a director of the Company since March, 2000.
Mr. Wellschlager is a partner at the law firm of Piper Marbury Rudnick & Wolfe
LLP, specializing in general corporate law. He has served as and Adjunct
Professor at the University of Maryland Law School and at the University of
Baltimore School of Law.
Mitchell Weiss joined the Company in 1984, first in customer service and later
as a sales representative. In 1993, Mr. Weiss joined R.R. Donnelley & Sons
Company as a salesman, and returned to the Company as a sales representative in
1995, becoming a Regional Sales Manager in 1996. Since January 1998 Mr. Weiss
has been responsible for developing the Company's new complete book
manufacturing facility in New Jersey and will manage the facility's operations.
On March 4, 2000, Mr. Weiss became a director of the Company.
Directors Compensation
Directors of the Company who are also employees of the Company do not
receive additional compensation for their services as directors. Non-employee
directors of the Company receive annual director compensation of $10,000 cash.
Committees of the Board of Directors
There are currently no committees created by the Board of Directors.
Employment Agreements
None of the Company's officers have employment agreements.
Employee Stock Bonus and Ownership Plan
The Company's Employee Stock Bonus and Ownership Plan (the "Stock Bonus
Plan") was established in 1980, initially as a profit-sharing, tax-qualified
retirement plan, and later as a stock bonus plan. Employees become participants
on any June 30 or December 31 after they complete one year of service. Annual
Company contributions to the Stock Bonus Plan are discretionary, and have been
made in the form of Company stock and cash. Contributions are allocated among
all Stock Bonus Plan participants, based on the proportion which each
participant's eligible compensation bears to the total compensation of all
participants. Company contributions for participants become vested for each
participant in equal installments over a six-year period of continuing service.
The Trustees of the Stock Bonus Plan are Louis LaSorsa and Edward Lieberman, and
the Stock Bonus Plan held 6,794 shares of Class B Common Stock of the Company as
of December 31, 1999. The Class B Common Stock is non-voting stock. See
"Security Ownership of Certain Beneficial Owners and Management."
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the three
years ended December 31, 1999 for the Chief Executive Officer and the four other
most highly compensated executive officers of the Company, including both fixed
salary compensation and discretionary management incentive compensation
("Bonus"):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
- --------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Louis LaSorsa ............. 1999 $544,284 $565,000 $ --
Chief Executive Officer 1998 549,979 452,652 --
1997 599,420 847,096 6,294
Edward Lieberman .......... 1999 365,275 282,000 --
Chief Financial Officer 1998 361,350 226,326 --
1997 392,729 478,840 6,294
Mitchel Weiss ............. 1999 193,109 113,744 --
Vice President 1998 164,621 37,711 --
1997 166,519 56,292 6,294
Dion von der Lieth ........ 1999 283,727 -- --
Vice President 1998 278,372 150,884 --
1997 289,402 211,774 6,294
John Carbone .............. 1999 274,670 226,000 --
Vice President 1998 267,315 94,303 --
1997 201,468 90,366 6,294
<FN>
(1) Reflects amounts contributed by the Company pursuant to the Stock Bonus
Plan.
</FN>
</TABLE>
No information is presented for options, restricted stock awards,
long-term incentive or other compensation because no such compensation has been
awarded.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company's Class A and Class B Common Stock as of March 15, 2000
by (i) each person known by the Company to own beneficially more than five
percent of the outstanding Class A Common Stock and Class B Common Stock, (ii)
each director of the Company, (iii) each of the named executive officers listed
under "Executive Compensation", and (iv) all executive officers and directors as
a group. Except as otherwise noted, the persons named in the table have sole
voting and investment powers with respect to all shares of Common Stock shown as
beneficially owned by them. The Company's capital stock is not registered under
Section 12 of the Securities Exchange Act of 1934, as amended, and, as a result,
stockholders holding more than five percent of any class of the Company's
capital stock are not required to file beneficial ownership reports with the
Securities and Exchange Commission.
19
<PAGE>
<TABLE>
<CAPTION>
Class A(1) % Class B(2) % Total %
---------- ---- ---------- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Louis LaSorsa ................................. 1,000 9.0 519 6.7 1,519 8.0
Edward Lieberman .............................. 1,000 9.0 363 4.7 1,363 7.2
John Biancolli ................................ 1,000 9.0 194 2.5 1,194 6.3
John Carbone .................................. 1,000 9.0 188 2.4 1,188 6.3
Thomas Newell ................................. 1,000 9.0 128 1.6 1,128 6.0
Mitchell Weiss ................................ 1,000 9.0 100 1.3 1,100 5.8
Dion von der Lieth ............................ 1,000 9.0 33 0.4 1,033 5.5
Henry Burk .................................... 1,000 9.0 441 5.7 1,441 7.6
Ronald Burk ................................... 1,000 9.0 424 5.4 1,424 7.5
Anthony DiMartino ............................. 1,000 9.0 393 5.0 1,393 7.4
Bruno Jung .................................... 1,000 9.0 279 3.9 1,279 6.8
Judith Lieberman .............................. -- -- 1,000 12.8 1,000 5.3
David Rubin ................................... -- -- -- -- -- --
Earl S. Wellschlager .......................... -- -- -- -- -- --
Louis LaSorsa and Edward Lieberman, as
Trustees under the Stock Bonus Plan (3) ..... -- -- 6,794 87.2 6,794 36.0
All directors and executive officers as a group
(8 persons) ................................. 6,000 54.1 1,331 17.1 7,331 38.8
<FN>
(1) All Class A voting shares are held directly by the named individuals.
</FN>
<FN>
(2) Indicates each named individual's vested interest in Class B non-voting
shares held in the Stock Bonus Plan, except for Judith Lieberman whose
Class B shares are held directly.
</FN>
<FN>
(3) See "Directors and Executive Officers of the Registrant Employee Stock
Bonus and Ownership Plan."
</FN>
</TABLE>
The address of all stockholders listed in the above table is c/o Phoenix
Color Corp., 540 Western Maryland Parkway, Hagerstown, Maryland 21740.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 15, 1998, in connection with the senior credit facility
between the Company and First Union National Bank, all of the Company's
shareholders except Anthony DiMartino, Judith Lieberman and the Stock Bonus Plan
executed a Stock Pledge Agreement, pursuant to which all of their respective
shares of the Company's stock were pledged as security for the Company's
obligations under the loan agreement. The Stock Pledge Agreement requires such
shares to remain pledged during the term of the senior credit facility For
information regarding each of the Company's shareholders, see "Security
Ownership of Certain Beneficial Owners and Management."
Louis LaSorsa, Edward Lieberman, Ronald Burk, Henry Burk and Anthony
DiMartino, each of whom are shareholders of the Company, loaned $395,000 to the
Company in 1988, the proceeds of which
20
<PAGE>
were used as working capital. Such loans were represented by demand notes
bearing interest at 12% per annum. These notes were repaid by the Company in
1999.
Mr. Earl S. Wellschalger, a director of the Company, is a partner in a law
firm that served as counsel to the Company in 1999. During the year ended
December 31, 1999, the Company paid Mr. Wellschlager's law firm total fees of
$179,873 for legal services and disbursements.
David Rubin, a director of the Company, is an officer and principal of Don
Aux Associates, which furnishes management consulting services to the Company.
During the years ended December 31, 1998 and 1999, the Company paid Don Aux
Associates a total of $36,766 and $31,361, respectively, in management
consulting fees.
