UNITED
STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-Q (Mark One) |X|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the Quarterly
Period Ended June 30, 2005 or |_|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For
the transition period from ___________ to _________  Commission File No.
333-50995 PHOENIX COLOR CORP.(Exact name of Registrant as specified in its charter) Delaware 
      (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 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 whether the Registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes |_| No |X| As
of August 10, 2005, 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.    PART I
- FINANCIAL INFORMATION


Item 1.
Financial Statements.


Index to Financial
Statements



Page
      No.Consolidated
      Balance Sheets
    3June
      30, 2005 and December 31, 2004Consolidated
      Statements of Operations
    4Six
      and Three Months Ended June 30, 2005 and 2004Consolidated
      Statements of Cash Flows
    5Six
      Months Ended June 30, 2005 and 2004Notes to
      Consolidated Financial Statements
    62
PHOENIX COLOR CORP.
AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS



June
      30, 2005
      (Unaudited)
    
    December
      31, 
      2004
      (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
    $
    2,588,384
    
    $
    38,685Accounts
      receivable, net of allowance for doubtful accounts and rebates of$2,764,059
      in 2005 and $2,743,052 in 2004
    
    11,786,153
    
    
    17,713,036Inventory
    
    5,818,647
    
    
    6,098,672Prepaid
      expenses and other current assets
    
    2,062,199
    
    
    2,785,923Income
      tax refund receivable
    
    
    
    
    439,696Total
      current assets
    
    22,255,383
    
    
    27,076,012Property,
      plant and equipment, net
    
    40,449,183
    
    
    43,859,747Goodwill
    
    13,302,809
    
    
    13,302,809Deferred
      financing costs, net
    
    1,725,541
    
    
    1,990,527Other assets
    
    5,662,932
    
    
    5,435,981Total
      assets
    $
    83,395,848
    
    $
    91,665,076LIABILITIES
      & STOCKHOLDERS DEFICITCurrent
      liabilities:Accounts
      payable
    $
    4,957,051
    
    $
    6,865,450Accrued
      expenses
    
    8,162,999
    
    
    9,446,459Revolving
      line of credit
    
    259,718
    
    
    3,850,146MICRF
      Loan
    
    500,000
    
    
    500,000Capital
      lease obligations
    
    155,515
    
    
    151,646Total
      current liabilities
    
    14,035,283
    
    
    20,813,70110 3/8%
      Senior subordinated notes
    
    105,000,000
    
    
    105,000,000Capital
      lease obligations
    
    214,892
    
    
    293,523Other liabilities
    
    
    
    
    752,795Total
      liabilities
    
    119,250,175
    
    
    126,860,019Commitments
      and contingencies (Note 7)Stockholders
      deficitCommon
      Stock, Class A, voting, par value $0.01 per share,20,000
      authorized shares, 14,560 issued shares, 11,100 outstanding shares
    
    146
    
    
    146Common
      Stock, Class B, non-voting, par value $0.01 per share,200,000
      authorized shares, 9,794 issued shares, 7,794 outstanding shares
    
    98
    
    
    98Additional
      paid in capital
    
    2,126,804
    
    
    2,126,804Accumulated
      deficit
    
    (36,212,145
    )
    
    (35,552,761
    )Treasury
      stock, at cost: Class A, 3,460 shares and Class B, 2,000 shares
    
    (1,769,230
    )
    
    (1,769,230
    )Total
      stockholders deficit
    
    (35,854,327
    )
    
    (35,194,943
    )Total
      liabilities & stockholders deficit
    $
    83,395,848
    
    $
    91,665,076The accompanying notes
are an integral part of these consolidated financial statements.


3
PHOENIX
COLOR CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS

(Unaudited) 
      Three Months Ended June 30,
    
    (Unaudited) 
      Six Months Ended June 30,2005
    
    2004
    2005
    
    2004Sales
    $
    27,165,972
    
    $
    25,734,975
    
    $
    53,046,386
    
    $
    52,053,452Cost of
      sales
    
    19,779,793
    
    
    18,927,879
    
    
    38,774,279
    
    
    37,928,800Gross profit
    
    7,386,179
    
    
    6,807,096
    
    
    14,272,107
    
    
    14,124,652Operating
      expenses:Selling
      and marketing expenses
    
    1,400,631
    
    
    1,397,562
    
    
    2,733,085
    
    
    2,875,591General
      and administrative expenses
    
    2,280,258
    
    
    2,487,442
    
    
    4,436,687
    
    
    5,156,174Loss
      on sale of assets
    
    26,184
    
    
    4,949
    
    
    47,121
    
    
    11,011Total operating
      expenses
    
    3,707,073
    
    
    3,889,953
    
    
    7,216,893
    
    
    8,042,776Income
      from operations
    
    3,679,106
    
    
    2,917,143
    
    
    7,055,214
    
    
    6,081,876Other expenses:Interest
      expense
    
    3,135,696
    
    
    4,268,905
    
    
    6,631,693
    
    
    6,518,967Other
      income
    
    (12,460
    )
    
