(Mark One)
| |X| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| |_| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________ to ___________ |
PHOENIX COLOR CORP.
(Exact name of Registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
22-2269911 (I.R.S. Employer Identification No.) |
| 540
Western Maryland Parkway Hagerstown, Maryland (Address of principal executive offices) |
21740 (Zip Code) |
Registrant’s telephone number, including area code: (301) 733-0018
Indicate
by X 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 X whether the Registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2).
Yes |_| No |X|
As of November 12, 2004, 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.
| September
30, 2004 (Unaudited) |
December 31, 2003 (Audited) |
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|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 80,877 | $ | 63,714 | ||||
| Accounts receivable, net of allowance for doubtful accounts and rebates of | ||||||||
| $2,622,386 in 2004 and $2,345,715 in 2003 | 17,357,691 | 18,846,859 | ||||||
| Inventory | 6,530,219 | 5,642,108 | ||||||
| Prepaid expenses and other current assets | 2,930,182 | 3,045,703 | ||||||
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| Total current assets | 26,898,969 | 27,598,384 | ||||||
| Property, plant and equipment, net | 51,008,275 | 57,799,341 | ||||||
| Goodwill | 13,302,809 | 13,302,809 | ||||||
| Deferred financing costs, net | 2,123,020 | 2,443,698 | ||||||
| Other assets | 9,496,144 | 10,635,423 | ||||||
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| Total assets | $ | 102,829,217 | $ | 111,779,655 | ||||
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| LIABILITIES & STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Notes payable | $ | — | $ | 409,194 | ||||
| Capital lease obligations | 900,219 | 831,169 | ||||||
| Revolving line of credit | 7,353,894 | 6,827,929 | ||||||
| Accounts payable | 6,998,737 | 8,556,760 | ||||||
| Accrued expenses | 6,106,823 | 9,064,919 | ||||||
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| Total current liabilities | 21,359,673 | 25,689,971 | ||||||
| 10 3/8% Senior subordinated notes | 105,000,000 | 105,000,000 | ||||||
| MICRF Loan | 500,000 | 500,000 | ||||||
| Capital lease obligations | 1,849,778 | 2,533,018 | ||||||
| Other liabilities | 526,426 | 105,447 | ||||||
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| Total liabilities | 129,235,877 | 133,828,436 | ||||||
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| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ deficit | ||||||||
| Common Stock, Class A, voting, par value $0.01 per share, authorized | ||||||||
| 20,000 shares, 14,560 issued shares, 11,100 outstanding shares | 146 | 146 | ||||||
| Common Stock, Class B, non-voting, par value $0.01 per share, authorized | ||||||||
| 200,000 shares, 9,794 issued shares, 7,794 outstanding shares | 98 | 98 | ||||||
| Additional paid in capital | 2,126,804 | 2,126,804 | ||||||
| Accumulated deficit | (26,764,478 | ) | (22,392,167 | ) | ||||
| Stock subscriptions receivable | — | (14,432 | ) | |||||
| Treasury stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares | (1,769,230 | ) | (1,769,230 | ) | ||||
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| Total stockholders’ deficit | (26,406,660 | ) | (22,048,781 | ) | ||||
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| Total liabilities & stockholders’ deficit | $ | 102,829,217 | $ | 111,779,655 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
1
| (Unaudited) Three Months Ended September 30, |
(Unaudited) Nine Months Ended September 30, |
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| 2004
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2003
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2004
|
2003
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| Net sales | $ | 31,733,055 | $ | 38,091,952 | $ | 97,463,676 | $ | 105,982,425 | ||||||
| Cost of sales | 25,979,379 | 28,961,597 | 79,606,528 | 83,592,281 | ||||||||||
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| Gross profit | 5,753,676 | 9,130,355 | 17,857,148 | 22,390,144 | ||||||||||
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| Operating expenses: | ||||||||||||||
| Selling and marketing expenses | 1,502,603 | 1,495,958 | 5,109,298 | 5,242,773 | ||||||||||
| General and administrative expenses | 2,503,040 | 3,042,985 | 8,358,409 | 9,264,086 | ||||||||||
| (Gain) loss on sale of assets | (87,666 | ) | 403,321 | (76,655 | ) | 422,679 | ||||||||
| Restructuring credit | — | (2,180,946 | ) | — | (2,180,946 | ) | ||||||||
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| Total operating expenses | 3,917,977 | 2,761,318 | 13,391,052 | 12,748,592 | ||||||||||
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| Income from operations | 1,835,699 | 6,369,037 | 4,466,096 | 9,641,552 | ||||||||||
| Other expenses: | ||||||||||||||
| Interest expense | 2,399,691 | 3,051,602 | 8,918,658 | 9,185,569 | ||||||||||
| Other income | (19,402 | ) | (25,034 | ) | (80,250 | ) | (81,356 | ) | ||||||
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| Income (loss) before income taxes | (544,590 | ) | 3,342,469 | (4,372,312 | ) | 537,339 | ||||||||
| Income tax benefit | — | — | — | — | ||||||||||