Govi C. Reddy, a former director of the Company, is President of
General Binding Corp., which supplies certain raw materials to the Company. For
the years ended December 31, 1998 and 1999, the Company purchased a total of
$9,162,523 and $11,510,076 respectively, of such raw materials from General
Binding Corp. Such purchases were on terms and conditions no less favorable than
would be obtainable from an unaffiliated third-party vendor.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) The following consolidated financial statements of the Company are
included in Item 8 of the Form 10-K Index to Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998 and December 31, 1999
Consolidated Statements of Operations as of December 31, 1997, December
31, 1998 and December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity as of
December 31, 1997, December 31, 1998 and December 31, 1999
Consolidated Statements of Cash Flows as of December 31, 1997, December
31, 1998 and December 31, 1999
Notes to Consolidated Financial Statements
(a)(2) Report of Independent Accountants on Financial Statement Schedule
Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted
because they are either not required or not applicable or
because the required information has been included elsewhere
in the financial statements or notes thereto.
(a)(3) See Item 14(c) of this Form 10-K
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended December 31, 1999.
22
<PAGE>
(c) 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.
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**)
</TABLE>
23
<PAGE>
(c) Exhibits (continued).
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- --------------------------------------------------------------------------------------------
<S> <C>
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**
12.1 Statement regarding Ratios of Earnings to Fixed Charges
12.2 Statement concerning calculation of EBITDA
21.1 Subsidiaries of the Company
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.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Phoenix Color Corp. has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Hagerstown, State of Maryland, on March 27, 2000.
PHOENIX COLOR CORP.
By: /s/ Louis LaSorsa
-----------------
Louis LaSorsa
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this form 10-K been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Louis LaSorsa Chairman, Chief Executive Officer March 27, 2000
- ------------------------- and Director
Louis LaSorsa
/s/ Edward Lieberman Executive Vice President, Chief March 27, 2000
- ------------------------- Financial Officer, Secretary and Director
Edward Lieberman
/s/ John Carbone Vice President, Manufacturing, Book March 27, 2000
- ------------------------- Component Manufacturing, and Director
John Carbone
s/ Mitchel Weiss Vice President, Manufacturing, Thin Book March 27, 2000
- ------------------------- Manufacturing, and Director
Mitchel Weiss
/s/ Earl S. Wellschlager Director March 27, 2000
- -------------------------
Earl S. Wellschlager
/s/ David Rubin Director March 27, 2000
- -------------------------
David Rubin
</TABLE>
25
<PAGE>
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 as amended, by Registrants That
Have Not Registered Securities Pursuant to Section 12 of such Act
The Company has not provided any of its security holders a proxy statement,
form of proxy or other proxy soliciting material sent to more than ten of the
Company's security holders with respect to any annual or other meeting of its
security holders. As of the date of this Form 10-K, the Company has not provided
to its security holders an annual report covering the Company's last fiscal
year.
26
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants................................... F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Changes in Stockholders' Equity.......... F-5
Consolidated Statements of Cash Flows............................... F-6
Notes to Consolidated Financial Statements.......................... F-8
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Phoenix Color Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Phoenix Color Corp. and its subsidiaries as of December 31, 1998 and 1999 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 18, 2000, except Note 5,
as to which the date is March 23, 2000
F-2
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 14,834,035 $ 270,585
Accounts receivable, net of allowance for doubtful accounts and rebates of
$1,113,784 in 1998 and $1,119,300 in 1999 ............................. 14,760,695 21,184,283
Inventory ................................................................. 3,875,398 5,375,775
Income tax receivable ..................................................... 1,233,554 2,827,423
Prepaid expenses and other current assets ................................. 2,222,196 1,070,989
Deferred income taxes ..................................................... 337,571 627,438
------------- -------------
Total current assets ................................................. 37,263,449 31,356,493
Property, plant and equipment, net .............................................. 70,288,665 81,942,743
Goodwill, net ................................................................... 11,239,752 24,905,065
Deferred financing costs, net ................................................... 1,892,726 4,171,005
Other assets .................................................................... 11,754,763 9,129,466
------------- -------------
Total assets ......................................................... $ 132,439,355 $ 151,504,772
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................. $ -- $ 45,684
Accounts payable .......................................................... 13,619,972 13,154,518
Accrued expenses .......................................................... 3,483,445 7,944,589
------------- -------------
Total current liabilities ............................................ 17,103,417 21,144,791
10 3/8% Senior subordinated notes ............................................... -- 105,000,000
Revolving line of credit ........................................................ 11,325,225 9,264,053
Notes payable ................................................................... 78,150,335 52,596
Obligations under capital leases ................................................ 5,971,609 --
Deferred income taxes ........................................................... 2,606,257 3,572,711
------------- -------------
Total liabilities .................................................... 115,156,843 139,034,151
------------- -------------
Commitments and contingencies
Stockholders' equity
Common Stock, Class A, voting, par value $0.01 per share, authorized
20,000 shares, 14,560 issued shares and 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 and 7,794 outstanding shares .... 98 98
Additional paid in capital ................................................ 2,126,804 2,126,804
Retained earnings ......................................................... 17,094,486 12,250,195
Stock subscriptions receivable ............................................ (169,792) (137,392)
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 12,470,621
------------- -------------
Total liabilities & stockholders' equity ............................. $ 132,439,355 $ 151,504,772
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales ............................... $ 104,793,705 $ 107,491,045 $ 141,338,367
Cost of sales ........................... 73,721,630 80,627,039 109,357,385
------------- ------------- -------------
Gross profit ............................ 31,072,075 26,864,006 31,980,982
------------- ------------- -------------
Operating expenses:
Selling and marketing expenses .... 5,880,844 6,278,379 5,688,212
General and administrative expenses 12,265,442 12,933,474 17,167,869
------------- ------------- -------------
Total operating expenses ................ 18,146,286 19,211,853 22,856,081
------------- ------------- -------------
Income from operations .................. 12,925,789 7,652,153 9,124,901
Other expenses:
Interest expense .................. 4,483,820 5,076,057 14,939,009
Other (income) expense ............ -- (327,095) 358,174
Loss (gain) on disposal of assets . 62,436 (132,862) (282,682)
------------- ------------- -------------
Income (loss) before income taxes ....... 8,379,533 3,036,053 (5,889,600)
Income tax provision (benefit) .......... 3,897,989 2,007,767 (1,045,309)
------------- ------------- -------------
Net income (loss) ....................... $ 4,481,544 $ 1,028,286 $ (4,844,291)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Class A Class B Additional Stock Treasury Stock Total
-------------- -------------- Paid-in Retained Subscription -------------------- Stockholders'
Shares Amount Shares Amount Capital Earnings Receivable Shares Amount Equity
------ ------- ------ ------- ---------- ------------ ------------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 14,560 $146 9,794 $98 $2,126,804 $11,584,656 $(332,244) 5,460 $(1,769,230) $11,610,230
Payment of stock subscription -- -- -- -- -- -- 61,700 -- -- 61,700
Net income .................. -- -- -- -- -- 4,481,544 -- -- -- 4,481,544
------ ------- ------ ------- ---------- ------------ ------------ ------ ------------- -------------
Balance at December 31, 1997 14,560 146 9,794 98 2,126,804 16,066,200 (270,544) 5,460 (1,769,230) 16,153,474
Payment of stock subscription -- -- -- -- -- -- 100,752 -- -- 100,752
Net income .................. -- -- -- -- -- 1,028,286 -- -- -- 1,028,286
------ ------- ------ ------- ---------- ------------ ------------ ------ ------------- -------------
Balance at December 31, 1998 14,560 146 9,794 98 2,126,804 17,094,486 (169,792) 5,460 (1,769,230) 17,282,512
Payment of stock subscription -- -- -- -- -- -- 32,400 -- -- 32,400
