Back to GetFilings.com



================================================================================
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, 2002 Commission File Number

PHOENIX COLOR CORP.
(Exact name of registrant as specified in its charter)

Delaware 22-2269911
(State or other (I.R.S. Employer
jurisdiction of incorporation or organization) Identification No.)

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 |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|



As of December 31, 2002, the Registrant had no voting or non-voting common
equity registered under the Securities Exchange Act of 1934, as amended.

As of March 15, 2003, 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.

Documents Incorporated by Reference

None.



Table of Contents

Item No. Name of Item Page No.

Part I
Item 1. Business..................................................... 2
Item 2. Properties................................................... 7
Item 3. Legal Proceedings............................................ 7
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... 19
Item 8. Financial Statements and Supplementary Data.................. 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 19

Part III
Item 10. Directors and Executive Officers of the Registrant........... 19
Item 11. Executive Compensation....................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 26
Item 13. Certain Relationships and Related Transactions............... 27
Item 14 Controls and Procedures...................................... 27
Item 16 Principal Accountant Fees and Services....................... 28

Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 29


1


Forward Looking Statements

Some of the statements in this Annual Report on Form 10-K are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include our indications
regarding our intent, beliefs or current expectations. In some cases, you can
identify forward-looking statements by terminology such as "may," "estimates,"
"anticipates," "intends," "will," "should," "could," "expects," "believes,"
"continues" or "predicts." These statements involve a variety of known and
unknown risks, uncertainties, and other factors that may cause our actual
results to differ materially from intended or expected results. These factors
include (i) the risk factors and other information presented in our Registration
Statement filed with the Securities and Exchange Commission, File No. 333-50995,
which became effective May 13, 1999, (ii) the sufficiency of funds to finance
our current operations, remaining capital expenditures and internal growth for
the year 2003, and (iii) the outcome of any claims and lawsuits filed,
threatened to be filed or pending against us. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We expressly decline any obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

PART I

ITEM 1. BUSINESS

Unless the context requires otherwise, "Phoenix," "we," "us," and "our"
refers to Phoenix Color Corp. and its subsidiaries.

Overview

We manufacture books and book components, which include book jackets,
paperback covers, pre-printed case covers for hardcover books, illustrations,
endpapers and inserts. We generate revenues primarily through the sale of book
components to book publishers. Book publishers generally design book components
to enhance the sales appeal of the books. This work requires specialized
equipment, materials and finishes and often demands high-quality, intricate
work. As a result, many leading publishers rely on specialty printers such as
Phoenix to supply high quality book components. We also produce book components
for our book manufacturing operations, which print heavily illustrated
multicolor books, and one and two color hard and soft cover 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 furnish real time operating data;

o Fast turnaround times made possible by our state-of-the-art
manufacturing equipment, the strategic location of our four plants
near major delivery points and the use of our own delivery trucks;


2


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 was founded in 1979 by a group of fifteen printing industry
veterans, including Louis LaSorsa, our Chairman, President and Chief Executive
Officer. Initially, we focused on supplying book components for the higher
education and professional reference markets but in subsequent years expanded
into other segments of the publishing industry. In 1998, we began manufacturing
heavily illustrated multicolor books, and in 1999, one and two color hard and
soft cover books. We originally conducted our operations in a single production
facility in Long Island City, New York. In 1993, we moved the major portion of
our business to Hagerstown, Maryland. In December 2000, we closed the book
component manufacturing facility we previously operated in Taunton,
Massachusetts. We currently operate a total of four plants in the States of
Maryland and New Jersey and maintain a sales office in New York.

We were incorporated in the State of New York in 1979 and reincorporated
by merger in the State of Delaware in 1996. Our headquarters is at 540 Western
Maryland Parkway, Hagerstown, Maryland 21740 and our telephone number is (301)
733-0018.

Restructuring

In September 2000, we announced a plan to restructure our operations,
which resulted in our recording a one-time restructuring charge totaling $11.4
million. Under the restructuring plan, we closed TechniGraphix, Inc. and our
Taunton, Massachusetts component facility to reduce costs and improve
productivity. The restructuring charge included approximately $7.5 million
related to the write-down of unrecoverable assets and goodwill in TechniGraphix,
Inc. and the Taunton facility, in which the carrying value was no longer
supported by future cash flows, $3.6 million for equipment lease termination
costs and $325,000 for facility closing costs.

Manufacturing Operations and Technology

Order Processing.

Our customers transmit orders to our various plant locations by physical
delivery or electronic file transfer. After entering a customer order into our
order processing system, we monitor the order on a real-time basis throughout
the entire manufacturing process. Our management allocates work orders among our
plants through our data network to maximize plant efficiency and minimize
operating cost.

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 Phoenix, are under
increasing pressure to process orders quickly and efficiently. By investing in
upgrades to our printing equipment, digital communications and information
network, we have been able to respond successfully to our customers' increasing
demands. Further, our printing facilities operate on a 24-hour basis, seven days
a week. As an additional service, we provide real-time job status and plant
capacity information to our customers over the Internet.


3


Digital Prepress Services.

We provide 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. We offer prepress services at each of our manufacturing facilities
as well as our New York City sales office. Our prepress services are linked
through a high speed telecommunications network. We do not rely on any
subcontractors for our prepress needs.

Printing and Finishing Services.

We manufacture book components, heavily illustrated multicolor books, and
one and two color hard and soft cover books. We manufacture book components by
using 19 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 most with inline coaters. We
protect the manufactured book components by applying an ultraviolet liquid
coating or laminating different types of film such as polypropelene and mylar.
We also offer a complete array of in-house services, including foil stamping,
selected and overall embossing, selected and overall liquid coatings and die
cutting.

We produce heavily illustrated multicolor books in our manufacturing plant
in New Jersey, which has three presses capable of printing up to eight or ten
colors on a single side or four 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. We offer 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.

We print one and two color hard and soft cover books in our manufacturing
plant in Maryland, which has two single color web presses and two, two-color web
presses. Our workflow for the production of books is completely digital. In
connection with the manufacture of books, we offer perfect binding, saddle wire
binding and hard cover casing-in.

Distribution and Logistics.

We operate our own tractor-trailers to deliver a majority of our products.
This enables us 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 our manufacturing plants.

Technology.

We continue to invest in new technology to ensure modern highly efficient
production capabilities. We archive negative film and digital files to
facilitate reorders. We also have state of the art printing presses, foil
stamping presses, finishing equipment and binding equipment, most of which are
less than five years old.

Before printing, we provide customers with a color accurate digital proof
of their jobs, which our customers must approve. We can transfer digital files
within our facilities and to our customers who have been provided with the
appropriate equipment. Proofs for book manufacturing consist of bound galleys,


4


which are digitally printed and bound. We may also receive or transmit files
from or to our customers through the Internet in various formats, including PDF,
HTML and FTP, among others.

Raw Materials, Purchasing and Inventory

We use substantial quantities of paper, ink, laminating film, foil and
other materials in our operations. We generally favor "single sourcing" of our
various raw materials purchases. We believe that establishing strong commercial
relationships with a relatively small number of suppliers enables us to
negotiate favorable prices and to maintain reliable supplies of such materials.
Nevertheless, we are not party to any long-term supply agreements, are not
dependent on any single source for our raw materials and believe we could
replace any individual supplier without disruption to our business. We maintain
minimal inventories of our supplies. A change in suppliers could cause a delay
in manufacturing, and a possible loss of sales, which could adversely affect
operating results.

We generally obtain annual pricing commitments from our suppliers, but
such commitments are not legally binding. Nevertheless, our vendors have
historically complied with commitments made to us. In the event of material
price increases by vendors, we could pass such increases through to our
customers.

We use centralized purchasing and storage for book component inventory at
the Hagerstown, Maryland plants in order to control raw material costs. Further,
we purchase paper in large rolls and convert the paper, using our own
computerized sheeters, into sheets in the sizes required by our presses. By
converting in excess of 30 million pounds of paper in-house annually, we are
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.

Trademarks

Phoenix owns trademarks that are used in the conduct of its business.
These trademarks are valuable assets, the most important of which are "Phoenix
Color," and "Phoenix Colornet."

Markets

We sell book components, heavily illustrated multicolor books, and one and
two color hard and soft cover 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, we view
our sales to a broad range of book publishing market segments as a competitive
strength.

Sales of book components represented 63.2% of our net sales in 2002 and
65.6% of net sales in 2001. Sales of book components for use in general interest
books accounted for 47.8% of our net book component sales for the year 2002 and
50.1% for 2001. Sales of book components to publishers of educational materials
accounted for 24.9% and 24.3% of net book component sales in 2002 and 2001,
respectively, and sales to publishers of business-related books accounted for
9.4% and 7.8% of net book component sales in 2002 and 2001, respectively. Sales
of book components to all other book publishers, accounted for 17.9% and 17.8%
of net book component sales in 2002 and 2001, respectively.

We began selling heavily illustrated multicolor books to publishers of
juvenile books in the fourth quarter of 1998. We are continuing to expand our
customer base of both juvenile and non-juvenile


5


illustrated multicolor book customers. Sales of heavily illustrated multicolor
books represented 17.6% and 17.1% of our net sales for the years ended December
31, 2002 and 2001, respectively.

We opened our one and two color hard and soft cover book manufacturing
facility in Hagerstown, Maryland in July 1999. Sales of hard and soft cover
books represented 19.2% and 17.3% of our net sales for the years ended December
31, 2002 and 2001, respectively. We manufacture hard and soft cover books for
virtually all segments of the book publishing industry.

Customers

We have a base of over 400 active customers, including many of the leading
publishing companies in the world. Among our largest customers are
HarperCollins, Pearson Publishing, Simon & Schuster, Random House, Holtzbrink
Publishers, McGraw-Hill, Time Warner, Thomson Learning, John Wiley & Sons,
Houghton Mifflin, Oxford University Press, Walt Disney and W.W. Norton, many of
which have been our customers since our inception in 1979. Many of these
customers have decentralized operations in which purchasing decisions are made
by various divisions. Harper Collins Publishers and Pearson Publishing accounted
for 13.8%, and 13.4%, respectively, of our net sales in 2002. Pearson Publishing
and HarperCollins Publishers accounted for 11.7% and 10.8%, respectively, of our
net sales in 2001. Our ten largest customers accounted for approximately 70.2%
and 64.8% of net sales in 2002 and 2001, respectively. The loss of any one or
more of our ten largest customers would be detrimental to our operating results.

Sales

We have a direct sales force consisting of 35 sales representatives
located throughout the U.S. We intend to expand our sales force to provide
superior service to customers, to capture a greater share of the business from
our existing publishing customers, and to identify and solicit new customers,
including smaller regional publishers. We have established a marketing
department which works with our sales department to promote our services,
including participating in publishing industry trade shows.

Printing has become more technology driven. To remain competitive, we
require our new sales representatives to participate in a three-month
manufacturing and sales orientation program, which includes spending at least
two weeks at our manufacturing plants. All sales personnel are required to
participate annually in our continuing education program. Various programs by
management are used to monitor goals for individual sales representatives.

Backlog

We do not operate with any backlog at our book component and heavily
illustrated multicolor books facilities. We pre-schedule orders at our one and
two color hard and soft cover book facility. Both we and our 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 manufacturing of
books in particular, are extremely competitive. We face competition in the
printing and manufacturing of books from the dominant printers in the industry,
consisting of R.R. Donnelley, Quebecor/World and Banta Corporation, all of which
have significantly more revenues and assets than us. In addition, we compete
with book component printers, such as Coral Graphics, which offer services
similar to ours to the publishing


6


industry. 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. Many of the largest publishers also have contracts
with the large book printers to insure that their products are printed on a
preferred basis in the event manufacturing availability becomes limited. We do
not have contracts for book manufacturing with any of the large publishers;
however, we have been named the third supplier of choice for Pearson Publishing
and McGraw-Hill.

In both the printing and manufacturing of books and book component
printing, we believe that we compete by offering a high level of service that
many customers, particularly medium sized publishers, are unaccustomed to
receiving from our competitors. We also compete with our book component
competitors by being the only book component manufacturer to offer a complete
array of book component services in-house.

Employees

As of December 31, 2002, we had 818 employees, of whom 12 were engaged in
management, 46 in finance, administration and billing, 93 in sales, sales
support and customer service, 10 in information systems and technological
development, 17 in transportation and 640 in manufacturing. None of our
employees are represented by unions, and we believe we have satisfactory
relations with our workforce.

ITEM 2. PROPERTIES

Our corporate and administrative offices are located in one of our two
adjacent manufacturing facilities in Hagerstown, Maryland. We lease various
manufacturing and regional sales offices. A summary of the location, size and
nature of the principal facilities appears below:




Leased/Owned; Square
Location Use Expiration Date Footage
- -------- --- --------------- -------

Hagerstown, MD......... Corporate offices; printing, prepress Owned 114,000
and finishing for book components

Hagerstown, MD......... Printing, prepress and finishing for Owned 86,000
book components

New York City, NY...... Prepress and sales Leased; 11,000
10/31/09

Rockaway, NJ........... Printing, prepress and finishing for Leased; 3/31/08 90,000
complete books

Hagerstown, MD......... Printing, prepress and binding for Owned 170,000
complete books


In July 2002, we terminated our lease in Taunton, Massachusetts.

We believe that our existing facilities are suitable and adequate for our
current needs. For the year ended December 31, 2002, we had sales of $26.6
million at our Maryland book manufacturing facility and estimate that the
facility has the capacity to produce a sufficient number of books to generate
$45 million in sales with our current equipment.