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| Net income (loss) | ($ 544,590 | ) | $ | 3,342,469 | ($ 4,372,312 | ) | $ | 537,339 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
2
| Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) 2004 |
(Unaudited) 2003 |
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| Operating activities | ||||||||
| Net (loss) income | ($4,372,312 | ) | $ | 537,339 | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | 8,173,126 | 7,738,847 | ||||||
| Amortization of deferred financing costs | 380,679 | 417,334 | ||||||
| Provision for uncollectible accounts | 486,979 | 399,305 | ||||||
| Recapture of restructuring charge | — | (2,180,946 | ) | |||||
| Change in fair value of interest rate swap | 420,979 | — | ||||||
| (Gain) loss on disposal of assets | (76,655 | ) | 422,679 | |||||
| Increase (decrease) in cash resulting from changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,002,189 | (1,587,648 | ) | |||||
| Inventory | (888,111 | ) | 240,509 | |||||
| Prepaid expenses and other assets | 1,373,169 | 1,342,264 | ||||||
| Accounts payable | 323,728 | (1,382,571 | ) | |||||
| Accrued expenses | (2,988,096 | ) | (1,721,678 | ) | ||||
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| Net cash provided by operating activities | 3,835,675 | 4,225,434 | ||||||
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| Investing activities: | ||||||||
| Proceeds from sale of equipment | 1,040,816 | 200,067 | ||||||
| Capital expenditures | (4,346,342 | ) | (2,654,614 | ) | ||||
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| Net cash used in investing activities | (3,305,526 | ) | (2,454,547 | ) | ||||
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| Financing activities: | ||||||||
| Net receipts from (payments to) revolving line of credit | 525,965 | (819,501 | ) | |||||
| Principal payments on long term borrowings and capital leases | (1,023,383 | ) | (942,587 | ) | ||||
| Payment of deferred financing costs | (30,000 | ) | (40,000 | ) | ||||
| Proceeds from the payment of stock subscriptions | 14,432 | 10,800 | ||||||
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| Net cash used in financing activities | (512,986 | ) | (1,791,288 | ) | ||||
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| Net increase (decrease) in cash | 17,163 | (20,401 | ) | |||||
| Cash and cash equivalents at beginning of period | 63,714 | 109,297 | ||||||
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| Cash and cash equivalents at end of period | $ | 80,877 | $ | 88,896 | ||||
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| Non-cash investing activities: | ||||||||
| Equipment included in accounts payable | $ | 108,321 | $ | 1,067,943 | ||||
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3
| 1. | Basis of Presentation. |
The accompanying interim consolidated financial statements of Phoenix Color Corp. and its subsidiaries (the “Company”) do not include all of the information and disclosures generally required for annual consolidated financial statements and are unaudited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments (consisting of normal recurring accruals), necessary to present fairly the Company’s financial position as of September 30, 2004, and the results of its operations for the three month and nine month periods ended September 30, 2004 and 2003. The unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2003, included in the Company’s Annual Report filed on Form 10-K.
| 2. | Inventory. |
Inventory consists of the following:
| September
30, 2004
|
December 31,
2003
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|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 4,695,276 | $ | 4,121,000 | ||||
| Work in process | 1,834,943 | 1,521,108 | ||||||
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| $ | 6,530,219 | $ | 5,642,108 | |||||
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| 3. | Other Assets. |
Other assets at September 30, 2004 and December 31, 2003 include equipment deposits of $1,988,230 and $1,869,861, respectively.
| 4. | Accrued Expenses. |
Accrued expenses at September 30, 2004 and December 31, 2003 include accrued interest payable of $1,824,383 and $4,433,471, respectively.
| 5. | Debt. |
The Company issued $105.0 million of 10-3/8% Senior Subordinated Notes due 2009 under an indenture (the “Indenture”) in a private offering. The Senior Subordinated Notes are uncollateralized senior subordinated obligations of the Company with interest payable semiannually on February 1 and August 1 of each year. Although not due until 2009, the Senior Subordinated 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 Subordinated Note holders have the right to require the Company to repurchase the Senior Subordinated 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 Indenture, are guarantors of the Senior Subordinated Notes on an uncollateralized senior subordinated basis. The Indenture prohibits the Company from incurring more than $5 million of debt for the acquisition of equipment unless the required consolidated coverage ratio is achieved and contains other non-financial covenants. As of September 30, 2004 and December 31, 2003 the Company failed to meet the required consolidated coverage ratio. The Company has incurred $2.7 million of the $5 million permitted for equipment indebtedness pursuant to the Indenture.