Net loss .................... -- -- -- -- -- (4,844,291) -- -- -- (4,844,291)
------ ------- ------ ------- ---------- ------------ ------------ ------ ------------- -------------
Balance at December 31, 1999 14,560 $146 9,794 $98 $2,126,804 $12,250,195 $(137,392) 5,460 $(1,769,230) $12,470,621
====== ======= ====== ======= ========== ============ ============ ====== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ........................................................... $ 4,481,544 $ 1,028,286 $ (4,844,291)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property, plant and equipment ......... 7,017,749 8,710,352 12,513,790
Amortization of goodwill ............................................... 2,123,544 2,123,529 3,122,712
Amortization of deferred financing costs ............................... 180,000 210,000 1,537,684
Provision for uncollectible accounts ................................... -- 150,000 220,000
Deferred income taxes .................................................. 328,105 1,450,245 478,796
Loss (gain) on disposal of assets ...................................... 62,436 (132,862) 358,174
Increase (decrease) in cash resulting from changes in assets and liabilities:
Accounts receivable .................................................... (2,504,779) 4,785,085 (4,490,823)
Inventory .............................................................. 340,921 512,878 (414,407)
Prepaid expenses and other assets ...................................... (37,680) (1,061,399) 442,553
Accounts payable ....................................................... 4,988,585 (3,224,538) (4,805,691)
Accrued expenses ....................................................... 2,246,669 (542,561) 4,120,225
Income tax refund receivable ........................................... (1,075,455) 143,423 (1,593,869)
------------ ------------ -------------
Net cash provided by operating activities .............................. 18,151,639 14,152,438 6,644,853
------------ ------------ -------------
Investing activities:
Proceeds from sale of equipment ........................................ 1,017,963 876,247 1,362,607
Capital expenditures ................................................... (3,294,066) (9,415,529) (17,871,249)
Increase in equipment deposits ......................................... (6,056,372) (5,262,490) --
Purchase of businesses, net of cash acquired ........................... -- -- (17,617,055)
------------ ------------ -------------
Net cash used in investing activities .......................... (8,332,475) (13,801,772) (34,125,697)
------------ ------------ -------------
Financing activities:
Proceeds from issuance of senior subordinated notes .................... -- -- 105,000,000
Net borrowings from revolving line of credit ........................... 2,764,393 (3,000,520) (2,103,449)
Proceeds from long term borrowings ..................................... 473,760 40,000,000 --
Principal payments on long term borrowings ............................. (8,472,215) (18,089,753) (78,224,270)
Principal payments on capital lease obligations ........................ (3,760,090) (3,679,350) (7,653,925)
Debt financing costs ................................................... -- (1,892,726) (4,133,362)
Payment of stock subscription .......................................... 61,700 100,752 32,400
------------ ------------ -------------
Net cash provided by (used in) financing activities ............ (8,932,452) 13,438,403 12,917,394
------------ ------------ -------------
Net increase (decrease) in cash ................................ 886,712 13,789,069 (14,563,450)
Cash and cash equivalents at beginning of year .............................. 158,254 1,044,966 14,834,035
------------ ------------ -------------
Cash and cash equivalents at end of year .................................... $ 1,044,966 $ 14,834,035 $ 270,585
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Cash paid for interest ............................ $4,104,020 $ 4,722,336 $ 9,977,620
Cash paid for income taxes, net of refunds received $4,645,339 $ 414,099 $ 67,892
Non-cash investing and financing activities:
Equipment acquired under capital leases ........... $ -- $ 555,476 $ --
Equipment acquired under notes payable ............ $5,781,290 $32,934,848 $ --
Acquisitions:
Fair value of assets acquired ..................... $ -- $ -- $22,230,528
Less: Liabilities assumed and cash acquired ...... -- -- 4,613,473
---------- ----------- -----------
Acquisitions net of cash acquired ............. $ -- $ -- $17,617,055
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
PHOENIX COLOR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Phoenix Color Corp. (the "Company") manufactures book components, which
include book jackets, paperback covers, pre-printed case covers, inserts and
endpapers at its headquarters in Hagerstown, MD and other locations in Taunton,
MA and Rockaway, NJ. The Company also manufactures complete books in Rockaway,
NJ and Hagerstown, MD. Customers consist of major publishing companies as well
as smaller publishing companies throughout the United States.
2. Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market value as determined by
the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property and equipment are stated at cost, except when acquired through a
business acquisition, in which case they are stated at fair value. Depreciation
for all fixed assets is provided on the straight-line method over the assets'
estimated useful lives. Depreciable lives range from 3-40 years: 5-40 years for
buildings and improvements, 3-10 years for machinery and equipment, and 3-5
years for transportation equipment.
Expenditures for maintenance and repairs are charged to operations when
incurred. Expenditures determined to represent additions and betterments are
capitalized. Gains and losses from disposals, if any, are included in earnings.
The Company has purchased additional equipment, which is either on order or
in various stages of installation. Depreciation begins at the time installation
is completed.
F-8
<PAGE>
2. Significant Accounting Policies (Continued)
Fair Value of Certain Financial Instruments
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable, and accrued expenses, approximate fair value, due to the relatively
short maturity of these instruments.
Concentration of Risk
Financial instruments that subject the Company to significant concentration
of credit risk consist primarily of accounts receivable. The Company sells
products to customers located throughout the United States without requiring
collateral. However, the Company assesses the financial strength of its
customers and provides allowances for anticipated losses when necessary. The
Company has not experienced any losses on its investments.
Customers that accounted for more than 10% of net sales or accounts
receivable are as follows:
<TABLE>
<CAPTION>
Customers
------------------------------
A B C
----- ----- -----
<S> <C> <C> <C>
Net Sales
1999 ......... 11% 12% --
1998 ......... 15% 15% --
1997 ......... 17% 14% --
Accounts receivable
1999 ......... -- -- --
1998 ......... 11% 7% 14%
</TABLE>
The Company currently purchases its paper and printing supplies from a
limited number of suppliers. There are a number of other suppliers of these
materials throughout the U.S. and management believes that these other suppliers
could provide similar printing supplies and paper on comparable terms. A change
in suppliers, however, could cause a delay in manufacturing, and a possible loss
of sales, which could adversely affect operating results.
Because the Company derives all of its revenues from customers in the book
publishing and book printing industries, the Company's business, financial
condition and results of operations could be adversely affected by changes which
have a negative impact on these industries.
F-9
<PAGE>
2. Significant Accounting Policies (Continued)
Intangible Assets
Goodwill represents the excess of cost of purchased acquisitions (see Note
7) over the fair value of identifiable net tangible assets acquired and is being
amortized using the straight-line method. Goodwill consists of $17.8 million
associated with the 1996 acquisition of New England Book Holding Corporation
which is being amortized over eight years, and $9.9 million and $6.4 million
associated with the 1999 acquisitions of Mid-City Lithographers, Inc. and
TechniGraphix, Inc., respectively, which is being amortized over twenty years.
Deferred financing costs incurred in connection with the Company's bank
credit agreements with its financial institutions in 1996 (see Note 5) were
written off to interest expense in 1998 upon consummation of the financing
agreements discussed in Note 5. Costs incurred in connection with the 1998
financing discussed in Note 5 were deferred and were amortized using the
straight-line method, which approximates the interest method, over the life of
the related loan. These costs were written off in their entirety in 1999 as a
result of the issuance of 10 3/8% Senior Subordinated Notes in February 1999
(see Note 5). Costs incurred in connection with the 1999 issuance of the 10 3/8%
Senior Subordinated Notes maturing February 1, 2009 have been deferred and are
being amortized using the straight-line method over a ten year period.
Long-lived Assets
The Company evaluates quarterly the recoverability of the carrying value of
property and equipment and intangible assets. The Company considers historical
performance and anticipated future results in its evaluation of any potential
impairment. Accordingly, when the indicators of impairment are present, the
Company evaluates the carrying value of these assets in relation to the
operating performance of the business and future and undiscounted cash flows
expected to result from the use of these assets. Impairment losses are
recognized when the sum of the expected future cash flows is less than the
assets' carrying value.