ITEM 3. LEGAL PROCEEDINGS

In December 1998, we filed a complaint against Krause Biagosch GmbH
("Krause Germany") and Krause America, Inc. ("Krause America" and together with
Krause Germany "Krause"), which was tried in October 2000 in the United States
District Court for the District of Maryland, based on breach of contract and
statutory warranties on certain prepress equipment which we had agreed to
purchase from Krause. We attempted to operate the equipment, and contended that
the equipment failed to perform as


7


warranted. During 1999, we removed the portion of the equipment actually
delivered, and sought recovery of the approximately $2.0 million paid on this
equipment, which included amounts for deposits on the balance of the equipment
not yet delivered. On January 27, 2000, the court granted summary judgment in
our favor with respect to the three machines previously delivered to us. On
October 24, 2000, a jury rendered a verdict against Krause for $1.9 million. On
December 27, 2001, the Federal Court of Appeals for the 4th Circuit rendered a
decision confirming the lower court's decision without modification. Due to
recent efforts by Krause America to avoid enforcement of the judgment, we were
forced to file a new lawsuit in the U.S. District Court for the District of
Maryland against Krause America, Krause CTP, Limited, Krause Germany, and Jurgen
Horstmann, Krause Germany's sole shareholder. We and Krause are currently
negotiating a settlement of the monies due us. The terms on which we believe
this matter will be settled are as follows: we would accept $1.4 million,
comprised of a down payment of $200,000 and four annual installments of
$300,000, to be paid beginning in January 2004. There can be no assurances that
such a settlement will be reached. As a result of these developments, we
recognized a non-cash charge of approximately $745,000 in the fourth quarter of
2002. As of December 31, 2002 and 2001, we included in other non-current assets
a receivable from Krause of approximately $1.2 million and $2.0 million,
respectively.

In August 1999, we filed a complaint against Motion Technology Horizons,
Inc. ("Motion Technology") 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. In March 2001, we amended our complaint, adding Eagle
Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, we
obtained an order of default against Eagle. We filed a motion for summary
judgment against Eagle and Motion Technology. On February 25, 2002, the court
granted our motion for summary judgment and entry of an order of default and
entered a judgment against Eagle and Motion Technology in the amount of
$1,006,750. Defendants had thirty (30) days from that date to appeal the
judgment. On February 26, 2002, defendants filed for bankruptcy. We have
reserved the entire balance originally paid to Motion Technology Horizons, Inc.

On May 20, 2002, Xerox Corporation ("Xerox") filed a complaint against
Phoenix in United States District Court for the District of Maryland alleging
accounts due and owing pursuant to various equipment leases between Xerox and
Phoenix's subsidiary TechniGraphix, Inc. ("TechniGraphix"). TechniGraphix ceased
operations pursuant to our restructuring plan in September 2000. Phoenix filed a
motion to dismiss based on Xerox's failure to state a claim upon which relief
may be granted and failure to name an indispensable party. On July 19, 2002,
Xerox filed an amended complaint naming Phoenix and TechniGraphix as defendants.
The amended complaint alleges that Phoenix has an account due and owing of $2.7
million and that Phoenix and TechniGraphix are jointly liable for an account due
and owing of $.5 million. On August 1, 2002, Phoenix and TechniGraphix filed
motions to dismiss the claims against them based on Xerox's failure to identify
the specific accounts at issue and state a claim on which relief may be granted.
On October 29, 2002, the Court issued an Order denying the motions to dismiss
filed by Phoenix and TechniGraphix. The case is in the very early stages of
discovery.

We are not a party to any other legal proceedings, other than claims and
lawsuits arising in the normal course of our business. Although the outcome of
any claims and lawsuits against us cannot be accurately predicted, we do not
believe that any of the claims and lawsuits described above or in this
paragraph, individually or in the aggregate, will have a material adverse effect
on our business, financial condition, results of operations and cash flows for
any quarterly or annual period.


8


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 our Class A Common Stock
or Class B Common Stock. As of March 15, 2003 there were eleven holders of
record of our Class A Common Stock and two holders of record of our Class B
Common Stock.

We did not declare or pay any dividends on our capital stock in the past
three years. We expect to retain future earnings, if any, to finance the growth
and development of our business. Thus, we do not intend to declare or pay
dividends on our capital stock for the foreseeable future. Further, both our
senior credit facility and the indenture under which we have issued 10-3/8%
Senior Subordinated Notes restrict the payment of dividends.


9


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial information is derived from our
Consolidated Financial Statements and related Notes thereto as of December 31,
1998 through 2002 and for the years then ended. PricewaterhouseCoopers LLP,
independent accountants, has audited our Consolidated Financial Statements for
the years ended December 31, 1998 through 2002. PricewaterhouseCoopers LLP's
report on our Consolidated Financial Statements as of December 31, 2001 and 2002
and for each of the three years in the period ended December 31, 2002 is
included as Item 8 of this Form 10-K. The selected consolidated financial
information set forth below should be read with our Consolidated Financial
Statements, the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."



Years Ended December 31,
--------------------------------------------------------------------
1998 1999(1) 2000 2001 2002
-------- -------- -------- -------- --------
(dollars in thousands)

Statement of Operations Data:
Sales .................................... $107,491 $141,338 $150,758 $132,260 $137,961
Cost of sales ............................ 80,627 109,357 121,742 107,590 107,556
Gross profit ............................. 26,864 31,981 29,016 24,670 30,405

Operating expenses:
Selling and marketing expenses ........... 6,278 5,688 6,840 7,721 7,652
General and administrative ............... 12,934 17,168 17,511 15,619 12,172
(Gain) loss on sale of assets (2) ........ (133) 358 2,630 122 (33)
Restructuring charge (3) ................. -- -- 11,425 (304) --
Impairment charge (4) .................... -- -- -- -- 745
Lease termination charge (5) ............. -- -- -- -- 1,760
Total operating expenses ................. 19,079 23,214 38,406 23,158 22,296
Income (loss) from operations ............ 7,785 8,767 (9,390) 1,512 8,109
Interest expense ......................... 5,076 14,939 12,943 12,374 12,675
Other (income) expense ................... (327) (282) (116) (253) 344
Income (loss) before income taxes: ....... 3,036 (5,890) (22,217) (10,609) (4,910)
Income tax (benefit) provision ........... 2,008 (1,046) (7,055) 4,400 (3,269)
Net income (loss) ........................ $ 1,028 $ (4,844) $(15,162) $(15,009) $ (1,641)

Balance Sheet Data (at year end):
Cash and cash equivalents ................ $ 14,834 $ 271 $ 368 $ 122 $ 109
Total assets ............................. 132,440 151,505 133,072 122,402 119,526
Total debt (including capital lease
obligations) ............................. 95,447 114,362 114,180 117,902 119,626
Total stockholders' equity (deficit) ..... 17,283 12,471 (2,653) (17,624) (19,233)

Other Financial Data:
Depreciation and amortization expense .... $ 10,834 $ 17,174 $ 15,956 $ 14,484 $ 10,880
Capital expenditures (6) ................. 48,168 17,871 7,431 5,368 5,835
EBITDA (7) ............................... 18,946 24,686 6,162 15,720 18,095
Ratio of earnings to fixed charges (8) ... 1.5x -- -- -- --



10


(1) In January and February 1999, we acquired Mid-City Lithographers, Inc. and
TechniGraphix, Inc., respectively.

(2) Reflects non-cash (gains) and losses on sale of capital assets.

(3) Reflects, in 2000, a charge for closing the operations of TechniGraphix,
Inc. and the Taunton, Massachusetts facility, of which approximately $7.5
million are non-cash expenses, and in 2001, a reversal of part of the
charge due to a negotiated settlement of certain lease obligations.

(4) Reflects a charge for a decrease, under a proposed settlement, of the
amount owed to us by Krause America pursuant to a lawsuit. See Note 8 of
Notes to Consolidated Financial Statements.

(5) Reflects a charge for the cancellation of a lease on the Taunton,
Massachusetts facility. See Note 5 of Notes to Consolidated Financial
Statements.

(6) Includes property and equipment financed through notes, deposits and
capital leases. See Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.

(7) EBITDA represents our net income 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 we assess our
financial performance, and certain covenants in our borrowing agreements
are tied to similar measurements. See Consolidated Statements of Cash
Flows. The table below reflects how we calculate EBITDA.



1998 1999 2000 2001 2002
-------- -------- -------- -------- --------

Pretax income (loss) .................... $ 3,036 $ (5,890) $(22,217) $(10,609) $ (4,910)
Interest expense ........................ 5,076 14,939 12,943 12,374 12,675
Depreciation and amortization expense ... 10,834 15,637 15,436 13,955 10,330
-------------------------------------------------------------------
Total EBITDA ............................ $ 18,946 $ 24,686 $ 6,162 $ 15,720 $ 18,095
===================================================================


(8) 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. For 1999, 2000, 2001 and 2002 the ratio of
earnings to fixed charges was less than one-to-one. The dollar amount by
which the earnings, as defined above, were insufficient to cover fixed
charges was $6.3 million, $22.2 million, $10.6 million and $4.9 million in
the years 1999, 2000, 2001 and 2002, respectively.


11


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
our "Selected Consolidated Financial Data" and the audited Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.

Critical Accounting Policies

The preparation of financial statements requires us to make difficult and
subjective estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We continually re-evaluate our estimates, including those
related to bad debts, inventories, goodwill, income taxes, restructuring,
contingencies and litigation. We base our estimates and judgments on historical
experience and on various other assumptions which we believe are reasonable
under the circumstances and are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:

Revenue Recognition

We recognize revenue upon shipment of our products to or on behalf of our
customers.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments for products
shipped. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances might be required. As of December 2002, our accounts receivable
balance, net of allowances for doubtful accounts and rebates of $1.5 million,
was $18.3 million.

Inventory

Our inventory is stated at the lower of cost or market value, as
determined under the first-in, first-out ("FIFO") method.

Intangible Assets

Our goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible assets acquired. For the years prior to 2002,
we amortized our goodwill over the estimated useful life of the assets to which
it related. Our total goodwill of $13.3 million consists of $4.7 million and
$8.6 million associated with the 1996 and 1999 acquisitions of New England Book
Holding Corporation, and Mid-City Lithographers, Inc., respectively. Effective
January 1, 2002, we adopted the Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") and ceased to
amortize goodwill. We test for impairment to the value of goodwill based on a
comparison of undiscounted cash flow to the recorded value. We test goodwill for
impairment at least annually, but more often when circumstances or events so
dictate. In 2002, we performed the required annual test and determined that
goodwill was not impaired. If actual market conditions deteriorate from those we
projected, or if other events or circumstances occur that would reduce the
recorded value of goodwill below undiscounted cash flow, we might be required to
recognize impairment charges to our goodwill. In


12


2000, we closed our TechniGraphix, Inc. subsidiary and, accordingly, took a
charge to earnings equal to the unamortized cost of acquired goodwill.

Long Lived Assets

We evaluate quarterly the carrying value of property, equipment and
tangible assets for impairment. We consider our historical performance and
anticipated future results by evaluating the carrying value of the assets in
relation to the operating performance of the business and future undiscounted
cash flows expected to result from the use of these assets. We recognize an
impairment loss on assets when the value of the assets is less than the sum of
the expected cash flows from those assets.

Restructuring

As part of our restructuring costs, we provided for the estimated cost of
the net lease expense for facilities that are no longer being used. The cost is
based on the contractual future minimum lease payments reduced by estimated
future sublease receipts. At the end of 2002, our accrued restructuring
liability related to net lease payments and other related charges was $2.6
million. We may incur additional restructuring charges if market conditions are
less favorable than we originally projected.

Deferred Tax Valuation Allowance

As of December 31, 2002, we recorded a valuation allowance of $5.7 million
against our total deferred tax assets of $12.4 million. Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109") requires us to evaluate the likely
realization of the tax asset, and if evidence exists that would create doubt as
to the realization of the tax asset, to provide an allowance against it. Our
results over the past three years created a large cumulative loss and
represented sufficient negative evidence to require us to provide for a
valuation allowance against the tax asset. We intend to maintain this valuation
allowance until such time as sufficient positive evidence exists to support its
reversal.


13


Results of Operations

The following table sets forth for the periods indicated, certain
information derived from our Consolidated Statements of Operations:



Years Ended December 31,
-------------------------------------------------
(dollars in thousands)
-------------------------------------------------
2000 2001 2002
-------------- --------------- ---------------
$ % $ % $ %
------- ----- ------- ----- ------- -----

Sales ................................ 150,758 100.0 132,260 100.0 137,961 100.0
Cost of sales ........................ 121,742 80.8 107,590 81.3 107,556 78.0
Gross profit ......................... 29,016 19.2 24,670 18.7 30,405 22.0

Operating Expenses:
Selling and marketing expenses ....... 6,840 4.5 7,721 5.8 7,652 5.5
General and administrative expenses... 17,511 11.6 15,619 11.8 12,172 8.8
Loss (gain) on sale of assets ........ 2,630 1.7 122 0.1 (33) --
Restructuring charge ................. 11,425 7.6 (304) -0.2 -- --
Impairment charge..................... -- -- -- -- 745 0.5
Lease termination charge.............. -- -- -- -- 1,760 1.3
Total operating expenses ............. 38,406 25.4 23,158 17.5 22,296 16.1
Income (loss) from operations ........ (9,390) -6.2 1,512 1.2 8,109 5.9
Interest expense ..................... 12,943 8.6 12,374 9.4 12,675 9.2
Other( income) expense................ (116) -0.1 (253) -0.2 344 0.2
Loss before income taxes ............. (22,217) -14.7 (10,609) 8.0 (4,910) -3.5
Income tax (benefit) provision ....... (7,055) -4.7 4,400 3.3 (3,269) -2.4
Net loss ............................. (15,162) -10.0 (15,009) 11.3 (1,641) -1.1


Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Sales increased $5.7 million or 4.3% to $138.0 million for the year ended
December 31, 2002, from $132.3 million for the same period in 2001. This
increase was primarily the result of an increase in the volume of sales of
complete books manufactured in Rockaway, New Jersey and Hagerstown, Maryland.
Sales of complete books increased $5.3 million or 11.7% to $50.7 million for the
year ended December 31, 2002, from $45.4 million for the same period in 2001.