    (13,464
    )
    
    (31,343
    )
    
    (60,848
    )Income
      (loss) from continuing operations
    
    555,870
    
    
    (1,338,298
    )
    
    454,864
    
    
    (376,243
    )Loss
      from discontinued operations - BTP division
    
    467,693
    
    
    1,492,171
    
    
    1,114,248
    
    
    3,451,479Income
      (loss) before income taxes
    
    88,177
    
    
    (2,830,469
    )
    
    (659,384
    )
    
    (3,827,722
    )Income
      tax benefit
    
    
    
    
    
    
    
    
    
    
    Net income
      (loss)
    $
    88,177
    
    
    ($2,830,469
    )
    
    ($659,384
    )
    
    ($3,827,722
    )The accompanying notes
are an integral part of these consolidated financial statements.


4
PHOENIX COLOR CORP.
AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Six
      Months Ended June 30,(Unaudited)
      2005
    
    (Unaudited)
      2004Operating
      activitiesNet
      loss
    
    ($659,384
    )
    
    ($3,827,722
    )Adjustments
      to reconcile net loss to net cash provided by operating activities:Depreciation
      and amortization of property, plant and equipment
    
    3,783,743
    
    
    5,490,596Amortization
      of deferred financing costs
    
    264,986
    
    
    250,585Provision
      for uncollectible accounts
    
    50,350
    
    
    329,346Change
      in fair value of interest rate swap
    
    (752,795
    )
    
    937,131Loss
      on disposal of assets
    
    47,121
    
    
    11,011Increase
      (decrease) in cash resulting from changes in assets and liabilities:Accounts
      receivable
    
    5,876,533
    
    
    2,024,271Inventory
    
    280,025
    
    
    (513,616
    )Prepaid
      expenses and other assets
    
    1,587,751
    
    
    1,224,370Income
      tax refund receivable
    
    439,696
    
    
    Accounts
      payable
    
    (1,674,439
    )
    
    809,855Accrued
      expenses
    
    (1,283,464
    )
    
    (485,341
    )Net
      cash provided by operating activities
    
    7,960,123
    
    
    6,250,486Investing
      activities:Proceeds
      from sale of equipment
    
    33,600
    
    
    29,500Capital
      expenditures
    
    (1,778,835
    )
    
    (3,168,714
    )Net
      cash used in investing activities
    
    (1,745,235
    )
    
    (3,139,214
    )Financing
      activities:Net
      payments on revolving line of credit
    
    (3,590,428
    )
    
    (2,426,216
    )Principal
      payments on long term borrowings and capital leases
    
    (74,761
    )
    
    (675,950
    )Net
      cash used in financing activities
    
    (3,665,189
    )
    
    (3,102,166
    )Net
      increase in cash
    
    2,549,699
    
    
    9,106Cash
      and cash equivalents at beginning of period
    
    38,685
    
    
    63,714Cash
      and cash equivalents at end of period
    $
    2,588,384
    
    $
    72,820Non-cash
      investing activities:Equipment
      included in accounts payable
    $
    150,530
    
    $
    208,456The accompanying notes
are an integral part of these consolidated financial statements.


5
PHOENIX COLOR CORP.
AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Basis
of Presentation.The
accompanying interim financial statements of Phoenix Color Corp. and its subsidiaries (the
Company) do not include all of the information and disclosures generally
required for annual financial statements and are unaudited. In the opinion of management,
the accompanying unaudited financial statements contain all material adjustments
(consisting of normal recurring accruals), necessary to present fairly the Companys
financial position as of June 30, 2005, and the results of its operations for the three
and six month periods ended June 30, 2005 and 2004. The unaudited interim financial
statements should be read in conjunction with the Companys audited Consolidated
Financial Statements for the year ended December 31, 2004, included in the Companys
Annual Report filed on Form 10-K.