In 1998, the Company sold certain of its real estate holdings in
Connecticut for approximately $87,000, which had been reflected on its balance
sheet as assets held for sale at a net realizable value of $364,000.
Accordingly, in 1998, the Company recognized a loss on the disposal of this
asset of approximately $277,000.
Revenue Recognition
The Company recognizes revenue on product sales upon shipment on behalf of
or to the customer.
Income Taxes
Deferred income taxes are recognized for the tax consequences in the future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at year end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Income tax expense is the tax payable for the period and
the change during the period
F-10
<PAGE>
2. Significant Accounting Policies (Continued)
in deferred tax assets and liabilities. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and contingent liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
3. Inventory
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Raw Materials ..... $3,031,744 $3,943,701
Work in process.... 843,654 1,432,074
---------- ----------
$3,875,398 $5,375,775
========== ==========
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land ........................................... $ 2,842,205 $ 2,998,006
Buildings and improvements ..................... 18,254,125 34,129,309
Machinery and equipment ........................ 80,348,167 85,165,991
Transportation equipment ....................... 4,348,608 4,945,816
------------ ------------
105,793,105 127,239,122
Less: Accumulated depreciation and amortization 35,504,440 45,296,379
------------ ------------
$ 70,288,665 $ 81,942,743
============ ============
</TABLE>
Included in other long-term assets are equipment deposits (see Note 8) in
the amount of $9,786,394 and $5,196,228 as of December 31, 1998 and 1999,
respectively.
F-11
<PAGE>
4. Property, Plant and Equipment (Continued)
The Company leased certain printing presses under capital lease
arrangements. Included in machinery and equipment on the balance sheet are the
following amounts under capital lease arrangements:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
----------- ---------------
<S> <C> <C>
Machinery and equipment ........................... $13,158,305 $ --
Less: Accumulated depreciation and amortization... 5,988,916 --
----------- ---------------
$ 7,169,389 $ --
=========== ===============
</TABLE>
5. Debt
Senior Subordinated Notes
On February 2, 1999, the Company issued $105.0 million of 10 3/8% Senior
Subordinated Notes due 2009 ("Senior Notes") in a private offering. The Senior
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, beginning on August 1, 1999. Net proceeds
of approximately $101.0 million from the Senior Notes were used to repay
substantially all short and long term debt facilities (discussed below) and
capital leases existing at December 31, 1998 and to fund the acquisition of
TechniGraphix (see Note 7) and working capital requirements. Although not due
until 2009, the Senior Notes are redeemable, at the option of the Company, on or
after February 1, 2004, at declining premiums through January 2007 and at their
principal amount thereafter. Until February 1, 2002, the Company may also redeem
up to 25% of the Senior Notes at a price of 110.375% of their face amount with
the net cash proceeds from one or more public equity offerings. If a third party
acquires control of the Company, the Senior Note holders have the right to
require the Company to repurchase the Senior Notes at a price equal to 101% of
the principal amount of the notes plus accrued and unpaid interest to the date
of purchase. All of the current and future "restricted subsidiaries," as defined
in the Senior Notes indenture, are guarantors of the Senior Notes on an
uncollateralized senior subordinated basis (see Note 12). In May 1999, the
Company completed the exchange of new registered 10 3/8% Senior Subordinated
Notes for the original notes. The terms of the registered notes are equivalent
to the original notes in all material respects.
F-12
<PAGE>
5. Debt (Continued)
At December 31, 1998 and 1999, notes payable, which were substantially
repaid in 1999 by the Senior Notes, consisted of the following:
<TABLE>
<CAPTION>
Maturity December 31,
--------------------------
Notes Date 1998 1999
----- ----------- ----------- -----------
<S> <C> <C> <C>
Bridge Notes ........................ 2008 $40,000,000 $ --
Equipment Notes ..................... 1999-2004 37,503,130 98,280
Former shareholder notes (see Note 9) 2000 252,000 --
Shareholder notes ................... Demand 395,205 --
----------- -----------
Total ......................... 78,150,335 98,280
Less current portion .......... -- 45,684
----------- -----------
Long-term portion ............. $78,150,335 $ 52,596
=========== ===========
</TABLE>
All December 31, 1998 amounts attributable to notes payable, revolving line
of credit, term loans, equipment notes and obligations under capital leases were
classified as noncurrent liabilities on the December 31, 1998 consolidated
balance sheet as a result of the repayment of these facilities by the net
proceeds of the Senior Notes.
Revolving Line of Credit
Prior to 1997, the Company entered into a joint $40.0 million Loan and
Security Agreement ("the 1996 Loan Agreement") with two commercial banks. In
September 1998, the Company entered into an Amended and Restated Loan Agreement
(the "1998 Loan Agreement") with a commercial bank for a three year $20,000,000
revolving credit facility, the proceeds of which were used to repay the balance
of the previous revolving credit facility. Borrowings under the 1998 Loan
Agreement are subject to a borrowing base as defined in the Agreement. The
Company's unused availability under the 1998 Loan Agreement was $9,763,027 as of
December 31, 1999. Borrowings under the 1998 Loan Agreement and Senior Notes are
collateralized by all of the assets of the Company.
Borrowings under the 1996 Loan Agreement bore interest at 8.5% during 1998.
The 1998 Loan Agreement provides for interest at a base rate plus an applicable
margin which varies depending on the Company's attaining certain leverage
ratios, or at the LIBOR rate plus an applicable margin which varies depending on
the Company attaining certain leverage ratios and only if the Company is not in
default of any of the covenants of the 1998 Loan Agreement. At December 31, 1998
and 1999, the interest rate on its borrowings was 9.75% and 10%, respectively.
Included in accrued expenses is accrued interest in the amount of
$4,664,455 and $343,520 as of December 31, 1999 and 1998, respectively.
F-13
<PAGE>
5. Debt (Continued)
Compliance with Debt Covenants
The 1998 Loan Agreement contains certain covenants that requires the
Company to maintain certain financial and non-financial covenants, the most
restrictive of which requires the Company to maintain certain interest coverage
and leverage ratios as defined in the 1998 Loan Agreement. As of December 31,
1999, the Company was not in compliance with the interest coverage ratio. On
March 23, 2000, the Company and its lender amended the 1998 Loan Agreement
effective December 31, 1999, which redefined the interest coverage ratio and
brought the Company into compliance with this covenant as of December 31, 1999.
As of December 31, 1999, the Company has not met the required consolidated
coverage ratio under the Senior Notes and therefore, is unable to incur more
than $5 million of additional indebtedness until the Company attains the
consolidated coverage ratio as defined in the Senior Note agreement. The Senior
Notes also contain limitations on the payment of dividends, the distribution or
redemption of stock, sales of assets and subsidiary stock, as well as
limitations on additional Company and subsidiary debt, and requires the Company
to maintain certain non-financial covenants.
Fair Value
The carrying value of the revolving line of credit, equipment notes and
shareholder and former shareholder notes approximated their fair value at
December 31, 1999. The fair value of the Senior Subordinated Notes at December
31, 1999, was approximately $100,275,000 and was estimated based on quoted
market rate for instruments with similar terms and remaining maturities.