Gross profit increased $5.7 million or 23.1% to $30.4 million for the year
ended December 31, 2002, from $24.7 million for the same period in 2001, and the
gross profit margin increased to 22.0% for the year ended December 31, 2002,
from 18.7% for the same period in 2001. The increase in the gross profit margin
was primarily attributable to increased sales combined with reductions in labor
and materials as a percentage of sales to 52.6% for the year ended December 31,
2002, from 54.3% for the same period in 2001.

Operating expenses decreased $900,000 or 3.9% to $22.3 million for the
year ended December 31, 2002, from $23.2 million for the same period in 2001.
Selling, general and administrative expenses decreased $3.5 million or 15.0% to
$19.8 million for the year ended December 31, 2002, from $23.3 million for the
same period in 2001, which is primarily attributable to reductions in
administrative


14


compensation, telephone costs and the elimination of amortization of goodwill of
$2.7 million in accordance with Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets", which we adopted January 1, 2002. In
2002, we also incurred a non-cash charge of $745,000 for the write down of our
receivable relating to our lawsuit with Krause America, and a lease termination
charge of $1.8 million for cancellation of our lease at our Taunton,
Massachusetts facility. Had such expenses not been incurred, the total decrease
in recurring operating expenses would have been $3.5 million.

Interest expense increased $300,000 or 2.4% to $12.7 million for the year
ended December 31, 2002, from $12.4 million for the same period in 2001. The
increase was the result of larger average outstanding debt under the revolving
line of credit at the beginning of the fiscal year and additional debt for
equipment acquisitions in the second half of the year.

For the year ended December 31, 2002, we recorded a tax benefit of $3.3
million compared to a tax expense of $4.4 million for the same period in 2001.
The effective rate for the year ended December 31, 2002, was a benefit of 66.5%
compared to an expense of 41.5% for the same period in 2001. The change in the
effective rate for 2002 compared to the same period in 2001 is due to a decrease
in the valuation allowance in 2002 resulting from the passage of the Jobs
Creation and Workers Assistance Act in March 2002. The expense in 2001 was due
to the recognition of a valuation allowance against our deferred tax assets due
to the uncertainty of the likelihood of the realization of certain of these
assets.

Net loss decreased $13.4 million to a loss of $1.6 million for the year
ended December 31, 2002, from a loss of $15.0 million for the same period in
2001. The decrease was due to the factors described above.

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

Sales decreased $18.5 million or 12.3% to $132.3 million for the year
ended December 31, 2001, from $150.8 million for the same period in 2000. This
decrease was a result of lower sales of book components offset by higher sales
of complete books manufactured in Rockaway, New Jersey and Hagerstown, Maryland.
Sales of complete books increased $11.7 million or 34.7% to $45.4 million for
the year ended December 31, 2001, from $33.7 million for the same period in
2000. The decrease in book components was primarily caused by a contraction in
the publishing industry, particularly in reprints of general interest books, and
was exacerbated by the further contraction of the U.S. economy in general after
the September 11, 2001 terrorist attacks.

Gross profit decreased $4.3 million or 14.8% to $24.7 million for the year
ended December 31, 2001, from $29.0 million for the same period in 2000, and the
gross profit margin decreased to 18.7% for the year ended December 31, 2001,
from 19.2% for the same period in 2000. The decline in gross profit margin was
primarily attributable to lower sales of components without a corresponding
decrease in overhead, and from the continued operating losses at our book
manufacturing facility in Hagerstown, Maryland. The Maryland book manufacturing
facility incurred $28.4 million of costs with offsetting sales of $22.9 million
for the year ending December 31, 2001, compared to $20.0 million of costs with
offsetting sales of $13.4 million for the same period in 2000. We estimate the
Maryland book manufacturing facility has the capacity to produce a sufficient
amount of books to generate $45.0 million in sales with our current equipment.

Operating expenses decreased $15.2 million or 39.6% to $23.2 million for
the year ended December 31, 2001, from $38.4 million for the same period in
2000. This decrease was composed of a reduction in the non-cash losses on the
sale of certain property, plant and equipment; a reversal of part of


15


the restructuring charge associated with the termination of certain operating
leases for equipment; a reduction in general and administrative expenses of $1.9
million, due primarily to staff reductions, and offset by an increase in selling
expenses of $900,000.

Interest expense decreased $500,000 or 3.9% to $12.4 million for the year
ended December 31, 2001, from $12.9 million for the same period in 2000. The
decrease was the result of less average outstanding debt and lower interest
rates during the period.

Our effective tax rate for the year ended December 31, 2001, was a
provision of 41.5% compared to a benefit of 31.8% for the same period in 2000.
The change in the effective rate is primarily attributable to the recognition of
a valuation allowance in 2001 against our deferred tax assets due to the
uncertainty regarding the likelihood of the realization of certain of these
assets.

Net loss decreased $200,000 to a loss of $15.0 million for the year ended
December 31, 2001, from a loss of $15.2 million for the same period in 2000. The
decrease was due to the factors described above.

Liquidity and Capital Resources

Our primary source of liquidity is cash from operations, which increases
and decreases our revolving line of credit, and is supplemented from time to
time by capital leases and notes payable.

In September 1998, we entered into a three year $20.0 million revolving
credit facility with First Union National Bank (the "Senior Credit Facility").
On August 14, 2001, the Senior Credit Facility was amended to extend the
maturity date to August 1, 2004 and provide for an increase in the availability
of funds. As of December 31, 2002, the outstanding aggregate principal of the
Senior Credit Facility was $9.1 million, bearing interest at the rate of 4.6%
per annum, and we had the ability to borrow an additional $9.7 million in
accordance with the terms of our agreement. Our borrowings under the Senior
Credit Facility are collateralized by substantially all of our assets. The
Senior Credit Facility contains limitations on the payment of dividends, the
distribution or redemption of stock, sales of assets and subsidiary stock, and
on additional Phoenix and subsidiary debt, and requires that we maintain a fixed
coverage charge ratio, as defined in the Senior Credit Facility as amended on
August 14, 2001. As of December 31, 2002 and 2001, we were in compliance with
the covenants of the Senior Credit Facility as amended in August 2001.

On February 2, 1999, we issued $105.0 million in 10-3/8% Senior
Subordinated Notes (the "Senior Notes") maturing on February 2, 2009. The
proceeds from the issuance of the Notes were used to repay substantially all of
our existing debt including capital leases, and to invest in our expansion.

We have operating lease arrangements for printing equipment. Rental
expense related to such leases was approximately $5.8 million for 2000, $4.5
million for 2001 and $4.9 million for 2002. The decrease from 2000 to 2001 was
primarily attributed to the closing of TechniGraphix, Inc., our print-on-demand
facility. The increase from 2001 to 2002 was substantially due to the addition
of a new operating lease, offset by the retirement of an existing operating
lease for printing and binding equipment at the Maryland book manufacturing
facility.

Our net cash from operations increased $3.8 million, or 316.7% to $5.0
million for the year ended December 31, 2002, from $1.2 million for the same
period in 2001. Net cash flows from operations decreased by $4.8 million to $1.2
million for the year ended December 31, 2001, from $6.0 million for the year
ended December 31, 2000. The 2002 operating cash flow reflects a loss of $1.6
million increased


16


by $10.0 million of non-cash charges and offset by approximately $3.4 million
attributable to increases in working capital (primarily the paydown of certain
trade payables). The 2001 operating cash flow reflects a loss of $15.0 million
increased by $20.0 million of non-cash charges and offset by $3.8 million
increases in working capital. The 2000 operating cash flows reflects a loss of
$15.2 million increased by $19.2 million of non-cash charges and $2.0 million
decrease in working capital (primarily attributable to the receipt of income tax
refunds).

Our cash used in investing activities was $1.4 million, $4.9 million, and
$5.8 million for the years ended December 31, 2002, 2001, and 2000,
respectively. We invested net cash of $1.4 million for plant and equipment in
2002, compared to $4.9 million in 2001 and $5.8 million in 2000. We invested an
additional $4.3 million in equipment in 2002, which was funded through capital
leases, and accordingly did not require the outlay of funds.

Our cash used in financing activities was $3.6 million, and $0.1 million
for the years ended December 31, 2002 and 2000. Our cash provided by financing
activities was $3.4 million for the year ended 2001.We reduced our debt under
our revolving line of credit in 2002 by $3.3 million compared to an increase of
$3.7 million for the year 2001.

The following is a summary of our future payments under contractual
obligations as of December 31, 2002. In the event of a default, many of the
contracts provide for acceleration of payments.



Payments Due by Period
(in thousands of dollars)
----------------------------------------------------------------
Less
than 1-3 4-5 After
Contractual Obligations Total 1 year years Years 5 years
-------- -------- -------- -------- --------

Long-Term Debt (1) ..................... $105,955 $ 546 $ 409 $ -- $105,000
Capital Lease Obligations .............. 4,683 1,013 2,026 1,644 --
Operating Leases ....................... 31,311 6,532 12,927 10,667 1,185
Unconditional Purchase Obligations ..... -- -- -- -- --
Other Long-Term Obligations ............ -- -- -- -- --
----------------------------------------------------------------
Total Contractual Cash Obligations ..... $141,949 $8,091 $15,362 $12,311 $106,185
================================================================


The following is a summary of our other commercial commitments by
commitment expiration date as of December 31, 2002:



Amount of Commitment Expiration Per Period
(in thousands of dollars)
------------------------------------------------------------
Less
than 1-3 4-5 After 5
Other Commercial Commitments Total 1 year Years years years
------- -------- ------- ------- -------

Lines of Credit ........................ $20,000 $ -- $20,000 $ -- $ --
Standby Letter of Credit ............... -- -- -- -- --
Guarantees ............................. -- -- -- -- --
Standby Repurchase Obligations ......... -- -- -- -- --
Other Commercial Commitments ........... -- -- -- -- --
------- -------- ------- ------- -------
Total Commercial Commitments ........... $20,000 $ -- $20,000 $ -- $ --
======= ======== ======= ======= =======



17


(1) The amounts stated are the expected amounts of Phoenix's commitments under
the 10-3/8% Senior Subordinated Notes and assumes that no notes are
tendered.

Capital expenditures totaled $6.8 million for 2000, $5.3 million for 2001
and $5.8 million for 2002, of which $4.3 million was financed through a capital
lease. We have traditionally invested in facilities and equipment to increase
capacity, improve efficiency, maintain high levels of productivity and meet
customer needs. Our primary capital expenditures have been for prepress,
pressroom and finishing equipment and plant construction.

We currently estimate our capital expenditures for 2003 will total
approximately $2.5 million. The capital expenditures are principally for the
replacement of existing equipment including printing presses, finishing
equipment and prepress equipment. We believe that in 2003 funds generated from
operations and funds available under the Senior Credit Facility ($9.7 million as
of December 31, 2002) will be sufficient to complete our budgeted capital
expenditures and service our debt. Net income from operations (after adjusting
for non-cash expenses for depreciation, amortization, lease termination costs,
impairment charges and restructuring charges) was $14.0 million, $16.0 million
and $21.5 million for the years ended December 31, 2000, 2001 and 2002,
respectively. Should we fail to achieve results in 2003 equal at least to the
year 2002, or should a decrease in demand for our products, or inability to
reduce costs, adversely affect the availability of funds, such decrease in the
availability of funds could have a material adverse effect on our business
prospects or results of operations. As of December 31, 2002, we had not met the
required consolidated coverage ratio under the Senior Notes and therefore, we
are unable to incur more than $5 million of additional new indebtedness for
capital expenditures until we attain the consolidated coverage ratio as defined
in the Senior Note agreement. As of December 31, 2002, we have used $4.6 million
of the $5 million available for equipment indebtedness pursuant to the Senior
Note.

Issued But Not Yet Effective Accounting Standards

The following is a discussion of recently issued accounting standards that
the Company will be required to adopt in a future period.

Accounting for Costs Associated with Exit or Disposal Activities - In June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." This statement will become effective for exit or
disposal activities initiated after December 31, 2002. Under current accounting
rules, a liability for exit costs is recognized on the date on which management
of the corporation commits to a defined exit plan. A fundamental conclusion
reached by the FSAB in SFAS No. 146 is that management's commitment to a defined
exit plan does not create a present obligation to others that meets the
definition of a liability. The recognition of obligations for employee severance
and the exit of contractual obligations such as leases will be recognized when a
defined event leaves the corporation with little or no discretion as to its
completion. These defined events include the exit of a leased facility, the
contractual termination of an agreement and notifying an employee of the
termination within a period of time that is generally no longer than 60 days in
advance of their exit date. As a result, the period in which these events are
recognized will change. We do not believe that the application of SFAS No. 146
will have a material impact on the consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to


18


recognize, at the inception of the guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements for periods ending after
December 15, 2002. We do not guarantee any obligations of third parties; however
our restricted subsidiaries jointly and severally, fully and unconditionally
guarantee our senior subordinated debt obligations (See Note 5 to the
consolidated financial statements). We do not believe that the application of
FASB Interpretation No. 45 will have a material impact on the consolidated
financial statements

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe our current exposure to interest rate changes is immaterial
because approximately 92% of our debt bears a fixed rate of interest. However,
if the ratio of debt with fixed interest were to materially decline or interest
rates were to materially increase it could have a material adverse effect on our
business and results of operations.