2.
Sale
of Assets and Discontinued OperationsOn
December 29, 2004, the Company sold the manufacturing assets of the Companys book
manufacturing facility in Hagerstown, Maryland (the BTP Facility) to R.R.
Donnelley & Sons Company (R.R. Donnelley) and ceased operations at the BTP
Facility effective January 31, 2005. Pursuant to the Asset Purchase Agreement, R.R.
Donnelley acquired substantially all of the binding line and press equipment and other
tangible personal property for an aggregate purchase price of $16,831,514, which equaled
the Companys buyout price for the equipment subject to various equipment leases
terminated at the transactions closing. In connection with the transaction, the
Company agreed not to engage in the business of printing one or two color, soft or hard
cover books in the United States for a period of five (5) years. The Company has decided
to consolidate its book component manufacturing operations from the two current
manufacturing facilities in Hagerstown, Maryland (the Components Facilities)
into the BTP Facility in Hagerstown, Maryland. The Company has decided that after
consolidating its book component manufacturing operations it will sell the Components
Facilities. In accordance with the provisions of its Senior Credit Facility and the
10-3/8% Senior Subordinated Notes due 2009, the Company will use the proceeds to reduce
its debt. The Company and R.R. Donnelly have reached an agreement (the R.R. Donnelly
Agreement) through which the Company will produce components for a number of R.R.
Donnelly book plants. The R.R. Donnelly Agreement does not contain any volume requirements


The
results of the BTP division have been presented as discontinued operations in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). Net Sales
from the BTP division were $1,941,000 and $13,677,000 for the six months ended June 30,
2005 and 2004, respectively. Pretax losses from the BTP division were $1,114,000 and
$3,451,000 for the six months ended June 30, 2005 and 2004, respectively.


3.
Inventory.Inventory
consists of the following:



June
      30, 2005
    
    December
      31, 2004Raw
      materials
    $
    4,352,236
    
    $
    4,554,915Work in
      process
    
    1,466,411
    
    
    1,543,757$
    5,818,647
    
    $
    6,098,6726
4.
Other
Assets.Other
assets at June 30, 2005 and December 31, 2004 include equipment deposits of $1,971,218 and
$880,240, respectively.


5.
Accrued
Expenses.Accrued
expenses at June 30, 2005 and December 31, 2004 include accrued interest payable of
$4,547,358 and $4,553,416, respectively.



6.
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 June 30, 2005 and December 31, 2004 the Company failed to
meet the required consolidated coverage ratio. The Company has previously incurred $0.4
million of the $5 million permitted for equipment indebtedness pursuant to the Indenture.


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 converted $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 received payments based on a 10-3/8% rate and made payments based
on a LIBOR-based variable rate plus 7.42% adjusted semiannually in arrears. The interest
rate swap did not qualify for hedge accounting and therefore any change in the interest
rate swaps value was recorded as a component of interest expense on the
Companys consolidated statement of operations. On April 7, 2005, the Company
terminated the interest rate swap because of increases in the LIBOR-based variable rate
and incurred a one time termination fee of $1.3 million of which $0.6 million was included
in interest expense for the six months ended June 30, 2005. Interest expense for the six
months ended June 30, 2004 increased approximately $0.9 million which represented the
difference in the fair value of the swap on December 31, 2003 as compared to June 30,
2004.


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, 2004, the Company employed over 600 people in the State of
Maryland. In January 2005, the Company closed its BTP Facility. The Company does not
expect


7
to meet the employment requirements
in the loan agreement going forward. The Company has included the principal amount of
this loan in short term debt on the consolidated balance sheet at June 30, 2005 and
December 31, 2004, respectively. On May 26, 2005, the Company and MICRF executed an
amendment to the loan agreement that provides that if the Company has fewer than 543 but
at least 360 permanent, full-time employees within the State of Maryland as of December
31, 2005, the Company shall pay to MICRF an amount equal to (i) $1,485 multiplied by (ii)
543 minus the number of full-time, permanent employees of the Company as of December 31,
2005 (the Pro Rata Repayment), together with accrued interest thereon from
May 3, 2000 and, provided that the Company is not in default, the remaining principal
balance of the loan will be forgiven. The amendment to the loan further provides for
forgiveness of the accrued interest on the Pro Rata Repayment if the Company provides
MICRF with employment reports on its permanent full-time employees by January 30, 2006
and makes the Pro Rata Repayment to MICRF by January 31, 2006. Based on current
employment levels in Maryland, it is estimated the Company will be required to repay
approximately $200,000 of the $500,000 outstanding, excluding interest by January 31,
2006.