6. Income Taxes
Provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the year December 31,
------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal .......................................... $ 2,924,739 $ 592,145 $(1,498,218)
State ............................................ 645,145 130,103 (331,255)
State payments (refunds) resulting from changes in
estimates on prior year returns ............... -- (164,726) 111,456
----------- ----------- -----------
3,569,884 557,522 (1,718,017)
----------- ----------- -----------
Deferred:
Federal .......................................... 268,103 1,190,866 550,903
State ............................................ 60,002 259,379 121,805
----------- ----------- -----------
328,105 1,450,245 672,708
----------- ----------- -----------
$ 3,897,989 $ 2,007,767 $(1,045,309)
=========== =========== ===========
</TABLE>
F-14
<PAGE>
6. Income Taxes (Continued)
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Covenant not to compete .................. $ 42,792 $ 31,828
Allowance for doubtful accounts .......... 112,827 120,708
Accrued liabilities ...................... 306,002 459,507
AMT Credit carryforward .................. -- 625,457
Contribution and Loss Carryforward ....... -- 295,575
----------- -----------
Total deferred income tax assets .... 461,621 1,533,075
----------- -----------
Deferred income tax liabilities:
Property and equipment ................... (2,649,049) (4,427,799)
Inventory ................................ (81,258) (50,549)
----------- -----------
Total deferred income tax liabilities (2,730,307) (4,478,348)
----------- -----------
Net deferred tax liability .......... $(2,268,686) $(2,945,273)
=========== ===========
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards
of $514,000 expiring in 2018 and a contribution carryforward of $251,000
expiring in 2003.
The provision (benefit) for income taxes differed from the amount of income
tax determined by applying the applicable U.S. statutory rate to income before
taxes as a result of the following:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Statutory U.S. rate ................. 34.0% 34.0% (34.0)%
State taxes net of federal benefit... 5.5 4.9 (2.3)
Goodwill amortization ............... 8.6 23.8 15.4
Other permanent differences ......... (1.6) 3.4 3.2
------ ------ -------
Effective tax rate .................. 46.5% 66.1% (17.7)%
====== ====== =======
</TABLE>
F-15
<PAGE>
7. 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 formerly located in Sterling, Virginia. These transactions
were accounted for as purchase business combinations.
The following unaudited pro forma information sets forth the consolidated
results of operations of the Company for the year ended December 31, 1998 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.
Net sales............................. $127,924,000
Net loss.............................. $ (412,000)
8. Commitments and Contingencies
Operating Leases
The Company leases certain office, manufacturing facilities and equipment
under operating leases. Lease terms generally range from 1 to 10 years with
options to renew at varying terms. The leases generally provide for the lessee
to pay taxes, maintenance, insurance and other operating costs of the leased
property. Rent expense under all leases is recognized ratably over the lease
terms. Rent expense under all operating leases was approximately $1,914,650,
$2,154,522 and $4,943,092 for the years ending December 31, 1997, 1998, and
1999, respectively.
Future minimum lease payments under operating leases as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
2000 ........ $ 7,492,783
2001 ........ 7,516,411
2002 ........ 7,505,581
2003 ........ 7,411,258
2004 ........ 7,231,881
Thereafter... 14,594,327
-----------
$51,752,241
===========
</TABLE>
F-16
<PAGE>
8. Commitments and Contingencies (Continued)
Effective March 1, 2000, the Company sublet the TechniGraphix, Inc.
manufacturing facility in Sterling, Virginia for the remainder of the term of
the prime lease, and on the same terms as the prime lease. The Company remains
liable under the terms of the prime lease in the event of a default by the
subtenant.
Legal 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 March 15,
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.
Purchase Commitments
The Company has contractual commitments totaling approximately $3.5 million
for the purchase of various equipment.
F-17
<PAGE>
9. Related Party Transactions
In February 1995 the Company redeemed 2,000 shares from two former
stockholders in accordance with a stockholders' agreement which has been
subsequently terminated effective January 1, 1998. The total purchase price of
$1,098,000 was being paid in monthly installments of $18,000 plus interest at
1.0% below the prime rate, but not less than 7.0% (7.8% at December 31, 1998).
The balance due to these stockholders was $252,000 as of December 31, 1998, and
was included in notes payable on the consolidated balance sheet. The debt was
repaid in 1999.
The Company formerly utilized the services of a law firm in which a former
director of the Company is also a partner. The Company paid the law firm
approximately $315,000, $514,000 and $127,000 for the years ended December 31,
1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, included in
accrued expenses is a payable to the law firm of $-0- and $51,948, respectively.
Mr. Earl S. Wellschalger, director of the Company, is a partner in a law
firm that served as counsel to the Company in 1999. During the year ended
December 31, 1999, the Company paid Mr. Wellschlager's law firm total fees of
approximately $180,000 for legal services.
The Company utilizes the services of a management consulting firm in which
a director of the Company is also a principal. The Company paid the consulting
firm approximately $31,000, $38,000 and $180,000 for the years ended December
31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998,
included in accrued expenses is a payable to the consulting firm of $-0- and
$1,800, respectively.
The Company purchases raw materials from a supplier in which a former
director of the Company is President and CEO. The Company purchased
approximately $11.5 million, $9.2 million and $9.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and
1998, $1,763,181 and $1,637,897, respectively, is owed to the supplier and is
included in accounts payable.
On December 31, 1998, the Company had outstanding $392,765 of demand notes
payable to five stockholders of the Company, which were repaid in 1999, and
which are included in current liabilities in the consolidated balance sheet at
December 31, 1998. These notes bore interest at the rate of 12%. Interest
expense paid to these stockholders totaled $12,635, $35,348 and $47,131 for the
years ended December 31, 1999, 1998 and 1997, respectively. The Company has
classified all the notes payable to the aforementioned stockholders as current
liabilities.
10. Retirement Programs
Phoenix Color Corp.'s Employee Stock Bonus and Ownership Plan (the "Plan")
is the primary retirement program of the Company. Contributions to the Plan are
made at the discretion of management. There was a $750,000 contribution made in
the year ended December 31, 1997; however, no contribution was made in each of
the years ended December 31, 1999 and 1998.
The Company offers a 401(k) Employee Savings and Investment Plan to all
employees of the Company who have completed at least one year of service (1,000
hours) during the plan year. The Company may, at its discretion, make
contributions to the plan. No contributions were made to the plan during the
three year period ended December 31, 1999.
F-18
<PAGE>
11. Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
Quarterly Financial Information
First Second Third Fourth Total
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1999:
Net sales ............ 33,303,845 35,860,929 36,266,441 35,907,152 141,338,367
Cost of sales ........ 25,675,791 26,771,962 28,147,120 28,762,512 109,357,385
Income from operations 1,552,557 3,785,003 2,871,466 915,875 9,124,901
Net loss ............. (2,860,238) (58,227) (345,653) (1,580,173) (4,844,291)
1998:
Net sales ............ 24,620,306 25,167,939 31,443,964 26,258,836 107,491,045
Cost of sales ........ 19,973,761 19,143,343 20,791,748 20,718,187 80,627,039
Income from operations 846,919 1,983,586 5,076,207 (254,559) 7,652,153
Net (loss) income .... (44,784) 569,790 1,707,431 (1,204,151) 1,028,286
1997:
Net sales ............ 23,714,635 23,746,341 28,649,934 28,682,795 104,793,705
Cost of sales ........ 16,804,341 16,930,950 19,668,733 20,317,606 73,721,630
Income from operations 2,618,666 2,615,599 4,815,143 2,876,381 12,925,789
Net (loss) income .... 759,319 827,800 1,996,567 897,858 4,481,544
</TABLE>
F-19
<PAGE>
12. Guarantor Subsidiaries:
The following summarized consolidating financial information sets forth the
information regarding the Company and its subsidiaries all of which are
restricted subsidiaries (see Note 5) as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999:
<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:
December 31, 1999
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
December 31, 1998
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:
December 31, 1999
Sales .......................... 135,459,238 975,240 5,879,129 -- (975,240) 141,338,367
Gross profit ................... 32,396,288 (4,090) (229,660) -- (181,556) 31,980,982
Income (loss) from operations... 9,124,901 (10,355) (2,198,911) -- 2,209,266 9,124,901
Net loss ...................... (4,844,291) (10,355) (2,850,444) -- 2,860,799 (4,844,291)
December 31, 1998
Sales .......................... 107,491,045 915,020 -- -- (915,020) 107,491,045
Gross profit ................... 26,596,945 (241,697) -- -- 508,758 26,864,006
Income (loss) from operations... 7,652,153 (256,889) -- -- 256,889 7,652,153
Net income (loss) .............. 1,028,286 (256,889) -- -- 256,889 1,028,286
December 31, 1997
Sales .......................... 104,793,705 459,215 -- -- (459,215) 104,793,705
Gross profit ................... 30,826,302 (169,170) -- -- 414,943 31,072,075
Income (loss) from operations... 12,925,789 (178,314) -- -- 178,314 12,925,789
Net income (loss) ........... 4,481,544 (178,314) -- -- 178,314 4,481,544
</TABLE>
F-20
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
Phoenix Color Corp.