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-23 and S-1 and S-2.

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
three years.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our Board of Directors is composed of seven members, of which there are
now five incumbents and two vacancies. Directors generally serve for one-year
terms and until their successors are duly elected and qualified.

The following table sets forth certain information regarding our current
directors and executive officers:



Directors and Executive Officers Age Positions
- -------------------------------- --- ---------

Louis LaSorsa.................... 56 Chairman, Chief Executive Officer and Director
Edward Lieberman................. 60 Executive Vice President, Chief Financial Officer, Secretary and Director
John Carbone..................... 44 Executive Vice President, Chief Operating Officer Book Components, and
Director
David Rubin...................... 46 Director
Thomas Newell.................... 59 Chief Information Officer
Earl S. Wellschlager............. 55 Director



19


Louis LaSorsa has been with us since our inception in 1979, when he became Vice
President, Sales and Marketing. Mr. LaSorsa has been President of Phoenix since
1982, was elected Chairman and Chief Executive Officer in 1996, and is involved
in the management of all areas of our operations, planning and growth.

Edward Lieberman joined us 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.

John Carbone joined us in 1981, has been Executive Vice President, Chief
Operating Officer Book Components since February 2001. Prior to becoming
Executive Vice President and Chief Operating Officer Book Components, Mr.
Carbone held the positions of Vice President of Manufacturing/Hagerstown, Vice
President of Operations/New York, and Vice President of Sales.

David Rubin was elected a director of Phoenix 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. In February 2003, Mr. Rubin joined Videre
Consulting, LLP, as a principal.

Thomas Newell has been Chief Information Officer since May 1988 and is
responsible for developing, implementing and managing our digital communications
and information network.

Earl S. Wellschlager has served as a director of Phoenix since March, 2000. Mr.
Wellschlager has a business law practice, including significant experience with
closely held companies and shareholder dispute resolution. He currently serves
as outside or United States counsel to approximately twenty domestic and foreign
companies, both publicly and privately held.

Directors Compensation

Our directors who are also employees of Phoenix do not receive additional
compensation for their services as directors. Our non-employee directors receive
annual director compensation of $10,000 cash.

Committees of the Board of Directors

We have an audit committee consisting of our outside directors, Earl. S.
Wellschlager and David Rubin, each of whom are senior principals in their
respective companies, each of which provide services to us.

We have a compensation committee consisting of our outside directors, Earl
S. Wellschlager and David Rubin, each of whom are senior principals in their
respective companies, each of which provide services to us.

We have a disclosure committee consisting of our outside directors, Earl.
S. Wellschlager and David Rubin, and Edward Lieberman, Executive Vice President
and Chief Financial Officer.


20


ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to us in all capacities during the three years ended
December 31, 2002 for the Chief Executive Officer and the three other most
highly compensated executive officers of Phoenix, including both fixed salary
compensation and discretionary management incentive compensation ("Bonus").

Summary Compensation Table

Annual Compensation


Other Annual
Name and Principal Position Year Salary Bonus Compensation (1)
--------------------------- ---- -------- ------- ---------------

Louis LaSorsa ............. 2002 $506,586 $435,966 $ 3,479
Chief Executive Officer 2001 554,163 439,330 --
2000 541,423 451,540 --
Edward Lieberman .......... 2002 353,054 247,826 3,479
Chief Financial Officer 2001 368,457 219,665 --
2000 368,457 230,770 --
Mitchell Weiss ............ 2002 255,448 -- 3,479
Vice President 2001 193,234 131,799 --
2000 190,565 115,385 --
John Carbone .............. 2002 259,283 243,336 3,479
Vice President 2001 272,626 219,665 --
2000 273,447 230,770 --


(1) Represents amounts allocated under the Employee Stock Bonus and Ownership
Plan and for 2002 represents estimated amounts allocated under the
Employee Stock Bonus and Ownership Plan.

No information is presented for options, restricted stock awards, long
term incentive or other compensation because no such compensation has been
awarded. We have not granted any options or stock appreciation right in the last
fiscal year or otherwise.

Employment Contracts, Termination of Employment and Change of Control
Arrangements

On August 16, 2002, Phoenix entered into individual employment agreements
(the "Executive Employment Agreements") with each of Messrs. LaSorsa, Lieberman
and Carbone (collectively, the "Executives"). The Executive Employment
Agreements have an initial term of October 1, 2002 through September 30, 2004
and will automatically continue after the initial term for successive one-year
terms, unless terminated by either party by sixty (60) days prior written
notice. In addition to the base salary amounts described below, the Executive
Employment Agreements provide that the Executives are entitled to participate in
any bonus and stock option plans, programs, arrangements and practices as may be
established from time to time by our Board of Directors. Each of the Executive
Employment Agreements also provides that the Executives are entitled to certain
fringe benefits, including the use of a Phoenix automobile.

The Executive Employment Agreement with Mr. LaSorsa provides that he shall
serve as our Chairman of the Board of Directors, Chief Executive Officer and
President and be paid an annual base salary of $494,000, subject to any
increases that may be determined by our Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Lieberman provides that he
shall


21


serve as our Executive Vice President, Chief Financial Officer, and Secretary
and be paid an annual base salary of $393,500, subject to any increases that may
be determined by our Board of Directors based on periodic reviews. The Executive
Employment Agreement with Mr. Carbone provides that he shall serve as our
Executive Vice President and Chief Operating Officer/Book Components and be paid
an annual base salary of $253,800, subject to any increases that may be
determined by our Board of Directors based on periodic reviews.

Restrictive Covenants

Each of the Executive Employment Agreements includes a non-competition and
non-solicitation covenant expiring three (3) years after the Executive ceases to
be employed by Phoenix.

Severance

Under the terms of the Executive Employment Agreements, Phoenix must pay
severance as follows:

Nonrenewal

If, upon expiration of its initial term, we terminate the Executive
Employment Agreement of an Executive and do not enter into a new employment
agreement or a consulting agreement with the Executive, then, for a period of
one (1) year, we must pay the Executive an amount equal to his annual base
salary and provide the Executive with benefits.

Termination of the Executive's Employment

If we terminate an Executive's employment without cause or materially
reduce an Executive's duties or compensation or relocate him outside of a
specified geographic area, then, for the greater of (i) one (1) year or the (ii)
the remainder of the term of the Executive Employment Agreement, we must pay the
Executive his annual base salary and provide the Executive with benefits.

Termination of the Executive's Employment Upon a Change of Control

If, within six (6) months following certain change of control events, we
terminate an Executive's employment with or without cause or materially reduce
an Executive's duties or compensation or relocate him outside of a specified
geographic area, we must (i) pay the Executive an amount equal to 2.9 times his
annual compensation and (ii) provide the Executive with benefits for three (3)
years. If the Internal Revenue Code would impose excise taxes on any portion of
these payments, the severance payments shall be reduced to an amount that will
not result in the imposition of such taxes.

In addition, prior to the occurrence of certain change of control events,
Phoenix must implement a supplemental executive retirement plan that provides
for a payment to each of the Executives, upon a change of control transaction
involving net proceeds, (after the repayment of debt), of at least $40 million,
to or available for distribution to stockholders, a lump sum that may not be
less than the actuarial equivalent of ten (10) times thirty-two and one-half
percent (32.5%) of the Executive's average annual compensation.


22


Employee Stock Bonus and Ownership Plan

Our 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 contributions
by us to the Stock Bonus Plan are discretionary, and have been made in the form
of our 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. Our
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 our Class B Common Stock as of December 31, 2002. The
Class B Common Stock is non-voting stock. See "Security Ownership of Certain
Beneficial Owners and Management."

LONG-TERM INCENTIVE PLANS--AWARDS
IN LAST FISCAL YEAR


Number of Shares, Units Performance Or other Period
Name or Other Rights (1), (2) Until Maturation or Payout
---- ------------------------ ---------------------------

Louis LaSorsa.................. $3,479 (3)

Edward Lieberman............... 3,479 (3)

Mitchell Weiss................. 3,479 (3)

John Carbone................... 3,479 (3)


(1) All shares awarded to participants under the Employee Stock Bonus and
Ownership Plan (the "Stock Bonus Plan") during the fiscal year ended
December 31, 2002 or otherwise are shares of Class B Common Stock of
Phoenix Color. Contributions of cash or stock by Phoenix to the Stock
Bonus Plan are allocated among all participants based on the proportion to
which each participant's eligible compensation bears to the total
compensation of all participants. Participants become vested in the
contributions to the Stock Bonus Plan in equal installments over a
six-year period of continuing service. For more information, see
"Executive Compensation--Employee Stock Bonus and Ownership Plan."

(2) The Stock Bonus Plan does not provide for threshold or maximum payouts (or
equivalent items) for participants.

(3) Each participant in the Stock Bonus Plan becomes eligible to receive a
payout of the vested portion of his or her account upon termination of the
participant's employment with Phoenix. A participant is deemed retired
under the terms of the Stock Bonus Plan and to become eligible to receive
a payout of his or her benefits upon (a) reaching age 55 or (b)
participating in the Stock Bonus Plan for six years, whichever is later. A
participant may defer his or her benefit payments under the Stock Bonus
Plan by electing to continue his or her participation beyond the deemed
retirement date. No participant may participate in the Stock Bonus Plan,
however, unless he or she is employed by Phoenix. Benefits under the Stock
Bonus Plan are paid in either shares of stock or one or more cash
payments, whichever the participant elects to receive.


23


COMPENSATION COMMITTEE REPORT ON EXECUTIVE OFFICER COMPENSATION

Objectives

Our compensation policies and procedures have historically been aligned
with Phoenix's entrepreneurial traditions. We seek to compensate our officers
(including the Named Executive Officers) in a manner which:

(i) is consistent with our traditions;

(ii) is sufficient to attract and retain key executives critical to our
success;

(iii) reflects performance of both the individual officer and Phoenix; and

(iv) results in successful long-term strategic management and enhancement
of shareholder value.

Components of Compensation

The Compensation Committee (the "Committee") assesses the effectiveness
of, and administers our executive compensation programs in support of,
stockholder and bondholder interests. The key elements of our executive
compensation program are base salary and annual incentives. Recently, we adopted
the Phoenix 2002 Stock Option Plan and entered into executive employment
agreements with certain executives. Prior to the effective date of the executive
employment agreements, the executives who are parties to such agreements were
not subject to noncompete agreements with Phoenix, which the Committee viewed as
material to Phoenix's interests. The executive employment agreements include
noncompetition and nonsolicitation provisions. They also require Phoenix to
adopt, prior to the occurrence of a change of control, a supplemental employee
retirement plan. These key elements are addressed separately below. In
determining each component of compensation, the Committee considers all elements
of an executive's total compensation package. In 2002, the Committee considered
an opinion of an independent outside compensation consultant in evaluating the
compensation levels of members of management. The Committee determined that base
salary and bonus for members of management should not be increased and instead
decided to tie any increases in compensation to Phoenix's performance and
increases in shareholder and bondholder value.

Base Salary

The Committee regularly reviews each executive's base salary. We do not
necessarily compare our executives' base salaries to those of executives at
other institutions, although market rates for comparable executives with
comparable responsibilities are considered in some cases. The Committee adjusts
base salaries to recognize varying levels of responsibility, experience, breadth
of knowledge, internal equity issues, as well as external pay practices.
Increases to base salaries are driven primarily by individual performance.
Individual performance is evaluated based on sustained levels of individual
contribution to Phoenix.

Annual Incentives

The annual incentive program promotes our pay-for-performance philosophy
by providing the Chief Executive Officer and other named Executive Officers with
direct financial incentives in the form of annual cash bonuses to achieve
corporate and, in some cases, individual performance goals. Annual bonus


24


opportunities allow us to communicate specific goals that are of primary
importance during the coming year and motivate executives to achieve these
goals.

Long-Term Incentives

In keeping with Phoenix's commitment to provide a total compensation
package that includes at-risk components of pay, the Committee recently approved
the Phoenix 2002 Stock Incentive Plan. Although the Committee has not yet
granted any options under the plan, it has authorized options to acquire 2,835
shares under the plan. When awarding long-term grants, the Committee intends to
consider an executive's level of responsibility, prior compensation experience,
historical award data, and individual performance criteria.

The Committee intends to grant options at an exercise price equal to the
fair market value of the Common Stock on the date of grant. Accordingly, stock
options will have value only if the stock price appreciates. This design focuses
executives on the creation of enhanced shareholder value over the long term.

Supplemental Employee Retirement Plan

Also in keeping with Phoenix's commitment to provide a total compensation
package that includes at-risk components of pay, the Committee committed, in the
executive employment agreements, to implement, prior to the occurrence of
certain change of control events, a supplemental executive retirement plan that
provides for a payment to each of the executives who are party to executive
employment agreements with Phoenix, upon a change of control transaction
involving net proceeds, to, or available for distribution to shareholders,
(after repayment of debt), of at least $40 million, a lump sum that may not be
less than the actuarial equivalent of ten (10) times thirty-two and one-half
percent (32.5%) of the executive's average annual compensation.

Conclusion

The Committee believes these executive compensation policies and programs
serve the interests of Phoenix effectively. The various compensation vehicles
offered are balanced between current cash compensation and compensation keyed
to, and contingent upon, realization of stockholder and bondholder value,
thereby providing increased motivation for executives to contribute to Phoenix's
overall future success.

We will continue to monitor the effectiveness of the Phoenix's total
compensation program to meet the current and future needs of Phoenix.

Members of the Compensation Committee:

David Rubin and Earl S. Wellschlager.


25


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SECURITIES MATTERS.

EQUITY COMPENSATION PLANS

The following table summarizes share and exercise price information about
our equity compensation plans as of December 31, 2002.



Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding securities
outstanding options, options, warrants, reflected
Plan Category warrants and other rights and rights in column (a))
------------- ------------------------- ------------------ --------------------
(a) (b) (c)

Equity compensation plans
approved by security holders -- -- --

Equity compensation plans
not approved by security holders -- -- 2,835


The following table sets forth information with respect to the beneficial
ownership of our Class A and Class B Common Stock as of March 15, 2003 by (i)
each person known by us to own beneficially more than five percent of the
outstanding Class A Common Stock and Class B Common Stock, (ii) each of our
directors, (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. Our 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 our capital stock
are not required to file beneficial ownership reports with the Securities and
Exchange Commission.



Class Class
A(1) % B(2) % Total %
----- ---- ----- ----- ----- ----

Louis LaSorsa ............................................... 1,000 9.0 597 7.7 1,597 8.5
Edward Lieberman ............................................ 1,000 9.0 418 5.4 1,418 7.5
John Biancolli .............................................. 1,000 9.0 223 2.9 1,223 6.5
John Carbone ................................................ 1,000 9.0 217 2.8 1,217 6.4
Thomas Newell ............................................... 1,000 9.0 148 1.9 1,148 6.1
Mitchell Weiss .............................................. 1,000 9.0 116 1.5 1,116 5.9
Dion von der Lieth .......................................... 1,000 9.0 48 0.6 1,048 5.5
Henry Burk .................................................. 1,000 9.0 -- -- 1,000 5.3
Ronald Burk ................................................. 1,000 9.0 -- -- 1,000 5.3
Anthony DiMartino ........................................... 1,000 9.0 452 5.8 1,452 7.7
Bruno Jung .................................................. 1,000 9.0 321 4.1 1,321 7.0
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 (7
persons) ................................................. 5,000 45.0 1,496 19.2 6,496 34.4



26


(1) All Class A voting shares are held directly by the named individuals.

(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.

(3) See "Directors and Executive Officers of the Registrant Employee Stock
Bonus and Ownership Plan."

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 our Senior Credit Facility with
First Union National Bank, all of our 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 our stock were pledged as
security for our 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 our shareholders, see
"Security Ownership of Certain Beneficial Owners and Management."

Earl S. Wellschlager, director of the Company, is a partner in a law firm
that serves as counsel to the Company. The Company paid the law firm
approximately $320,000, $610,000 and $694,000 for the years ended December 31,
2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, no amounts
were owed to the law firm.

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 $289,000, $143,000, and $7,000 for the years ended December
31, 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, $24,264
and $22,866, respectively, is owed to the consulting firm and is included in
accounts payable.

The Company utilizes the services of a prepress systems integration firm
of which Edward Lieberman and Louis LaSorsa each own 6.7%. The Company paid the
firm approximately $541,000, $501,000 and $465,000 for the years ended December
31, 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, $25,904
and $8,000, respectively, is owed to the systems integration firm and is
included in accounts payable.

Item 14. Controls and Procedures.

Within the 90 days prior to the date of this report, Phoenix carried out
an evaluation under the supervision and with the participation of Phoenix's
management, including Phoenix's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Phoenix's
disclosure controls and procedures pursuant to Rule 15d-14 under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that Phoenix's
disclosure controls and procedures are adequate to ensure that material
information relating to Phoenix required to be included in Phoenix's periodic
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in


27


Phoenix's internal controls or in other factors that could significantly affect
Phoenix' controls subsequent to the date of that evaluation and no corrective
actions with regard to significant deficiencies and material weaknesses.

ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees.

The principal accountant billed us an aggregate of $155,303 for 2001 and
$151,562 for 2002 for professional services rendered by the principal accountant
for the audit of our annual financial statements and review of our financial
statements included in our Quarterly Reports on Form 10-Q and Annual Report on
Form 10-K or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for such years.

Audit-Related Fees.

In addition to the amounts disclosed above, the principal accountant
billed us an aggregate of $113,979 for 2001 and $91,500 for 2002 for assurance
and related services by the principal accountant that are reasonably related to
the performance of the audit or review of our financial statements. Audit
services include the testing of our books and records so our accountants can
form an opinion that there are no material misstatements in the financial
statements and that both the annual and quarterly interim financial statements
have been prepared in accordance with generally accepted accounting principles.

Tax Fees.

The principal accountant billed us an aggregate of $34,806 for 2001 and
$54,762 for 2002 for professional services rendered by the principal accountant
for tax return preparation, tax advice related thereto and representation before
the Internal Revenue Service.

All Other Fees.

In addition to the amounts disclosed above, the principal accountant
billed us an aggregate of $6,815 for 2001 and $5,300 for 2002 for products and
services provided by the principal accountant for the evaluation and
implementation of new accounting software.

Audit Committee Pre-Approval.

Our Audit Committee pre-approved our engagement of our principal
accountant to provide the audit, audit-related and tax services described above,
which represented 95.6% and 96.5%, of the total fees we paid our principal
accountant in 2001 and 2002, respectively. Our principal accountant performed
all work only with its full time permanent employees.


28


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:

(a)(1) The following consolidated financial statements of Phoenix are included
in Item 8 of the Form 10-K:

Index to Financial Statements.

Report of Independent Accountants.

Consolidated Balance Sheets at December 31, 2001 and December 31, 2002.

Consolidated Statements of Operations as of December 31, 2000, December
31, 2001 and December 31, 2002.

Consolidated Statements of Changes in Stockholders' Equity as of
December 31, 2000, December 31, 2001 and December 31, 2002.

Consolidated Statements of Cash Flows as of December 31, 2000, December
31, 2001 and December 31, 2002.

Notes to Consolidated Financial Statements.

(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.

(3) See Item 15(c) of this Form 10-K

(4) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, for the period ended December 31, 2002.

(5) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, for the period ended December 31, 2002.

(b) Reports on Form 8-K.

We filed no reports on Form 8-K during the fourth quarter of our fiscal
year ended December 31, 2002.

(c) Exhibits.


29


Exhibit
Number Description
- ------ -----------

2.1 Acquisition Agreement dated as of November 30, 1998 among Phoenix, Carl
E. Carlson, Wayne L. Sorensen, Donald Davis, Margaret Davis and Viking
Leasing Partnership (schedules and exhibits omitted). (2)

2.2 Acquisition Agreement dated as of February 3, 1999 among Phoenix,
TechniGraphix, Inc., Debra A. Barry and Jack L. Tiner (schedules and
exhibits omitted). (2)

2.3 Stock Purchase Agreement dated as of December 27, 1995 among Phoenix
and various stockholders of New England Book Holding Corporation. (1)

2.4 Plan and Agreement of Merger of Phoenix Corp. (New York) into Phoenix
Merger Corp. (Delaware). (1)

3.1 Certificate of Incorporation of Phoenix. (1)

3.2 By-Laws of Phoenix. (1)

4.1 Note Purchase Agreement dated January 28, 1999 among Phoenix, the
Guarantors and the Initial Purchasers. (2)

4.2 Indenture dated as of February 2, 1999 among Phoenix, the Guarantors
and Chase Manhattan Trust Company, National Association, Trustee. (2)

4.3 Registration Rights Agreement dated as of February 2, 1999 among
Phoenix, the Guarantors and the Initial Purchasers. (2)

4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2). (2)

4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit
4.2). (2)

4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2).
(2)

4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit
4.2). (2)

10.1 Employment Agreement dated as of February 12, 1999 between Phoenix and
Jack L. Tiner. (2)

10.4(a) Credit Agreement dated as of September 15, 1998 among Phoenix, the
Guarantors and First Union National Bank as Agent, as Issuer and as
Lender (schedules omitted). (2)

10.4(b) First Amendment to Credit Agreement dated as of March 31, 1999 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (4)

10.4(c) Second Amendment to Credit Agreement dated as of March 23, 2000 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (4)

10.4(d) Third Amendment to Credit Agreement dated as of November 13, 2000 by
and among Phoenix Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. (5)

10.4(e) Fourth Amendment to Credit Agreement dated as of March 30, 2001 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (6)

10.4(f) Fifth Amendment to Credit Agreement dated as of August 13, 2001 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (7)

10.4(g) Sixth Amendment to Credit Agreement dated as of December 26, 2001 by
and among Phoenix Corp. and its subsidiaries, and the lenders
referenced therein and First Union National Bank as issuer of letters
of credit and agent. (8)


30


10.4(h) Seventh Amendment to Credit Agreement dated as of March 15, 2002 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (8)

10.4(i) Eighth Amendment to Credit Agreement dated as of May 13, 2002 by and
among Phoenix Corp. and its subsidiaries, and the lenders referenced
therein and First Union National Bank as issuer of letters of credit
and agent. (9)

10.5 Revolving Credit Note dated as of September 15, 1998 executed by
Phoenix and the Guarantors. (2)

10.6 Master Security Agreement dated as of September 15, 1998 among Phoenix,
the Guarantors and First Union National Bank as Collateral Agent
(schedules omitted). (3)

10.7 Master Pledge Agreement dated as of September 15, 1998 executed by the
stockholders of Phoenix in favor of First Union National Bank, as
Collateral Agent (schedules omitted). (2)

10.8 Subsidiary Pledge Agreement dated as of September 15, 1998 executed by
Phoenix (schedules omitted). (2)

10.10 Lease Agreement dated as of March 20, 1998 between Phoenix and Maurice
M. Weill, Trustee Under Indenture Dated December 6, 1984 for the
facility located at 40 Green Pond Road, Rockaway, NJ 07866. (2)

10.11 Lease Agreement dated as of March 31, 1997 between Phoenix and
Constitution Realty Company, LLC for the facility located at 555
Constitution Drive, Taunton, MA 02780. (2)

10.12 Lease Agreement dated as of December 19, 1996 between Phoenix and CMC
Factory Holding Company, L.L.C. for the facility located at 47-07 30th
Place, Long Island City, NY 11101. (2)

10.13 Executive Employment Agreement by and between Phoenix Corp. and John
Carbone dated August 16, 2002 (10).

10.14 Executive Employment Agreement by and between Phoenix Corp. and Louis
LaSorsa dated August 16, 2002. (10)

10.15 Executive Employment Agreement by and between Phoenix Corp. and Edward
Lieberman dated August 16, 2002. (10)

10.16 Phoenix Corp. 2002 Stock Incentive Plan. (10)

99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. for the period ended December 31, 2002.

99.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002., for the period ended December 31, 2002.

(1) Incorporated by reference to Phoenix's Registration Statement on Form
S-1 (SEC File No. 333-50995), filed on April 24, 1998.

(2) Incorporated by reference to Phoenix's Amendment No. 1 on Form S-4 to
Registration Statement on Form S-1 (SEC File No. 333-50995), filed on
March 8, 1999.

(3) Incorporated by reference to Phoenix's Amendment No. 2 on Form S-4 to
Registration Statement on Form S-1 (SEC File No. 333-50995), filed on
May 5, 1999.

(4) Incorporated by reference in Phoenix's 1999 Annual Report on Form 10-K
filed on March 29, 2000. (SEC File. No. 333-50995).

(5) Incorporated by reference in Phoenix's Quarterly Report on Form 10-Q
filed on November 14, 2000. (SEC File No. 333-50995).

(6) Incorporated by reference in Phoenix's 2000 Annual Report on Form 10-K
filed on April 2, 2001. (SEC File No. 333-50995).


31


(7) Incorporated by reference in Phoenix's Quarterly Report on Form 10-Q
filed on August 14, 2001. (SEC File No. 333-50995).

(8) Incorporated by reference in Phoenix's 2001 Annual Report on Form 10-K
filed on March 26, 2002. (SEC File No. 333-50995).

(9) Incorporated by reference in Phoenix's Quarterly Report on Form 10-Q
filed May 15, 2002 (SEC File No. 333-50995).

(10) Incorporated by reference in Phoenix's Quarterly Report on Form 10-Q
filed November 13, 2002 (SEC File No. 333-50995). --

32


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 26, 2003.

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 has been signed below by the following persons in the
capacities and on the date indicated.




Signature Title Date
- --------- ----- ----

/s/ Louis LaSorsa Chairman, Chief Executive Officer March 26, 2003
- --------------------------- and Director
Louis LaSorsa

/s/ Edward Lieberman Executive Vice President, Chief March 26, 2003
- --------------------------- Financial Officer, Secretary and Director
Edward Lieberman

/s/ John Carbone Executive Vice President, Chief Operating Officer March 26, 2003
- --------------------------- Book Component Manufacturing, and Director
John Carbone

/s/ Earl S. Wellschlager Director March 26, 2003
- ---------------------------
Earl S. Wellschlager

/s/ David Rubin Director March 26, 2003
- ---------------------------
David Rubin



33


CERTIFICATIONS*

I, Louis LaSorsa, certify that:

1. I have reviewed this annual report on Form 10-K of Phoenix Color Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date : March 26, 2003

/s/ Louis LaSorsa
- ---------------------------
Louis LaSorsa, Chairman
and Chief Executive Officer


34


CERTIFICATIONS*

I, Edward Lieberman, certify that:

1. I have reviewed this annual report on Form 10-K of Phoenix Color Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date : March 26, 2003

/s/ Edward Lieberman
- -----------------------------------------
Edward Lieberman, Chief Financial Officer
and Chief Accounting Officer


35


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

We have not provided any of our security holders a proxy statement, form
of proxy or other proxy soliciting material sent to more than ten of our
security holders with respect to any annual or other meeting of our security
holders. As of the date of this Form 10-K, we have not provided to our security
holders an annual report covering our last fiscal year.


36


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 (Deficit)..... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8


F-1


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 (deficit)
and cash flows present fairly, in all material respects, the financial position
of Phoenix Color Corp. and its subsidiaries (the "Company") as of December 31,
2001 and 2002 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.