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. On
June 6, 2005, at the Companys request, the Senior Credit Facility was amended to
reduce the revolving credit facility to $15,000,000. Borrowings under the Senior Credit
Facility are subject to a borrowing base as defined in the Senior Credit Facility and are
collateralized by substantially all of the assets of the Company. The Companys
availability under the Senior Credit Facility was $9.2 million as of June 30, 2005.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 the incurrence of 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 June
30, 2005 and December 31, 2004 the Company was in compliance with the fixed coverage
charge ratio.


7.
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 described 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.


8.
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.


9.
Income
Taxes.The
Company did not record an income tax provision for the six or three months ended June 30,
2005 and 2004 due to the uncertainty of the expected realization of the benefit related to
certain deferred tax assets.


8
10.
Stock
OptionsThe
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 June 30, 2005, 219 options were exercisable and 2,178 shares are
available for future grants under the terms of the Companys Amended and Restated
Stock Incentive Plan.


The
following table illustrates the effect on net loss if the Company had applied the fair
value recognition provisions of SFAS Statement No. 123, Accounting for Stock-Based
Compensation to stock-based employee compensation for the three and six month period
ended June 30:



Three Months Ended June 30
    
    Six Months Ended June 302005
    
    2004
    2005
    
    2004Net
      income (loss) reported
    $
    88,177
    
    
    ($2,830,469
    )
    
    ($659,384
    )
    
    ($3,827,722
    )Add:
      Stock-based employee compensationexpense
      included in reported net loss, net ofrelated
      tax effects
    
    
    
    
    
    
    
    
    
    
    Deduct:
      Total stock-based employeecompensation
      expense determined under fairvalue
      based methods for stock options, net ofrelated
      tax effects
    
    ($10,777
    )
    
    ($10,777
    )
    
    ($21,554
    )
    
    ($21,554
    )Pro forma
      net (loss) income
    $
    77,400
    
    
    ($2,841,246
    )
    
    ($680,938
    )
    
    ($3,849,276
    )Item 2.  Managements
Discussion and Analysis of Financial Condition and Results of Operations.


Our
results of operations for the three and six months ended June 30, 2005 are presented to
reflect the impact of the discontinued operations of our one color book manufacturing (or
BTP) division in Hagerstown, Maryland. We believe that the closing of the BTP division
will allow the Company to focus on its core book components and multicolor juvenile book
manufacturing operations, while eliminating losses and intercompany costs attributable to
the BTP division. There can be no assurances, however, that we will be able to realize
our expected benefits from the closing of the BTP division, including, without
limitation, the costs savings that we anticipate from the closing of the BTP division. At
June 30, 2005 the book publishing industry continued to reflect inconsistent conditions
from quarter to quarter and month to month, particularly in general interest books.
Accordingly, this inconsistency impacts the performance of manufacturers whose customer
base is composed primarily of book publishers. Competitive pressures and manufacturing
overcapacity continue to dampen the ability of manufacturers to increase prices. In
response to this, we have continued to make reductions in our manufacturing and overhead
costs to remain competitive. The Elementary-High School education market is meeting
predictions of a stronger year 2005 compared to 2004, with component sales up in excess
of 30% over the corresponding six month period in


9
2004. Our Rockaway facility
continues to produce quality multicolor books and we are seeking to be more aggressive to
capture a greater share of the market. Our creation of a relationship with a Chinese
printer has resulted in a more than doubling of sales (which would have otherwise gone
directly to other Asian printers) and we believe this relationship has enhanced our
relationship with certain customers. While trade publishing has been spotty, the release
of the new Harry Potter book is expected to materially increase that segment of
publishing.


Forward
Looking Statements


Some
of the statements in this Quarterly Report on Form 10-Q 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 plans 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, seeks 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 next twelve months 2005, (iii) the realization of any revenue on the sale
of any of our assets, (iv) future consolidation in the printing industry, (v) the ability
to pass increased costs of materials on to our customers, (vi) the suitability and
adequacy of our existing facilities for our current and short term future needs, without
the necessity for major investment in plant and equipment, (vii) whether a resurgence in
book publishing will occur, (viii) our ability to continue to reduce costs (ix) the
outcome of any claims and lawsuits filed, threatened to be filed or pending against us,
(x) our statements regarding a potential sale of the Components Facilities and our use of
any proceeds resulting therefrom, (xi) our beliefs regarding the expected benefits and
effects on our business from the closing of the BTP Facility, including the expected cost
savings resulting therefrom, (xii) our plans to capture greater multicolor book market
share, (xiii) our beliefs that sales attributable to our relationship with an Asian
printer would otherwise have gone to other Asian printers and the effect that such
relationship has had on our relationships with our other customers and (xiv) our
statements regarding an increase in trade publishing sales. 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.