Our audits of the consolidated financial statements referred to in our report
dated February 18, 2000, except for Note 5, as to which the date is March 23,
2000, included in this Annual Report on Form 10-K also included an audit of the
financial statement schedule, Valuation and Qualifying Accounts, for each of the
three fiscal years in the year ended December 31, 1999, which is also included
in this Form 10-K. In our opinion, the financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 18, 2000, except Note 5,
as to which the date is March 23, 2000
1
<PAGE>
Schedule II - Valuation and Qualifying Accounts
For Each of the three Years in the Period Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
----------------------------------
Balance Charged to Balance
at Costs Rebates at
Beginning and Charged to End
of Year Expenses Sales Deductions of Year
--------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Description
- -----------
Allowance for doubtful Accounts Receivable and Rebates
Year ended December 31, 1999 ......................... $ 1,114 $ 220 $ 814 $ 1,029 $ 1,119
======== ======= ======= ======= =======
Year ended December 31, 1998 ......................... $ 674 $ 150 $ 823 $ 533 $ 1,114
======== ======= ======= ======= =======
Year ended December 31, 1997 ......................... $ 687 $ -- $ 533 $ 546 $ 674
======== ======= ======= ======= =======
</TABLE>
2
<PAGE>
Exhibit 10.4(b)
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement ("Amendment") is made this
31st day of March, 1999, by and among Phoenix Color Corp. ("Phoenix"), a
Delaware corporation, PCC Express, Inc. ("PCC"), a Delaware corporation, Phoenix
(MD.) Realty, LCC ("Realty"), a Maryland limited liability company, and
TechniGraphix, Inc. ("TechniGraphix"), a Maryland corporation (singly a
"Borrower" and collectively, "Borrowers"), the lending institutions listed from
time to time on Schedule A to the Credit Agreement (as defined below) (singly, a
"Lender" and collectively, "Lender"), First Union National Bank, a national
banking association, as issuer agent for Issuer and Lenders (in such capacity,
"Agent").
Background
A. Borrowers, Agent, Issuer, and Lenders are parties to a Credit Agreement
dated September 15, 1998, as supplemented on February 12, 1999 (collectively,
"Credit Agreement"), pursuant to which certain financing arrangements were
established for the benefit of Borrowers. All capitalized terms not otherwise
defined herein shall have the respective meanings ascribed thereto in the Credit
Agreement.
B. Borrowers have requested that Agent, Issuer and Lenders modify, in
certain respects, the Credit Agreement and Agent, Issuer and Lenders have agreed
to make such modifications, all as more fully set forth herein and subject to
the terms and conditions thereof.
NOW, THEREFORE, with the foregoing Background incorporated by reference
herein and made part hereof, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Amendments to Credit Agreement.
a. Definitional Amendment. Upon satisfaction of the Effectiveness
Conditions (as defined below), the following definitions in the Credit
Agreement are hereby amended and restated in its entirety and shall read as
follows:
Consolidated Capital Expenditures - For any period, the aggregate of
all expenditures (including that portion of Capitalized Lease Obligations
incurred during that period) made by Borrowers and their Subsidiaries
during such period in respect of the purchase, construction or other
acquisition of fixed or capital assets determined in accordance with GAAP;
provided however, Consolidated Capital Expenditures shall not include the
fair market value of any assets acquired by Borrower as a result of an
acquisition or merger permitted by written consent of Lenders (it being
understood that such consent may be withheld by Lenders in their sole and
absolute discretion). For the purposes hereof, any deposits made by
3
<PAGE>
any Borrower or its Subsidiaries for the purpose of acquiring fixed or
capital assets shall be deemed Consolidated Capital Expenditures.
Consolidated EBITDA - For any period, Borrowers' Consolidated Net
Income (or deficit) plus (a) Consolidated Interest Expense, (b)
Consolidated Tax Expense, (c) Consolidated Depreciation Expense, (d)
Consolidated Amortization Expense minus, (e) extraordinary gains and plus
(f) extraordinary non-cash loses, all as determined in accordance with
GAAP. In addition to the foregoing, for the measurement period in which an
acquisition or merger by any Borrower occurs which is permitted by written
consent of Lenders (it being understood that such consent may be withheld
by Lenders in their sole and absolute discretion), and for the next
succeeding three (3) measurement periods, Consolidated EBITDA shall be
calculated by giving effect to such acquisition or merger as if it has
occurred on the first day of the applicable measurement period.
Consolidated Interest Expense - For any period, the aggregate,
consolidated amount of interest expense required to be paid or accrued
during such period on all Indebtedness of Borrowers outstanding during all
or any part of such period, as determined in accordance with GAAP; provided
however, for the period commencing January 1, 1999 through March 31, 1999,
Consolidated Interest Expense shall not include the following one-time
charges associated with the closing of the high yield bond transaction: (i)
charges associated with a certain unamortized bridge loan fee in the amount
of $1,140,000 and (ii) payment of breakage fees on a certain capitalized
lease in the amount of $1, 168,000.
b. Technical Amendment - Upon satisfaction of the Effectiveness
Conditions, the following technical amendments to the Credit Agreement
shall be effective:
(i) The reference to subparagraph (d) contained in the fourth
line of Section 6.3(e) of the Credit Agreement is hereby amended so
that the reference is to subparagraph (e);
(ii) The reference to Section 6.3 (d) contained in the fifth line
of Section 6.7 of the Credit Agreement is hereby amended so that the
reference is to Section 6.3(e).
(iii) The reference to Section 6.7 contained in the second line
of Section 6.8 of the Credit Agreement is hereby amended so that the
reference is to Section 6.6.