As disclosed in Note 2, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon the adoption of the accounting
guidance of Statement of Financial Standards No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002.

PricewaterhouseCoopers LLP

Baltimore, Maryland
February 22, 2003


F-2


PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


December 31,
---------------------------------
2001 2002
------------- -------------
ASSETS


Current assets:
Cash and cash equivalents ................................ $ 122,101 $ 109,297
Accounts receivable, net of allowance for doubtful
accounts and rebates of $1,780,704 in 2001 and
$1,524,631 in 2002 ................................... 19,606,187 18,343,018
Inventory ................................................ 6,428,524 6,198,822
Income tax receivable .................................... 748,142 481,138
Prepaid expenses and other current assets ................ 2,600,140 2,645,563
------------- -------------
Total current assets ................................... 29,505,094 27,777,838

Property, plant and equipment, net ............................ 66,794,386 62,254,886
Goodwill ...................................................... 13,302,809 13,302,809
Deferred financing costs, net ................................. 3,434,959 2,885,048
Other assets .................................................. 9,364,936 13,304,922
------------- -------------
Total assets ........................................... $ 122,402,184 $ 119,525,503
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable ............................................ $ 7,418 $ 545,592
Capital lease obligations ................................ -- 725,060
Accounts payable ......................................... 10,884,790 7,344,110
Accrued expenses ......................................... 10,613,097 11,162,492
------------- -------------
Total current liabilities .............................. 21,505,305 19,777,254
10-3/8% Senior subordinated notes ............................. 105,000,000 105,000,000
MICRF Loan .................................................... 500,000 500,000
Notes Payable ................................................. -- 409,194
Capital lease obligations ..................................... -- 3,364,187
Revolving line of credit ...................................... 12,394,941 9,082,100
Deferred income taxes ......................................... 625,457 625,457
------------- -------------
Total liabilities ...................................... 140,025,703 138,758,192
------------- -------------

Commitments and contingencies
Stockholders' deficit
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
Accumulated deficit ...................................... (17,920,245) (19,561,675)
Stock subscriptions receivable ........................... (61,092) (28,832)
Treasury stock, at cost: Class A, 3,460 shares and
Class B, 2,000 shares .................................... (1,769,230) (1,769,230)
------------- -------------
Total stockholders' deficit ............................ (17,623,519) (19,232,689)
------------- -------------
Total liabilities & stockholders' deficit .............. $ 122,402,184 $ 119,525,503
============= =============

The accompanying notes are an integral part of these consolidated financial statements.



F-3


PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS


Year Ended December 31,
-----------------------------------------------------
2000 2001 2002
------------- ------------- -------------

Sales .................................... $ 150,758,425 $ 132,260,064 $ 137,961,176
Cost of sales ............................ 121,742,207 107,589,769 107,556,491
------------- ------------- -------------
Gross profit ............................. 29,016,218 24,670,295 30,404,685
------------- ------------- -------------
Operating expenses:
Selling and marketing expenses ...... 6,839,600 7,721,743 7,651,865
General and administrative
expenses ............................ 17,510,857 15,619,292 12,172,332
Loss (gain) on disposal of assets ... 2,630,285 121,782 (32,918)
Impairment charge ................... -- -- 744,395
Lease termination charge ............ -- -- 1,759,836
Restructuring charge ................ 11,425,000 (303,881) --
------------- ------------- -------------
Total operating expenses ................. 38,405,742 23,158,936 22,295,510
------------- ------------- -------------
Income (loss) from operations ............ (9,389,524) 1,511,359 8,109,175
Other expenses:
Interest expense .................... 12,942,862 12,374,252 12,674,946
Other (income) expense .............. (115,807) (253,693) 344,659
------------- ------------- -------------
Loss before income taxes ................. (22,216,579) (10,609,200) (4,910,430)
Income tax (benefit) provision ........... (7,055,000) 4,399,661 (3,269,000)
------------- ------------- -------------
Net loss ................................. $ (15,161,579) $ (15,008,861) $ (1,641,430)
============= ============= =============

The accompanying notes are an integral part of these consolidated financial statements.



F-4


PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)



Common Stock
---------------------------------
Class A Class B
------------- ---------------
Shares Amount Shares Amount
------ ----- ------ ------

Balance at December 31, 1999 ...... 14,560 $146 9,794 $98
Payment of stock subscription ..... -- -- -- --
Net loss .......................... -- -- -- --
------ ---- ----- ---

Balance at December 31, 2000 ...... 14,560 146 9,794 98
Payment of stock subscription ..... -- -- -- --
Net loss .......................... -- -- -- --
------ ---- ----- ---

Balance at December 31, 2001 ...... 14,560 146 9,794 98
Payment of stock subscription ..... -- -- -- --
Net loss .......................... -- -- -- --
------ ---- ----- ---
Balance at December 31, 2002 ...... 14,560 $146 9,794 $98
====== ==== ===== ===


Retained
Additional Earnings Stock Treasury Stock Total
Paid-in Accumulated Subscription ------------------- Stockholders'
Capital (Deficit) Receivable Shares Amount Equity (Deficit)
---------- ------------ ------------ ------ ----------- ---------------

Balance at December 31, 1999 ...... $2,126,804 $ 12,250,195 $(137,392) 5,460 $(1,769,230) $ 12,470,621
Payment of stock subscription ..... -- -- 37,900 -- -- 37,900
Net loss .......................... -- (15,161,579) -- -- -- (15,161,579)
---------- ------------ --------- ----- ----------- ------------

Balance at December 31, 2000 ...... 2,126,804 (2,911,384) (99,492) 5,460 (1,769,230) (2,653,058)
Payment of stock subscription ..... -- -- 38,400 -- -- 38,400
Net loss .......................... -- (15,008,861) -- -- -- (15,008,861)
---------- ------------ --------- ----- ----------- ------------

Balance at December 31, 2001 ...... 2,126,804 (17,920,245) (61,092) 5,460 (1,769,230) (17,623,519)
Payment of stock subscription ..... -- -- 32,260 -- -- 32,260
Net loss .......................... -- (1,641,430) -- -- -- (1,641,430)
---------- ------------ --------- ----- ----------- ------------
Balance at December 31, 2002 ...... $2,126,804 $(19,561,675) $ (28,832) 5,460 $(1,769,230) $(19,232,689)
========== ============ ========= ===== =========== ============

The accompanying notes are an integral part of these consolidated financial statements.



F-5


PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


Year Ended December 31,
--------------------------------------------------
2000 2001 2002
------------ ------------ ------------

Operating activities:
Net loss ................................................. $(15,161,579) $(15,008,861) $ (1,641,430)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property, plant and
equipment .............................................. 12,510,539 11,274,079 10,330,505
Amortization of goodwill ............................... 2,925,380 2,681,256 --
Amortization of deferred financing costs ............... 520,369 528,701 549,912
Provision for uncollectible accounts ................... 485,000 413,125 485,472
Deferred income taxes .................................. (7,344,934) 5,025,118 (3,269,000)
Lease termination charge ............................... -- -- 1,266,184
Impairment charge ...................................... -- -- 744,395
Restructuring charge ................................... 7,461,307 (303,881) --
Loss (gain) on disposal of assets ...................... 2,630,285 386,179 (32,918)
Increase (decrease) in cash resulting from changes in
assets and liabilities:
Accounts receivable .................................... 403,272 276,700 777,697
Inventory .............................................. (125,769) (926,980) 229,702
Prepaid expenses and other assets ...................... (81,853) (3,416,082) (4,029,431)
Accounts payable ....................................... (3,333,599) 321,027 (4,472,197)
Accrued expenses ....................................... 3,111,219 (138,830) 549,395
Income tax refund receivable ........................... 2,021,518 57,763 3,536,004
------------ ------------ ------------

Net cash provided by operating activities ........... 6,021,155 1,169,314 5,024,290
------------ ------------ ------------
Investing activities:
Proceeds from sale of equipment ........................ 1,059,306 391,500 128,250
Capital expenditures ................................... (6,838,595) (5,294,122) (625,185)
Equipment deposits ..................................... -- 39,656 (876,918)
------------ ------------ ------------
Net cash used in investing activities ............... (5,779,289) (4,862,966) (1,373,853)
------------ ------------ ------------
Financing activities:
Net (payments) proceeds from revolving line of
credit ................................................. (605,011) 3,735,899 (3,312,841)
Proceeds from long term borrowings ..................... 500,000 -- --
Principal payments on long term borrowings and
capital leases ......................................... (77,474) (13,388) (382,660)
Debt financing costs ................................... -- (313,024) --
Payment of stock subscription .......................... 37,900 38,400 32,260
------------ ------------ ------------
Net cash provided by (used in) financing
activities .......................................... (144,585) 3,447,887 (3,663,241)
------------ ------------ ------------
Net (decrease) increase in cash ..................... 97,281 (245,765) (12,804)
Cash and cash equivalents at beginning of year ......... 270,585 367,866 122,101
------------ ------------ ------------
Cash and cash equivalents at end of year ............... $ 367,866 $ 122,101 $ 109,297
============ ============ ============

The accompanying notes are an integral part of these consolidated financial statements.



F-6


PHOENIX COLOR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)


Year Ended December 31,
--------------------------------------------------
2000 2001 2002
------------ ------------ ------------

Supplemental cash flow disclosures:
Cash paid for interest ...................... $ 12,477,684 $ 11,928,179 $ 12,087,426
Cash paid for income taxes, net of
(refunds) received ......................... $ (1,733,468) $ (683,220) $ (3,536,004)
Non-cash investing and financing activities:
Equipment and deposits included in accounts
payable ..................................... $ 592,230 $ 74,109 $ 931,517
Equipment financed through capital lease
obligations .................................. -- -- $ 4,328,091
Notes payable issued in connection with
lease termination ............................ -- -- $ 1,091,184

The accompanying notes are an integral part of these consolidated financial statements.



F-7


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 complete books at its
facilities 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
under the first-in, first-out ("FIFO") method.

Property, Plant and Equipment

Property and equipment are stated at cost. 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.

Periodically, the Company acquires equipment using capital leases to
finance the acquisition. In such instances, the Company capitalizes the
equipment and depreciates it over its useful life.

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


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, approximates 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 are as follows:



Customers
---------------------------------
A B C
-------- --------- --------

Net Sales
2002........... 14% 13% --
2001........... 11% 12% --
2000........... 11% 13% 10%


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.

Goodwill

Goodwill represents the excess of the purchase price over the fair value
of identifiable net tangible assets acquired. Goodwill consists of $4.7 million
associated with the 1996 acquisition of New England Book Holding Corporation and
$8.6 million associated with the 1999 acquisition of Mid-City Lithographers,
Inc., respectively. In 2000, the Company closed its TechniGraphix, Inc.
subsidiary and accordingly charged operations with the unamortized cost of
acquired goodwill (see Note 7).

The Company adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002. Under the provisions of SFAS No. 142,
goodwill is no longer amortized. Prior to the start of 2002, the corporation
followed the provisions of APB Opinion No. 17, which required that goodwill be
amortized by systematic charges to income over the period expected to be
benefited.


F-9


2. Significant Accounting Policies (Continued)

That period ranged from 8 to 20 years. SFAS No. 142 provides that goodwill is no
longer amortized and the value of an identifiable intangible asset must be
amortized over its useful life, unless the asset is determined to have an
indefinite useful life. Goodwill must be tested for impairment as of the
beginning of the fiscal year in which SFAS No 142 is adopted. The Company
annually evaluates the carrying value of goodwill and recognizes impairment
charges as required by SFAS 142. There was no impairment of goodwill upon
adoption of SFAS No. 142.

In order to permit the comparison of net income in 2002 with that of prior
years, the following table presents those amounts adjusted to exclude
amortization expense related to goodwill had SFAS No. 142 been in effect for
2000 and 2001.



Years Ended December 31
--------------------------------------------------
2000 2001 2002
------------ ------------ ------------

Net loss reported ....... ($15,161,579) ($15,008,861) ($ 1,641,430)
Goodwill amortization ... 2,925,380 2,681,256 --
------------ ------------ ------------
Adjusted net loss ....... ($12,236,199) ($12,327,605) ($ 1,641,430)
============ ============ ============


Deferred Financing Costs

Deferred financing costs incurred in connection with the issuance of
10-3/8% Senior Subordinated Notes in February 1999 (see Note 5) 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 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 2000, the Company sold various assets, the carrying value of which
exceeded the sales price, and accordingly the Company recognized a loss of
approximately $2.6 million. In addition, in 2000, the Company restructured its
operations, closing the Taunton, Massachusetts facility, and accordingly,
charged income for the unamortized cost of leasehold improvements (see Note 7).

Revenue Recognition

The Company recognizes revenue on product sales upon shipment on behalf of
or to the customer.


F-10


2. Significant Accounting Policies (Continued)

Shipping and Handling

The Company classifies shipping and handling costs invoiced to the
customer as revenues, and costs incurred relating to shipping and handling as
cost of sales.

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 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.

Guarantees and Indemnifications

In the ordinary course of business, the Company may enter into service
agreements with service providers in which it agrees to indemnify the service
provider against certain losses and liabilities arising from the service
provider's performance under the agreement. Generally, such indemnification
obligations do not apply in situations in which the service provider is grossly
negligent, engages in willful misconduct, or acts in bad faith. The Company was
not aware of any liability under such service agreements for the year ending
December 31, 2002.

Reclassifications

Certain prior year amounts have been reclassified to conform to the
current year presentation.