The
following discussion and analysis should be read in conjunction with our unaudited
Consolidated Financial Statements and the Notes thereto included elsewhere in this Form
10-Q.


Critical
Accounting Policies


Our
discussion and analysis of financial condition and results of operations are based upon
our Consolidated Financial Statements, which were prepared in accordance with accounting
principles generally accepted in the United States of America. To prepare our financial
statements, we must make certain judgments and estimates which affect the reporting of
assets and liabilities, both real and contingent, and income and expenses. Assets and
liabilities which are continually re-evaluated include, but are not limited to,
allowances for doubtful accounts, inventories, goodwill, income taxes, long lived assets,
contingencies and litigation. We use our best judgment when making estimates, based on
the current facts and historical experience with respect to numerous factors that are
difficult to predict and beyond managements control. Because we are making
judgments when we make estimates, actual results


10
may differ materially from these
estimates. We believe our estimates are reasonable under the circumstances based on our
critical accounting policies used in preparing our financial statements.


Management
believes that the following policies are critical accounting policies, as defined by the
Securities and Exchange Commission (the SEC). The SEC defines critical
accounting policies as those that are both most important to the portrayal of a
companys financial condition and results of operations and require managements
most difficult, subjective or complex judgment, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and might change in
subsequent periods. We discuss our significant accounting policies, including those that
do not require management to make difficult, subjective or complex judgments or estimates,
in the Notes to the Consolidated Financial Statements.


Revenue Recognition


We
recognize revenue upon shipment of our products to or on behalf of our customers. No sales
are made on consignment.


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. All accounts are
regularly reviewed to determine if the allowance is adequate, and if not, additional
allowances are made. 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 June 30, 2005, our accounts receivable balance, net of allowances for
doubtful accounts and rebates of $2.8 million, was $11.8 million. We believe the allowance
is reasonable.


Inventory


Our
inventory, which is physically counted monthly, is stated at the lower of cost or market
value, as determined under the first-in, first-out (FIFO) method. We do not
maintain an inventory of finished goods as all product manufactured is for a specific
order and is shipped upon completion.


Intangible Assets


Goodwill
represents the excess of the purchase price over the fair value of identifiable net
tangible assets acquired. Goodwill of $13.3 million arose from our prior acquisitions of
book component manufacturers and is tested annually for impairment as described below in
accordance with Statement of Financial Accounting Standards No. 142 Goodwill and
Other Intangible Assets. We test for impairment to the value of goodwill based on a
comparison of undiscounted cash flow to the recorded value at least annually but more
often if needed. In 2005, we performed the required annual test and determined that
goodwill was not impaired, but if market conditions deteriorate, we may be required to
recognize an impairment charge to the asset.


Long Lived Assets


We
regularly evaluate the value of property, equipment and tangible assets recorded on our
balance sheet for impairment and record any impairment loss when the value of the assets
is less than the sum of the expected cash flows from those assets. As of June 30, 2005, we
do not believe there was any impairment to the value of our physical assets.


11
Deferred Tax Valuation Allowance


As
of June 30, 2005, we recorded a valuation allowance of $7.1 million against our total net
deferred tax asset of $7.1 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 five 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.


Stock Based Compensation


We
disclose information relating to stock-based compensation awards in accordance with SFAS
No.123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation Transition and Disclosure, and we have elected to apply the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees to such compensation awards. Under our employee stock option plans, we grant
employee stock options at an exercise price equal to the fair market value at the date of
grant. No compensation expense has been recorded with respect to such stock option grants.


Results of
Operations


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



Three
      Months Ended June 30
    
    Six
      Months Ended June 302005
    
    %
    
    2004
    
    %
    2005
    
    %
    
    2004
    
    %Net
      sales
    $
    27.2
    
    
    100.0
    
    $
    25.7
    
    
    100.0
    
    $
    53.0
    
    
    100.0
    
    $
    52.0
    
    
    100.0Cost of
      sales
    
    19.8
    
    
    72.8
    
    
    18.9
    
    
    73.5
    
    
    38.8
    
    
    73.2
    
    
    37.9
    
    
    72.9Gross profit
    
    7.4
    
    
    27.2
    
    
    6.8
    
    
    26.5
    
    
    14.2
    
    
    26.8
    
    
    14.1
    
    
    27.1Operating
      expenses
    
    3.7
    
    
    13.6
    
    
    3.9
    
    
    15.2
    
    
    7.2
    
    
    13.6
    
    
    8.0
    
    
    15.4Income
      from operations
    
    3.7
    
    
    13.6
    
    
    2.9
    
    
    11.3
    
    
    7.0
    
    
    13.2
    
    
    6.1
    
    
    11.7Interest
      expense
    
    3.1
    
    
    11.4
    
    
    4.2
    
    
    16.3
    
    
    6.6
    
    
    12.5
    
    
    6.5
    
    
    12.5Income
      (loss) from continuing operations
    
    0.6
    
    
    2.2
    
    
    (1.3
    )
    