c. Financial Covenant Amendments - Upon satisfaction of the Effective
Conditions, Section 5.8 of the Credit Agreement is hereby amended and
restated in its entirety and shall read as follows:
4
<PAGE>
5.8 Financial Covenants: Borrowers shall maintain and comply with the
following financial covenants:
(a) Total Leverage Ratio: Borrowers shall have and maintain a Total
Leverage Ration of not more than the following during the following periods
(measured quarterly on a rolling four quarter basis):
<TABLE>
<CAPTION>
Period Maximum Ratio
------ -------------
<S> <C>
1/1/99 through 3/31/99 5.50:1
4/1/99 through 6/30/99 5.50:1
7/1/99 through 9/30/99 5.25:1
0/1/99 through 12/31/99 5.00:1
1/1/00 through 3/31/00 4.75:1
4/1/00 through 6/30/00 4.75:1
7/1/00 through 9/30/00 4.50:1
10/1/00 through 12/31/00 4.25:1
1/1/01 through 3/31/01 4.25:1
4/1/01 through 6/30/01 4.00:1
7/1/01 through 9/30/01 3.75:1
10/1/01 through 12/31/01 3.50:1
1/1/02 through 3/31/02 3.25:1
4/1/02 and thereafter 3.00:1
</TABLE>
(b) Interest Coverage Ratio: Borrowers shall have and maintain an
Interest Coverage Ration of not less than the following during the
following periods (measured quarterly on a rolling four quarter basis;
provided that the measurement at March 31, 1999 shall be based on nine
months):
<TABLE>
<CAPTION>
Period Minimum Ratio
------ -------------
<S> <C>
1/1/99 through 3/31/99 2.25:1
4/1/99 through 6/30/99 2.25:1
7/1/99 through 9/30/99 2.25:1
10/1/99 through 12/31/99 2.25:1
1/1/00 through 3/31/00 2.25:1
4/1/00 through 6/30/00 2.25:1
7/1/00 through 9/30/00 2.25:1
10/1/00 through 12/31/00 2.25:1
1/1/01 through 3/31/01 2.25:1
4/1/01 through 6/30/01 2.25:1
7/1/01 through 9/30/01 2.50:1
10/1/01 through 12/31/01 2.50:1
1/1/02 through 3/31/02 2.50:1
4/1/02 and thereafter 2.50:1
</TABLE>
5
<PAGE>
(c) Minimum Consolidated EBITDA: Borrowers shall have and maintain a
Consolidated EBITDA of not less than the following during the Following
periods (measured quarterly on a rolling four quarter basis):
<TABLE>
<CAPTION>
Period Minimum Amount
------ --------------
<S> <C>
1/1/99 through 3/31/99 $20,000,000
4/1/99 through 6/30/99 $21,000,000
7/1/99 through 9/30/99 $22,000,000
10/1/99 through 12/31/99 $23,000,000
1/1/00 through 3/31/00 $24,000,000
4/1/00 through 3/31/00 $25,000,000
7/1/00 through 6/30/00 $26,000,000
10/1/00 through 12/31/00 $27,000,000
1/1/01 through 3/31/01 $28,000,000
4/1/01 through 6/30/01 $29,000,000
7/1/01 through 9/30/01 $31,500,000
10/1/01 through 12/31/01 $34,000,000
1/1/02 through 3/31/02 $35,000,000
4/1/02 and thereafter $35,000,000
</TABLE>
(d) Consolidated Capital Expenditures: Borrowers shall not expend for
Consolidated Capital Expenditures more than the following amounts during
the following periods (measured quarterly on a rolling four quarter basis):
<TABLE>
<CAPTION>
Period Maximum Amount
------ --------------
<S> <C>
1/1/99 through 3/31/99 $55,000,000
4/1/99 through 6/30/99 $55,000,000
7/1/99 through 9/30/99 $40,000,000
10/1/99 through 12/31/99 $35,000,000
1/1/00 through 3/31/00 $35,000,000
4/1/00 through 6/30/00 $25,000,000
7/1/00 through 9/30/00 $20,000,000
10/1/00 through 12/31/00 $15,000,000
1/1/01 through 3/31/01 $15,000,000
4/1/01 through 6/30/01 $15,000,000
7/1/01 through 9/30/01 $15,000,000
10/1/01 through 12/31/01 $15,000,000
1/1/02 through 3/31/02 $15,000,000
4/1/02 and thereafter $15,000,000
</TABLE>
6
<PAGE>
2. Effectiveness Conditions. This Amendment shall become effective upon the
satisfactory completion, as determined by Agent in its discretion, of the
following conditions ("Effectiveness Conditions") (all documents to be in form
and substance satisfactory to Agent):
a. Execution of this Amendment
3. Representations and Warranties. Each Borrower warrants and represents to
Agent, Issuer and Lenders that:
a. Prior Representations. As of this date of the Amendment,
all warranties and representations set forth in the Credit
Agreement and Loan Documents are true and correct in all material
respects, both before and after giving effect to this Amendment.
b. No Default. After giving effect to this Amendment, no
Default or Event of Default is outstanding or would exist after
giving effect to this Amendment.
4. Incorporation into Existing Loan Documents. The parties acknowledge and
agree that this Amendment is incorporated into and made part of the Credit
Agreement and Loan Documents, the terms and provisions of which, unless
expressly modified herein, are hereby ratified and confirmed and continue
unchanged and in full force and effect. Any future reference to the Credit
Agreement or Loan Documents shall mean the Credit Agreement or Loan Documents as
amended hereby. To the extent that any term or provision of this Amendment is or
may be deemed expressly inconsistent with any term or provision in the Loan
Documents, the terms and provisions hereof shall control.
5. Miscellaneous.
a. Headings. The headings of any paragraph of this Amendment
are for convenience only and shall not be used to interpret any
provision thereof.
b. Other Instruments. Each Borrower shall execute any other
documents, instruments and writings, in form and substance
satisfactory to Agent, as Agent may reasonably request, to carry
out the intentions of the parties hereunder.
c. Modifications. No modification hereof or any agreement
referred to herein shall be binding or enforceable unless in
writing and signed on behalf of the party against whom
enforcement is sought.
d. Governing Law. The terms and conditions of this Amendment
shall be governed by and construed in accordance with the
substantive laws of the Commonwealth of Pennsylvania without
regard to its otherwise applicable principles of conflicts and
laws.
7
<PAGE>
e. Counterparts. This Amendment may be executed in
counterpart all, of which counterparts taken together shall
constitute one completed fully executed document. A photocopied
or facsimile signature shall be deemed to be the functional
equivalent of a manually executed original for all purposes.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment the day
and year First above written.
<TABLE>
<S> <C>
First Union National Bank, as Agent, Phoenix Color Corp.
Issuer, and Lender
By: /s/ Margaret Byrne By: /s/ Edward Lieberman
-------------------------------- ----------------------------
Name: Margaret Byrne Name: Edward Lieberman
-------------------------------- ----------------------------
Title: Vice President Title: Chief Financial Officer
-------------------------------- ----------------------------
PCC Express, Inc.
By: /s/ Edward Lieberman
----------------------------
Name: Edward Lieberman
----------------------------
Title: Chief Financial Officer
----------------------------
Phoenix (MD.) Realty, LLC
By: /s/ Edward Lieberman
----------------------------
Name: Edward Lieberman
----------------------------
Title: Chief Financial Officer
----------------------------
TechniGraphix, Inc.
By: /s/ Edward Lieberman
----------------------------
Name: Edward Lieberman
----------------------------
Title: Chief Financial Officer
----------------------------
</TABLE>
9
<PAGE>
Exhibit 10.4(c)
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement ("Amendment") is made this
23rd day of March, 2000, by and among Phoenix Color Corp. ("Phoenix"), a
Delaware corporation, PCC Express, Inc. ("PCC"), a Delaware corporation, Phoenix
(MD.) Realty, LCC ("Realty"), a Maryland limited liability company, and
TechniGraphix, Inc. ("TechniGraphix"), a Maryland corporation (singly a
"Borrower" and collectively, ("Borrowers"), the lending institutions listed from
time to time on Schedule A to the Credit Agreement (as defined below) (singly, a
"Lender" and collectively, "Lender"), First Union National Bank, a national
banking association, as issuer of letters of credit (in such capacity, "Issuer")
and First Union National Bank, as administrative agent for Issuer and Lenders
(in such capacity, "Agent").
Background
A. Borrowers, Agent, Issuer and Lenders are parties to a Credit
Agreement dated September 15, 1998, as supplemented on February 12, 1999, as
amended on March __, 1999 (collectively, "Credit Agreement"), pursuant to which
certain financing arrangements were established for the benefit of Borrowers.
All capitalized terms not otherwise defined herein shall have the respective
meanings ascribed thereto in the Credit Agreement.
B. Borrowers have requested that Agent, Issuer and Lenders modify, in
certain respects, the Credit Agreement and Agent, Issuer and Lenders have agreed
to make such modifications, all as more fully set forth herein and subject to
the terms and conditions hereof.