Issued But Not Yet Effective Accounting Standards

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement will become
effective for exit or disposal activities initiated after December 31, 2002.
Under current accounting rules, a liability for exit costs is recognized on the
date on which management of the corporation commits to a defined exit plan. A
fundamental conclusion reached by the FASB in SFAS No. 146 is that management's
commitment to a defined exit plan does not create a present obligation to others
that meets the definition of a liability. The recognition of obligations for
employee severance and the exit of contractual obligations such as leases will
be recognized when a defined event leaves the corporation with little or no
discretion as to its completion. These defined events include the exit of a
leased facility, the contractual termination of an agreement and notifying an
employee


F-11


2. Significant Accounting Policies (Continued)

of the termination within a period of time that is generally no longer than 60
days in advance of their exit date. As a result, the period in which these
events are recognized will change. The Company does not believe that the
application of SFAS No. 146 will have a material impact on the consolidated
financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This recognition and measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements for periods ending after December 15, 2002. The Company does not
guarantee any obligations of third parties; however the Company's restricted
subsidiaries jointly and severally, fully and unconditionally guarantee the
Company's senior subordinated debt obligations (See Note 5).

3. Inventory

Inventories consist of the following:

December 31,
--------------------------
2001 2002
---------- ----------
Raw Materials ..... $4,002,663 $4,477,238
Work in process ... 2,425,861 1,721,584
---------- ----------
$6,428,524 $6,198,822
========== ==========

4. Property, Plant and Equipment

Property, plant and equipment, at cost, consist of the following:

December 31,
------------------------------
2001 2002
------------ ------------
Land .................................. $ 2,998,006 $ 2,998,006
Buildings and improvements ............ 33,096,264 32,582,868
Machinery and equipment ............... 76,758,359 81,977,170
Transportation equipment .............. 3,384,528 3,361,751
------------ ------------
116,237,157 120,919,795
Less: Accumulated depreciation and
amortization ......................... 49,442,771 58,664,909
------------ ------------
$ 66,794,386 $ 62,254,886
============ ============

Included in other long-term assets are equipment deposits in the amount of
$3,667,416 and $2,988,457 as of December 31, 2001 and 2002, respectively.


F-12


4. Property, Plant and Equipment (Continued)

At December 31, 2002, machinery and equipment under capital leases
included in property plant and equipment totaled $4,328,091 net of $256,503 of
accumulated depreciation.

5. Debt

At December 31, notes payable consisted of the following:

December 31,
Maturity ------------------------------
Notes Date 2001 2002
----- -------- ------------ ------------

Senior Subordinated Notes ..... 2009 $105,000,000 $105,000,000
Revolving Line of Credit ...... 2004 12,394,941 9,082,100
MICRF Loan .................... 2005 500,000 500,000
Equipment and Other Notes ..... 2004 7,418 954,786
------------ ------------
Total .................. 117,902,359 115,536,886
Less current portion ... 7,418 545,592
------------ ------------
Long-term portion ...... $117,894,941 $114,991,294
============ ============

Senior Subordinated Notes

The Company issued $105.0 million of 10-3/8% Senior Subordinated Notes due
2009 ("Senior Notes") under an indenture in a private offering. The Senior Notes
are uncollateralized senior subordinated obligations of the Company with
interest payable semiannually on February 1 and August 1 of each year. Net
proceeds of approximately $101.0 million from the Senior Notes were used to
repay substantially all debt and capital leases existing at the time of their
issuance. 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. 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 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). The Senior Notes
prohibit the Company from incurring more than $5 million of debt for the
acquisition of equipment unless the required consolidated coverage ratio is
achieved. As of December 31, 2002, the Company failed to meet the required
consolidated coverage ratio. The Company has used $4.6 million of the $5 million
of available for equipment indebtedness pursuant to the Senior Note.

MICRF Loan

In May 2000, the Company entered into a five year $500,000 loan agreement
with the Maryland Industrial and Commercial Redevelopment Fund (MICRF) bearing
interest at 4.38% per annum. Pursuant to its terms, if the Company employs 543
people in Maryland in each of the years of the loan, then the loan and all
accrued interest thereon shall be forgiven. If the Company does not meet the
employment requirements, it will be required to repay the loan and accrued
interest thereon in quarterly installments until repaid in full. As of December
31, 2002, the Company employed over 690 people in the State of


F-13


5. Debt (Continued)

Maryland. The Company has included the principal amount of this loan in long
term debt on the consolidated balance sheet at December 31, 2002.

Revolving Line of Credit

In September 1998, the Company entered into an Amended and Restated Loan
Agreement (the "Senior Credit Facility") with a commercial bank for a three year
$20,000,000 revolving credit facility, the proceeds of which were used to repay
the balance of the previous revolving credit facility. Borrowings under the
Senior Credit Facility are subject to a borrowing base and are collateralized by
all of the assets of the Company. On August 14, 2001 the Senior Credit Facility
was amended to extend the maturity date to August 1, 2004 and provide increased
availability by reducing the borrowing base limitation. The Company's
availability under the Senior Credit Facility, as amended, was $9.7 million as
of December 31, 2002.

The Senior Credit Facility 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 but only if the
Company is not in default of any of the covenants of the Senior Credit Facility.
At December 31, 2001 and 2002, the weighted average interest rates on its
borrowings were 6.8% and 4.6%, respectively.

Included in accrued expenses is accrued interest for all Company debt in
the amount of $4,550,833 and $4,554,905 as of December 31, 2001 and 2002,
respectively.

Equipment Capital Leases

In June 2002, the Company entered into a capital lease for the acquisition
of equipment at its book manufacturing facility in Hagerstown, Maryland. The
lease is payable over 60 months in monthly installments of $70,853 including
interest. As part of the capital lease agreement, the Company provided the
lessor with a letter of credit from Wachovia Bank in the amount of $1.6 million,
to be exercised in the event of a default. The Company's borrowing base under
the Senior Credit Facility has been reduced by this outstanding letter of
credit.

In October 2002, the Company entered into a capital lease for the
acquisition of equipment at its book component manufacturing facility in
Hagerstown, Maryland. The lease is payable over 60 months in monthly
installments of $13,539 including interest.

Other Notes

On July 10, 2002, the Company entered into an agreement to terminate the
operating lease for its Taunton, Massachusetts manufacturing facility upon a
subsequent sale of the property, which occurred in September 2002. In June 2002,
the Company accrued a lease termination charge of $1.5 million comprised of a
$1.1 million termination fee, a prepayment penalty of $125,000, a brokerage fee
of $136,000 and forgiveness of an existing Note Receivable of $175,000 due from
the landlord. Under the terms of the agreement, the Company agreed to pay the
landlord the lease termination fee in equal monthly installments of $45,466 over
two years commencing October 2002.


F-14


5. Debt (Continued)

Compliance with Debt Covenants

Prior to August 14, 2001, the Senior Credit Facility contained certain
covenants that required the Company to maintain certain financial and
non-financial covenants, the most restrictive of which required the Company to
maintain certain interest coverage and leverage ratios as defined in the Senior
Credit Facility. On August 14, 2001, the Senior Credit Facility was amended to
require the Company to maintain a fixed coverage charge ratio as defined in the
amendment. As of December 31, 2001 and 2002, the Company was in compliance with
the Senior Credit Facility covenants. As of December 31, 2001 and 2002, however,
the Company was not in compliance with the consolidated coverage ratio under the
Senior Notes and therefore, is unable to incur more than $5 million of
additional new indebtedness (of which $4.6 million was used) until the Company
attains the consolidated coverage ratio as defined in the Indenture relating to
the Senior Notes. The Indenture relating to 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 require the Company to maintain
certain non-financial covenants.

Fair Value

The carrying value of the revolving line of credit, MICRF loan, equipment
and other notes approximated their fair value at December 31, 2002. The fair
value of the Senior Notes at December 31, 2002 was approximately $90,300,000 and
was estimated based on quoted market rate for instruments with similar terms and
remaining maturities.

Debt Maturities

A summary of debt maturities for the next five years is as follows:

2003 ......... $ 545,592
2004 ......... 9,491,294
2005 ......... 500,000
2006 ......... --
2007 ......... --
Thereafter ... 105,000,000
------------
Total ........ $115,536,886
============


F-15


6. Income Taxes

(Benefit) provision for income taxes is summarized as follows:



For the year December 31,
-----------------------------------------------
2000 2001 2002
----------- ----------- -----------

Current:
Federal .............................................. $ 237,439 $ (625,457) $ --
State ................................................ 52,495 -- --
State payments (refunds) resulting from changes in
estimates on prior year returns ................... -- -- --
----------- ----------- -----------
289,934 (625,457) --
----------- ----------- -----------

Deferred:
Federal .............................................. (6,015,010) 4,221,691 (3,269,000)
State ................................................ (1,329,924) 803,427 --
----------- ----------- -----------
(7,344,934) 5,025,118 (3,269,000)
----------- ----------- -----------
$(7,055,000) $ 4,399,661 $(3,269,000)
=========== =========== ===========


The (benefit) provision 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:

For the year ended December 31,
----------------------------------
2000 2001 2002
------ ------ ------
Statutory U.S. rate .................. (34.0)% (34.0)% 34.0%
State taxes net of federal benefit ... (3.9) (3.3) 4.2
Goodwill amortization ................ 4.1 8.6 --
Other permanent differences .......... 2.0 1.7 (3.2)
Valuation allowance .................. 68.5 31.5
------ ------ ------
Effective tax rate ................... (31.8)% 41.5% 66.5%
====== ====== ======


F-16


6. Income Taxes (Continued)

The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax asset (liability) are as follows:



December 31,
-------------------------------
2001 2002
------------ ------------

Deferred income tax assets:
Covenant not to compete ...................... $ 29,261 $ 26,040
Allowance for doubtful accounts .............. 336,326 381,687
Accrued liabilities .......................... 1,364,952 1,124,188
Contribution and loss carryforward ........... 11,550,351 10,834,977
------------ ------------
Total deferred income tax assets ........ 13,280,890 12,366,892
Valuation allowance .......................... (7,266,470) (5,718,409)
------------ ------------
Net deferred tax asset .................. 6,014,420 6,648,483
------------ ------------
Deferred income tax liabilities:
Property and equipment ....................... (6,634,816) (7,273,940)
Inventory .................................... (5,061) --
------------ ------------
Total deferred income tax liabilities ... (6,639,877) (7,273,940)
------------ ------------
Net deferred asset (liability) .......... $ (625,457) $ (625,457)
============ ============


During the year ended December 31, 2002, the Company decreased the
valuation allowance. On March 9, 2002, the "Job Creation and Worker Assistance
Act" (H.R. 3090), was signed into law, which temporarily extends the general NOL
carryback period to five years for NOLs arising in taxable years ending in 2001
and 2002. As a result of the law change, the Company realized a refund of
approximately $3.5 million in 2002 and reversed $3.3 million of the valuation
allowance associated with net operating loss carryforwards. This decrease in the
valuation allowance was offset by an increase in the valuation allowance due to
the uncertainty of the realization of the net operating losses generated in
2002.

During the year ended December 31, 2001, the Company established against
its deferred tax assets a valuation allowance of $7.3 million. The valuation
allowance was established against substantially all of the Company's net
operating loss carryforwards due to the uncertainty of their realizability. As
of December 31, 2002, the Company had net operating loss carryforwards of $25.7
million, which begins to expire in 2018, and a charitable contribution
carryforward of $355,000, which begins to expire in 2003.

7. Restructuring

In September 2000, the Company announced a plan to restructure its
operations, which resulted in the Company recording a one-time operating expense
totaling $11.4 million. The restructuring plan involved the closing of
TechniGraphix, Inc. and the Company's Taunton, Massachusetts facility in order
to reduce costs and improve productivity. In 2001, the Company negotiated a
settlement with respect to certain operating leases for equipment, which
resulted in a reduction of $304,000 of the amount accrued for restructuring
costs.


F-17


7. Restructuring (Continued)

The following table displays the activity and balances of the
restructuring accrual account from January 1, 2000 to December 31, 2002:

Lease
Termination Facility
Costs Closing Totals
---------- ---------- ----------
January 1, 2000 ............. $ -- $ -- $ --
Additions ................... 3,729,000 325,000 4,054,000
Payments .................... 73,000 325,000 398,000
---------- ---------- ----------
Balance December 31, 2000 ... 3,656,000 -- 3,656,000
Reductions .................. 304,000 -- 304,000
Payments .................... 378,000 -- 378,000
---------- ---------- ----------
Balance December 31, 2001 ... 2,974,000 -- 2,974,000
Payments .................... 377,000 -- 377,000
---------- ---------- ----------
Balance December 31, 2002 ... $2,597,000 $ -- $2,597,000
========== ========== ==========

Also included in restructuring and exit costs for the year ended December
31, 2000 were impairment charges of approximately $7.5 million related to the
write-down of unrecoverable assets and goodwill in TechniGraphix and the
Taunton, Massachusetts facility, in which the carrying value was no longer
supported by future cash flows.


F-18


8. Commitments and Contingencies

Operating and Capital Leases

The Company leases certain office, manufacturing facilities and equipment
under operating and capital 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
$7,759,638, $6,414,062 and $6,647,258 for the years ending December 31, 2000,
2001, and 2002, respectively.