    (5.1
    )
    
    0.4
    
    
    0.8
    
    
    (0.4
    )
    
    (0.8
    )Loss from
      discontinued operations BTP division
    
    0.5
    
    
    1.8
    
    
    1.5
    
    
    5.8
    
    
    1.1
    
    
    2.1
    
    
    3.5
    
    
    6.7Income
      (loss) before income taxes
    
    0.1
    
    
    0.4
    
    
    (2.8
    )
    
    (10.9
    )
    
    (0.7
    )
    
    (1.3
    )
    
    (3.9
    )
    
    (7.5
    )Income
      tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
      (loss)
    
    0.1
    
    
    0.4
    
    
    (2.8
    )
    
    (10.9
    )
    
    (0.7
    )
    
    (1.3
    )
    
    (3.9
    )
    
    (7.5
    )Three Months
Ended June 30, 2005 and 2004


Net
sales increased $1.5 million, or 5.8%, to $27.2 million for the three months ended June
30, 2005, from $25.7 million for the same period in 2004. The increase was primarily the
result of increases in the volume of component sales to book manufacturers of $0.9 million
and increased sales in juvenile books through Phoenix Asia of $0.6 million.


12
Gross
profit increased $0.6 million, or 8.8%, to $7.4 million for the three months ended June
30, 2005, from $6.8 million for the same period in 2004. This increase was primarily the
result of decreases in labor and related fringe costs, and other factory overhead costs.
The gross profit margin increased 0.7% to 27.2% for the three months ended June 30, 2005,
from 26.5% for the same period in 2004, primarily due to reductions in labor overhead
costs as a percentage of sales.


Operating
expenses decreased $0.2 million, or 5.1%, to $3.7 million for the three months ended June
30, 2005, from $3.9 million for the same period in 2004. The decrease was due primarily to
reductions in personnel and accompanying related costs.


Interest
expense decreased $1.1 million, or 26.2%, to $3.1 million for the three months ended June
30, 2005, from $4.2 million for the same period in 2004. The decrease was due primarily to
the fluctuations in our interest rate swap which resulted in a charge of $0.1 million for
the three months ended June 30, 2005, compared to an interest charge of $1.5 million for
the same period in the prior year. Interest expense also includes certain transaction
costs associated with the proposed refinancing of our debt, which, in light of market
conditions and anticipated pricing, we decided in May of 2005 not to pursue..


For
the three months ended June 30, 2005 and 2004, we did not record an income tax provision
due to the uncertainty of the expected realization of the benefit related to certain
deferred tax assets.


On
December 29, 2004, we sold the book manufacturing assets of the BTP division and ceased
operations of the BTP division effective January 31, 2005. Pretax losses from the BTP
division were $468,000 and $1,492,000 for the three months ended June 30, 2005 and 2004,
respectively and are reflected as Loss from discontinued operations  BTP
division in the income statement.


Net
loss decreased $2.9 million resulting in net income of $0.1 million for the three months
ended June 30, 2005 compared to a loss of $2.8 million for the same period in 2004, due to
the factors described above.


Six Months
Ended June 30, 2005 and 2004


Net
sales increased $1.0 million, or 1.9%, to $53.0 million for the six months ended June 30,
2005, from $52.0 million for the same period in 2004. The increase was primarily the
result of increases in the volume of component sales to book manufacturers.


Gross
profit increased $0.1 million, or 0.7%, to $14.2 million for the six months ended June 30,
2005, from $14.1 million for the same period in 2004. This increase was primarily the
result of decreases in labor and related costs and factory overhead costs. The gross
profit margin decreased 0.3% to 26.8% for the six months ended June 30, 2005, from 27.1%
for the same period in 2004, primarily due to reductions in labor overhead costs as a
percentage of sales offset by increases in material costs.


Operating
expenses decreased $0.8 million, or 10.0%, to $7.2 million for the six months ended June
30, 2005, from $8.0 million for the same period in 2004. The decrease was due primarily to
reductions in personnel and accompanying related costs, provision for doubtful accounts
and selling expenses.