NOW, THEREFORE, with the foregoing Background incorporated by reference
herein and made part hereof, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Amendments to Credit Agreement.
(a) Financial Covenant Amendments - Effective December 30, 1999,
Section 5.8 (b) of the Credit Agreement is hereby amended
and restated in its entirety and shall read as follows:
(b) Interest Coverage Ratio: Borrowers shall have and maintain
an Interest Coverage Ratio of not less than the following
during the following periods (measured quarterly on a
rolling four quarter basis; provided that the measurement at
March 31, 1999 shall be based on nine months):
10
<PAGE>
<TABLE>
<CAPTION>
Period Minimum Ratio
------ -------------
<S> <C>
1/1/99 through 3/31/99 2.25:1
4/1/99 through 6/30/99 2.25:1
7/1/99 through 9/30/99 2.25:1
10/1/99 through 12/31/99 1.90:1
1/1/00 through 3/31/00 1.90:1
4/1/00 through 6/30/00 1.90:1
7/1/00 through 9/30/00 2.25:1
10/1/00 through 12/31/00 2.25:1
1/1/01 through 3/31/01 2.25:1
4/1/01 through 6/30/01 2.25:1
7/1/01 through 9/30/01 2.50:1
10/1/01 through 12/31/01 2.50:1
1/1/02 through 3/31/02 2.50:1
4/1/02 and thereafter 2.50:1
</TABLE>
2. Effectiveness Conditions. This Amendment shall become effective
upon the satisfactory completion, as determined by Agent in its discretion,
of the following conditions ("Effectiveness Conditions") (all documents to
be in form and substance satisfactory to Agent):
a. Execution of this Amendment.
3. Representations and Warranties. Each Borrower warrants and
represents to Agent, Issuer and Lenders that:
a. Prior Representations. As of the date of this Amendment, all
warranties and representations set forth in the Credit
Agreement and Loan Documents are true and correct in all
material respects, both before and after giving effect to
this Amendment.
b. No Default. After giving effect to this Amendment, no
Default or Event of Default is outstanding or would exist
after giving effect to this Amendment.
4. Incorporation into Existing Loan Documents. The parties acknowledge
and agree that this Amendment is incorporated into and made part of the
Credit Agreement and Loan Documents, the terms and provisions of which,
unless expressly modified herein, are hereby ratified and confirmed and
continue unchanged and in full force and effect. Any future reference to
the Credit Agreement or Loan Documents shall mean the Credit Agreement or
Loan Documents as amended hereby. To the extent that any term or provision
of this Amendment is or may be deemed expressly inconsistent with any term
or provision in the Loan Documents, the terms and provisions hereof shall
control.
5. Miscellaneous.
a. Headings. The headings of any paragraph of this Amendment
are for convenience only and shall not be used to interpret
any provision hereof.
11
<PAGE>
b. Other Instruments. Each Borrower shall execute any other
documents, instruments and writings, in form and substance
satisfactory to Agent, as Agent may reasonably request, to
carry out the intentions of the parties hereunder.
c. Modifications. No modification hereof or any agreement
referred to herein shall be binding or enforceable unless in
writing and signed on behalf of the party against whom
enforcement is sought.
d. Governing Law. The terms and conditions of this Amendment
shall be governed by and construed in accordance with the
substantive laws of the Commonwealth of Pennsylvania without
regard to its otherwise applicable principles of conflicts
and laws.
e. Counterparts. This Amendment may be executed in counterpart
all, of which counterparts taken together shall constitute
one completed fully executed document. A photocopied or
facsimile signature shall be deemed to be the functional
equivalent of a manually executed original for all purposes.
IN WITNESS WHEREOF, the parties have executed this Amendment the day
and year First above written.
<TABLE>
<S> <C>
First Union National Bank, as Agent,
Issuer, and Lender
Phoenix (MD.) Realty, LLC
By: /s/ Margaret Byrne
-------------------------- By: /s/ Edward Lieberman
Name: Margaret Byrne ----------------------------
-------------------------- Name: Edward Lieberman
Title: Vice President ----------------------------
-------------------------- Title: Chief Financial Officer
----------------------------
Phoenix Color Corp.
By: /s/ Edward Lieberman TechniGraphix, Inc.
---------------------------- By: /s/ Edward Lieberman
Name: Edward Lieberman ---------------------------
---------------------------- Name: Edward Lieberman
Title: Chief Financial Officer ---------------------------
---------------------------- Title: Chief Financial Officer
---------------------------
PCC Express, Inc.
By: /s/ Edward Lieberman
----------------------------
Name: Edward Lieberman
----------------------------
Title: Chief Financial Officer
----------------------------
</TABLE>
12
<PAGE>
Exhibit 12.1 - Calculation of ratio of earnings to fixed charges
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before income tax provision... $ 6,400 $ 3,173 $ 8,380 $ 3,036 $ (5,890)
Add:
Portion of rent attributable to interest... 189 539 478 717 1,648
Interest excluding capitalized interest.... 1,827 4,787 4,304 4,866 12,171
Amortization of deferred financing costs... -- 150 180 210 2,768
-------- -------- -------- -------- --------
Earnings as adjusted ......................... $ 8,416 $ 8,649 $ 13,342 $ 8,829 $ 10,697
======== ======== ======== ======== ========
Fixed Charges
Portion of rent attributable to interest... 189 539 478 717 1,648
Interest including capitalized interest.... 1,827 4,787 4,304 4,866 12,597
Amortization of deferred financing costs... -- 150 180 210 2,768
-------- -------- -------- -------- --------
Fixed Charges ................................ $ 2,016 $ 5,476 $ 4,962 $ 5,793 $ 17,013
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ........... 4.2x 1.6x 2.7x 1.5x 0.6x
</TABLE>
16
<PAGE>
Exhibit 12.2 - Calculation of (1) EBITDA
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(1) EBITDA Calculation
Pretax income ......................... $ 6,400 $ 3,173 $ 8,380 $ 3,036 $ (5,890)
Interest expense ...................... 1,827 4,937 4,483 5,076 14,939
Depreciation and amortization expense.. 3,119 8,389 9,142 10,834 17,175
-------- -------- -------- -------- --------
Total EBITDA .......................... $ 11,346 $ 16,499 $ 22,005 $ 18,946 $ 26,224
======== ======== ======== ======== ========
</TABLE>
Interest expense includes amortization of deferred financing costs of $150,000,
$180,000, $210,000, and $1,538,000 in 1996, 1997, 1998, and 1999, respectively.
14
<PAGE>
Exhibit 21.1 Subsidiaries of the Company
<TABLE>
<CAPTION>
Subsidiaries of Phoenix Color Corp. Place of Incorporation
- ----------------------------------- ----------------------
<S> <C>
PCC Express Inc. United States
TechniGraphix Inc. United States
Phoenix MD. Realty, LLC United States
</TABLE>
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 271
<SECURITIES> 0
<RECEIVABLES> 22,304
<ALLOWANCES> 1,119
<INVENTORY> 5,376
<CURRENT-ASSETS> 31,356
<PP&E> 127,239
<DEPRECIATION> 45,296
<TOTAL-ASSETS> 151,505
<CURRENT-LIABILITIES> 21,145
<BONDS> 105,000
0
0
<COMMON> 0
<OTHER-SE> 12,471
<TOTAL-LIABILITY-AND-EQUITY> 151,505
<SALES> 141,338
<TOTAL-REVENUES> 141,338
<CGS> 109,357
<TOTAL-COSTS> 109,357
<OTHER-EXPENSES> 22,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,939
<INCOME-PRETAX> (5,890)
<INCOME-TAX> (1,045)
<INCOME-CONTINUING> (4,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,844)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