Future minimum lease payments under operating and capital leases as of
December 31, 2002 are as follows:

Operating Capital
----------- -----------
2003 ...................................... $ 6,531,681 $ 1,012,715
2004 ...................................... 6,422,138 1,012,715
2005 ...................................... 6,505,571 1,012,715
2006 ...................................... 6,118,937 1,012,715
2007 ...................................... 4,548,024 631,355
Thereafter ................................ 1,184,566 --
----------- -----------
$31,310,917 $ 4,682,215
===========
Amounts representing interest ............. 592,968
-----------
Present value of minimum lease payments ... 4,089,247
Current portion ........................... 725,060
-----------
Long term capital lease obligations ....... $ 3,364,187
===========

Legal Contingencies

In December 1998, the Company filed a complaint against Krause Biagosch
GmbH ("Krause Germany") and Krause America, Inc. ("Krause America" and together
with Krause Germany "Krause"), which was tried in October 2000 in the United
States District Court for the District of Maryland, based on breach of contract
and statutory warranties on certain prepress equipment which the Company had
agreed to purchase from Krause. The Company attempted to operate the equipment,
and contended that the equipment failed to perform as warranted. During 1999,
the Company removed the portion of the equipment actually delivered, and sought
recovery of the approximately $2.0 million paid on this equipment, which
included amounts for deposits on the balance of the equipment not yet delivered.
On January 27, 2000, the court granted summary judgment in favor of the Company
with respect to the three machines previously delivered to the Company. On
October 24, 2000, a jury rendered a verdict against Krause for $1.9 million. On
December 27, 2001, the Federal Court of Appeals for the 4th Circuit rendered a
decision confirming the lower court's decision without modification. Due to
recent efforts by Krause America to avoid enforcement of the judgment, the
Company has been forced to file a new lawsuit in the U.S. District Court for the
District of Maryland against Krause America, Krause CTP, Limited, Krause
Germany, and Jurgen Horstmann, Krause Germany's sole shareholder. The Company
and Krause are currently negotiating a settlement of the monies due the Company.
The terms on which the Company believes this matter will be settled are as
follows: $1.4 million, comprised of a down payment of


F-19


8. Commitments and Contingencies (Continued)

$200,000 and four annual installments of $300,000, to be paid beginning in
January 2004. There can be no assurances that such a settlement will be reached.
As a result of these developments, the Company recognized a non-cash charge of
approximately $745,000 in the fourth quarter of 2002. As of December 31, 2002
and 2001, the Company included in other non-current assets a receivable from
Krause of approximately $1.2 million and $2.0 million, respectively.

In August 1999, the Company filed a complaint against Motion Technology
Horizons, Inc. ("Motion Technology") 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. In March 2001, the Company amended its complaint, adding
Eagle Systems, Inc. ("Eagle") as a defendant in the case. In November 2001, the
Company obtained an order of default against Eagle. The Company has filed a
motion for summary judgment against Eagle and Motion Technology. On February 25,
2002, the court granted the Company's motions for summary judgment and entry of
an order of default and entered a judgment against Eagle and Motion Technology
in the amount of $1,006,750. Defendants had thirty (30) days from that date to
appeal the judgment. On February 26, 2002, defendants filed for bankruptcy. The
Company has reserved the entire balance originally paid to Motion Technology
Horizons, Inc.

On May 20, 2002, Xerox Corporation ("Xerox") filed a complaint against
Phoenix Color Corp. ("Phoenix") in United States District Court for the District
of Maryland alleging accounts due and owing pursuant to various equipment leases
between Xerox and Phoenix's subsidiary TechniGraphix, Inc. ("TechniGraphix").
TechniGraphix ceased operations pursuant to the Company's restructuring plan in
September 2000. Phoenix filed a motion to dismiss based on Xerox's failure to
state a claim upon which relief may be granted and failure to name an
indispensable party. On July 19, 2002, Xerox filed an amended complaint naming
Phoenix and TechniGraphix as defendants. The amended complaint alleges that
Phoenix has an account due and owing of $2.7 million and that Phoenix and
TechniGraphix are jointly liable for an account due and owing of $.5 million. On
August 1, 2002, Phoenix and TechniGraphix filed motions to dismiss the claims
against them based on Xerox's failure to identify the specific accounts at issue
and state a claim on which relief may be granted. On October 29, 2002, the Court
issued an Order denying the motions to dismiss filed by Phoenix and
TechniGraphix. The case is in the very 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 its business. Although the
outcome of these claims and lawsuits against the Company can not be accurately
predicted the Company does not believe that any of the claims and lawsuits
described above or in this paragraph, individually or in the aggregate, will
have a material adverse effect on its business, financial condition, results of
operations and cash flows for any quarterly or annual period.

9. Related Party Transactions

Earl S. Wellschlager, director of the Company, is a partner in a law firm
that serves as counsel to the Company. The Company paid the law firm
approximately $320,000, $610,000 and $694,000 for the


F-20


9. Related Party Transactions (Continued)

years ended December 31, 2002, 2001 and 2000, respectively. As of December 31,
2002 and 2001, no amounts were owed to the law firm.

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 $289,000, $143,000, and $7,000 for the years ended December
31, 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, $24,264
and $22,866, respectively, is owed to the consulting firm and is included in
accounts payable.

The Company utilizes the services of a prepress systems integration firm
of which Edward Lieberman and Louis LaSorsa each own 6.7%. The Company paid the
firm approximately $541,000, $501,000 and $465,000 for the years ended December
31, 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, $25,904
and $8,000, respectively, is owed to the systems integration firm and is
included in accounts payable.

10. Employment Agreements and Employee Benefits

Employment Contracts

On August 16, 2002, the Company entered into individual employment
agreements (the "Executive Employment Agreements") with each of Messrs. LaSorsa,
Lieberman and Carbone (collectively, the "Executives"). The Executive Employment
Agreements have an initial term of October 1, 2002 through September 30, 2004
and will automatically continue after the initial term for successive one-year
terms, unless terminated by either party by sixty (60) days prior written
notice. In addition to the base salary amounts described below, the Executive
Employment Agreements provide that the Executives are entitled to participate in
any bonus and stock option plans, programs, arrangements and practices as may be
established from time to time by our Board of Directors. Each of the Executive
Employment Agreements also provides that the Executives are entitled to certain
fringe benefits, including the use of a Company automobile. Each of the
Executive Employment Agreements includes a non-competition and non-solicitation
covenant expiring three (3) years after the Executive ceases to be employed by
the Company.

The Executive Employment Agreement with Mr. LaSorsa provides that he shall
serve as the Company's Chairman of the Board of Directors, Chief Executive
Officer and President and be paid an annual base salary of $494,000, subject to
any increases that may be determined by the Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Lieberman provides that he
shall serve as the Company's Executive Vice President, Chief Financial Officer,
and Secretary and be paid an annual base salary of $393,500, subject to any
increases that may be determined by the Board of Directors based on periodic
reviews. The Executive Employment Agreement with Mr. Carbone provides that he
shall serve as the Company's Executive Vice President and Chief Operating
Officer/Book Components and be paid an annual base salary of $253,800, subject
to any increases that may be determined by the Board of Directors based on
periodic reviews.

Under the terms of the Executive Employment Agreements, the Company must
pay severance as follows:


F-21


10. Employment Agreements and Employee Benefits (Continued)

Nonrenewal

If, upon expiration of its initial term, the Company terminates the
Executive Employment Agreement of an Executive and does not enter into a new
employment agreement or a consulting agreement with the Executive, then, for a
period of one (1) year, the Company must pay the Executive an amount equal to
his annual base salary and provide the Executive with benefits.

Termination of the Executive's Employment

If the company terminates an Executive's employment without cause or
materially reduces an Executive's duties or compensation or relocates him
outside of a specified geographic area, then, for the greater of (i) one (1)
year or the (ii) the remainder of the term of the Executive Employment
Agreement, the Company must pay the Executive his annual base salary and provide
the Executive with benefits.

Termination of the Executive's Employment Upon a Change of Control

If, within six (6) months following certain change of control events, the
Company terminates an Executive's employment with or without cause or materially
reduces an Executive's duties or compensation or relocates him outside of a
specified geographic area, the Company must (i) pay the Executive an amount
equal to 2.9 times his annual compensation and (ii) provide the Executive with
benefits for three (3) years. If the Internal Revenue Code would impose excise
taxes on any portion of these payments, the severance payments shall be reduced
to an amount that will not result in the imposition of such taxes.

In addition, prior to the occurrence of certain change of control events,
the Company must implement a supplemental executive retirement plan that
provides for a payment to each of the Executives, upon a change of control, a
lump sum that may not be less than the actuarial equivalent of ten (10) times
thirty-two and one-half percent (32.5%) of the Executive's average annual
compensation.

2002 Stock Incentive Plan

The Company implemented the 2002 Stock Incentive Plan in August of 2002.
Although the Committee has not granted any options under the plan, it has
authorized options to acquire 2,835 shares under the plan.

Employee Retirement Benefit Plans

Phoenix'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. No contributions were made to the Plan for the
years ended December 31, 2000 and 2001, respectively. For the year ended
December 31, 2002, the Board of Directors has authorized a contribution to the
Plan of $500,000, of which $300,000 remains to be paid in 2003.


F-22


10. Employment Agreements and Employee Benefits (Continued)

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, 2002.

11. Unaudited Quarterly Financial Data



Quarterly Financial Information
--------------------------------------------------------------------------------------
First Second Third Fourth Total
---------- ---------- ---------- ---------- -----------

2002
Net sales ....................... 30,221,841 35,844,237 40,016,755 31,878,343 137,961,176
Cost of sales ................... 25,423,288 27,258,654 29,039,110 25,835,439 107,556,491
Income (loss) from operations ... (435,087) 2,573,457 5,934,552 36,253 8,109,175
Net loss ........................ (244,581) (862,525) 2,580,688 (3,115,012) (1,641,430)

2001
Net sales ....................... 32,832,445 33,097,402 36,028,778 30,301,439 132,260,064
Cost of sales ................... 26,274,846 26,997,817 28,635,395 25,681,711 107,589,769
Income (loss) from operations ... 533,149 386,768 1,771,963 (1,180,521) 1,511,359
Net loss ........................ (1,249,749) (3,637,395) (6,059,360) (4,062,357) (15,008,861)

2000
Net sales ....................... 37,211,632 37,883,425 41,369,012 34,294,356 150,758,425
Cost of sales ................... 29,168,224 30,092,093 33,189,660 29,292,230 121,742,207
Income from operations .......... 2,018,661 (267,751) (9,492,239) (1,648,195) (9,389,524)
Net loss ........................ (581,277) (929,343) (10,576,180) (3,074,779) (15,161,579)


12. Guarantor Subsidiaries:

Phoenix currently has no independent operations and the guarantees made by
all of its subsidiaries, which are all 100% owned, are full and unconditional
and joint and several. The Company currently does not have any direct or
indirect non-guarantor subsidiaries. All consolidated amounts in Phoenix's
financial statements would be representative of the combined guarantors.


F-23


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 22, 2002 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 period ended December 31,
2001, 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 22, 2003


S-1




Schedule II - Valuation and Qualifying Accounts For Each
of the three Years in the Period Ended December 31, 2001
(in thousands)


Additions
-----------------------------------
Balance Charged to Balance
at Costs Rebates at
Beginning and Charged End
of Year Expenses to Sales Deductions of Year
---------- ----------- -------- ---------- ----------

Description

Allowance for doubtful Accounts Receivable and Rebates

Year ended December 31, 2002 ............................. $1,781 $ 485 $ 552 $ 1,293 $1,525
=======================================================

Year ended December 31, 2001 ............................. $1,085 $ 414 $ 888 $ 606 $1,781
=======================================================

Year ended December 31, 2000 ............................. $1,119 $ 492 $ 760 $ 1,286 $1,085
=======================================================

Restructuring Reserve

Year ended December 31, 2002 ............................. $2,974 $ -- $ -- $ 377 $2,597
=======================================================

Year ended December 31, 2001 ............................. $3,656 $ (304) $ -- $ 378 $2,974
=======================================================

Year ended December 31, 2000 ............................. $ -- $ 4,054 $ -- $ 398 $3,656
=======================================================

Tax Valuation Allowance

Year ended December 31, 2002 ............................. $7,266 $ 1,721 $ -- $ 3,269 $5,718
=======================================================

Year ended December 31, 2001 ............................. $ -- $ 7,266 $ -- $ -- $7,266
=======================================================



S-2


Exhibit 12.1 - Calculation of ratio of earnings to fixed charges



1998 1999 2000 2001 2002
-------- -------- -------- -------- --------

Earnings (loss) before income tax provision ... $ 3,036 $ (5,890) $(22,217) $(10,609) $ (4,910)

Add:
Portion of rent attributable to interest ... 717 1,648 2,561 2,117 1,994
Interest excluding capitalized interest .... 4,866 12,171 12,403 11,846 12,125
Amortization of deferred financing costs ... 210 2,768 540 528 550
-------------------------------------------------------------------

Earnings (loss) as adjusted ................... $ 8,829 $ 10,697 $ (6,713) $ 3,882 $ 9,759
===================================================================

Fixed Charges

Portion of rent attributable to interest ... 717 1,648 2,561 2,117 1,994
Interest including capitalized interest .... 4,866 12,597 12,403 11,846 12,125
Amortization of deferred financing costs ... 210 2,768 540 528 550
-------------------------------------------------------------------

Fixed Charges ................................. $ 5,793 $ 17,013 $ 15,504 $ 14,491 $ 14,669
===================================================================
Ratio of earnings to fixed charges ............ 1.5x -- -- -- --



1


Exhibit 12.2 - Calculation of (1) EBITDA

(1) EBITDA Calculation



1998 1999 2000 2001 2002
-------- -------- -------- -------- --------

Pretax income (loss) .................... $ 3,036 $ (5,890) $(22,217) $(10,609) $ (4,910)
Interest expense ........................ 5,076 14,939 12,943 12,374 12,675
Depreciation and amortization expense ... 10,834 15,637 15,436 13,955 10,330
-------------------------------------------------------------------

Total EBITDA ............................ $ 18,946 $ 24,686 $ 6,162 $ 15,720 $ 18,095
===================================================================


Interest expense includes amortization of deferred financing costs of $210,000,
$1,538,000, $529,000, $520,000 and $550,000 in 1998, 1999, 2000, 2001 and 2002,
respectively.


2