Interest
expense increased $0.1 million, or 1.5%, to $6.6 million for the six months ended June
30, 2005, from $6.5 million for the same period in 2004. The increase was due primarily
to certain transaction


13
costs associated with the proposed
refinancing of our debt, which, in light of market conditions and anticipated pricing, we
decided in May of 2005 not to pursue.


For
the six months ended June 30, 2005 and 2004, we did not record an income tax provision due
to the uncertainty of the expected realization of the benefit related to certain deferred
tax assets.


On
December 29, 2004, we sold the book manufacturing assets of the BTP division and ceased
operations of the BTP division effective January 31, 2005. Pretax losses from the BTP
division were $1.1 million and $3.5 million for the six months ended June 30, 2005 and
2004, respectively and are reflected as Loss from discontinued operations  BTP
division in the income statement.


Net
loss decreased $3.2 million or 82.1% to $0.7 million for the six months ended June 30,
2005 from $3.9 million for the same period in 2004, due to the factors described above.


Liquidity
and Capital Resources



During
the first six months of 2005, our cash increased by approximately $2.6 million. Net cash
provided by operating activities was approximately $8.0 million, which consisted
principally of (i) a net loss of $0.7 million offset by net non-cash expenses and credits
of $3.4 million, (ii) reductions in accounts receivable, inventory, and prepaid expenses
and other assets of $8.2 million offset by (iii) reductions in accounts payable and
accrued expenses of $2.9 million. Net cash used in investing activities was $1.7 million
due to capital and equipment expenditures. Net cash used for financing activities was $3.7
million, resulting primarily from repayments of borrowings under the Senior Credit
Facility.


Working
capital increased $1.9 million to $8.2 million as of June 30, 2005, from $6.3 million at
December 31, 2004. This increase is primarily attributable to a decrease in accounts
payable and accrued expenses of $3.2 million, a decrease in the Senior Credit Facility of
$3.6 million and an increase in other current assets of $1.1 million, offset by a
reduction in accounts receivable of $5.9 million.


We
historically have financed our operations with internally generated funds, external short
and long-term borrowings and operating leases. We believe that funds generated from
operations, together with existing cash amounts, available credit under the Senior Credit
Facility ($9.2 million as of June 30, 2005) and other financial sources will be sufficient
to finance our current operations, remaining capital expenditure requirements and internal
growth for the next twelve months. Should we experience a material decrease in demand for
our products, or an inability to reduce costs, the resulting decrease in the availability
of funds could have a material adverse effect on our business prospects or results of
operations.


We
entered into an Interest Rate Swap Agreement dated October 27, 2003 with Wachovia that
effectively converted $50 million of our $105 million of debt under the 10-3/8% Senior
Subordinated Notes due 2009 into variable rate debt based on a LIBOR-based variable rate
plus 7.42% adjusted semiannually in arrears. The purpose of the interest rate swap was to
manage our interest rate costs relating to our 10-3/8% Senior Subordinated Notes due 2009.
On April 7, 2005, we terminated the interest rate swap because of increases in the
LIBOR-based variable rate and incurred a one time termination fee of $1.3 million of which
$0.6 million was included in interest expense for the six months ended June 30, 2005.


In
May 2000, we entered into a five year $500,000 loan agreement with the Maryland Industrial


14
and Commercial Redevelopment Fund (MICRF)
bearing interest at 4.38% per annum. Pursuant to its terms, if we employ 543 people in
Maryland in each of the years of the loan, then the loan and all accrued interest thereon
shall be forgiven. If we do not meet the employment requirements, we will be required to
repay the loan and accrued interest thereon in quarterly installments until repaid in
full. As of December 31, 2004, we employed over 600 people in the State of Maryland. In
January 2005, we closed our book manufacturing facility in Hagerstown, Maryland, and do
not expect to meet the employment requirements in the loan agreement. We have included
the principal amount of this loan in short term debt on the consolidated balance sheet at
June 30, 2005 and December 31, 2004, respectively. We do not expect to meet the
employment requirements in the loan agreement going forward. We have included the
principal amount of this loan in short term debt on the consolidated balance sheet at
June 30, 2005 and December 31, 2004, respectively. On May 26, 2005, we and MICRF executed
an amendment to the loan agreement that provides that if we have fewer than 543 but at
least 360 permanent, full-time employees within the State of Maryland as of December 31,
2005, we shall pay to MICRF an amount equal to (i) $1,485 multiplied by (ii) 543 minus
the number of our full-time, permanent employees as of December 31, 2005 (the Pro
Rata Repayment), together with accrued interest thereon from May 3, 2000 and,
provided that we are not in default, the remaining principal balance of the loan will be
forgiven. The amendment to the loan further provides for forgiveness of the accrued
interest on the Pro Rata Repayment if we provide MICRF with employment reports on its
permanent full-time employees by January 30, 2006 and make the Pro Rata Repayment to
MICRF by January 31, 2006. Based on current employment levels in Maryland, it is
estimated we will be required to repay approximately $200,000 of the $500,000
outstanding, excluding interest by January 31, 2006.