4
On October 27, 2003, the Company entered into an Interest Rate Swap Agreement (the “Swap Agreement”) to manage interest rate costs relating to its Senior Subordinated Notes. The Swap Agreement effectively converts $50 million of the Company’s $105 million of debt under the Senior Subordinated Notes into variable rate debt. Pursuant to the Swap Agreement, the Company receives payments based on a 10-3/8% rate and makes payments based on a LIBOR-based variable rate plus 7.42% adjusted semiannually in arrears. For the period beginning October 27, 2003 and ending July 31, 2004, the Company received payments under Swap at a fixed rate of 10 3/8% and made payments at a fixed rate of 8.64%. The interest rate swap does not qualify for hedge accounting and therefore any change in the interest rate swap’s value is recorded as a component of interest expense on the Company’s consolidated statement of operations. As of September 30, 2004 and December 31, 2003, the fair value of the interest rate swap was ($526,426) and ($105,447), respectively, which were included in other long term liabilities on the consolidated balance sheet. Interest expense for the three month period ended September 30, 2004, decreased by $516,152, which represents the change in the valuation of the interest rate swap on June 30, 2004 and September 30, 2004. Interest expense for the nine month period ended September 30, 2004, increased by $420,979, which represents the change in the valuation of the interest rate swap on September 30, 2004 and December 31, 2003.
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 September 30, 2004, the Company employed over 575 people in the State of Maryland. The Company has included the principal amount of this loan in long term debt on the Company’s consolidated balance sheet at September 30, 2004.
On September 30, 2003, the Company entered into an Amended and Restated Loan and Security Agreement (the “Senior Credit Facility”) with a commercial bank providing for the continuance of a $20,000,000 revolving credit facility through August 31, 2006. Borrowings under the Senior Credit Facility are subject to a borrowing base as defined in the agreement and are collateralized by substantially all of the assets of the Company. The Company’s availability under the Senior Credit Facility was $4.3 million as of September 30, 2004. The Senior Credit Facility contains, without limitation, prohibitions against the payment of dividends, distributions and the redemption of stock; limitations on sales of assets, compensation of executives, and additional debt; and other financial and non-financial covenants, including a requirement that the Company maintain a defined fixed coverage charge ratio, as defined in the Senior Credit Facility. As of December 31, 2003 the Company was in compliance with fixed coverage charge ratio. As of September 30, 2004, the Company was in compliance with its fixed coverage charge ratio. The Company executed a second amendment (Exhibit 10.1 attached hereto) to the Senior Credit Facility which clarified the definition of fixed charges in the first amendment to the Senior Credit Facility.
5
| 6. | Commitments and Contingencies. |
The Company is not a party to any legal proceedings, other than claims and lawsuits arising in the normal course of its business. Although the outcome of claims and lawsuits against the Company can not be accurately predicted, the Company does not believe that any of the claims or lawsuits will have a material adverse effect on its business, financial condition, results of operations and cash flows for any quarterly or annual period.
| 7. | Guarantor Subsidiaries. |
Phoenix Color Corp. (“Parent”) currently has no independent operations, and the guarantees made by all of its subsidiaries, which are all 100% owned, are full and unconditional and joint and several. The Company currently does not have any direct or indirect non-guarantor subsidiaries. All consolidated amounts in the Parent’s financial statements would be representative of the combined guarantors.
| 8. | Income Taxes. |
The Company did not record an income tax provision for the three or nine months ended September 30, 2004 and 2003 due to the uncertainty of the utilization of its deferred tax assets generated primarily as a result of its net operating losses.
| 9. | Stock Options |
The Company has one stock-based employee compensation plan, which was established in 2002. The Company accounts for the plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APB No. 25, compensation cost is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of the grant over the exercise price of the option granted. Compensation cost is recognized over the vesting period. Prior to August 2003, no options were issued or outstanding. On August 16, 2003, options to purchase an aggregate of 657 shares of the Company’s Class A common stock were issued to key executives of the Company. The options vest ratably over a three year vesting period. As of September 30, 2004, one third of the options are exercisable and 2,178 shares are available for future grants under the terms of the Company’s Amended and Restated Stock Incentive Plan.
6
The following table illustrates the effect on net (loss) income if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 to stock-based employee compensation for the three and nine month periods ended September 30:
| Three Months
Ended September 30 |
Nine Months
Ended September 30 |
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| 2004 | 2003 | 2004 | 2003 | |||||||||||
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| Net (loss) income, reported | ($ 544,590 | ) | $ | 3,342,469 | ($4,372,312 | ) | $ | 537,339 | ||||||
| Add: Stock-based employee compensation | ||||||||||||||
| expense included in reported net loss, | ||||||||||||||
| net of related tax effects | — | — | — | — | ||||||||||
| Deduct: Total stock-based employee | ||||||||||||||
| compensation expense determined under | ||||||||||||||
| fair value based methods for stock | ||||||||||||||
| options, net of related tax effects | ($ 10,777 | ) | — | ($ 32,331 | ) | |||||||||