We
currently have agreements to make approximately $1 million of equipment acquisitions. In
addition, we have decided that after consolidating our book component manufacturing
operations we will sell the Components Facilities. In accordance with the provisions of
our Senior Credit Facility and the 10-3/8% Senior Subordinated Notes due 2009, we will use
the proceeds to reduce our debt. The indenture for the 10-3/8% Senior Subordinated Notes
due 2009 (the Indenture) prohibits us from incurring more than $5 million of
debt for the acquisition of equipment unless the required consolidated coverage ratio is
achieved and certain other non-financial covenants are met. As of June 30, 2005 and
December 31, 2004 we failed to meet the required consolidated coverage ratio. We have
previously incurred $0.4 million of the $5 million permitted for equipment indebtedness
pursuant to the Indenture. If we were to make any significant acquisitions for cash, it
may be necessary to obtain additional debt or equity financing. There can be no assurance
that such financing would be available on satisfactory terms or at all.


15
The
following is a summary of our future cash payments under contractual obligations as of
June 30, 2005. In the event of a default, many of the contracts provide for acceleration
of payments.


Contractual
      Obligations
    Payments
      Due by Period 
      (in thousands of dollars)Total
    
    Less
      than
      1 year
    
    1-3 
      years
    
    4-5
      (1)
      Years
    
    After 
      5 yearsLong-Term
      Debt
    $
    105,500
    
    $
    500
    
    $
    
    
    $
    105,000
    (1)
    $
    Capital
      Lease Obligations
    
    408
    
    
    162
    
    
    246
    
    
    
    
    
    Operating
      Leases
    
    5,702
    
    
    2,162
    
    
    2,610
    
    
    930
    
    
    Total Contractual
      Cash Obligations
    $
    111,610
    
    $
    2,824
    
    $
    2,856
    
    $
    105,930
    
    $
    (1)
The amounts stated are the expected amounts of our commitments under the 10-3/8% Senior
Subordinated Notes and assumes that no notes are tendered for redemption.


The
following is a summary of our other commercial commitments by commitment expiration date
as of June 30, 2005:


Other
      Commercial Commitments
    Amount
      of Commitment Expiration Per Period
      (in thousands of dollars)Total
    
    Less
      than
      1 year
    
    1-3 
      years
    
    4-5
      Years
    
    After 
      5 yearsLine
      of Credit (1)
    $
    15,000
    
    $
    
    
    $
    15,000
    
    $
    
    
    $
    Total
      Commercial Commitments
    $
    15,000
    
    $
    
    
    $
    15,000
    
    $
    
    
    $
    (1) The line of credit is the maximum
we could borrow subject to borrowing base limitations, and does not represent the amount
of debt outstanding under the line of credit.


Item 3.  Quantitative
and Qualitative Disclosures about Market Risk.


On
October 27, 2003, we entered into an interest rate swap agreement to manage interest rate
costs relating to our Senior Subordinated Notes due 2009, which carry a 10-3/8% fixed rate
of interest. The interest rate swap effectively converts $50 million of our $105 million
of debt under the Senior Subordinated Notes into variable rate debt. Under our interest
rate swap agreement, we receive payments based on a 10-3/8% rate and make payments based
on a LIBOR-based variable rate plus 7.42% thereafter, adjusted semiannually in arrears.
This interest rate swap agreement terminated by its terms on October 30, 2006.


Our
interest rate swap was subject to interest rate risk. Interest rates are highly sensitive
to many factors, including governmental, monetary and tax policies, domestic and
international economic and political considerations, and other factors beyond our
control. If the LIBOR-based variable rate upon which our payments under the interest rate
swap were made exceeded 2.955%, the amount we were required to pay each semi-annual
period pursuant to our interest rate swap would exceed the amount we


16
were entitled to receive each
semi-annual period pursuant to the swap. On April 7, 2005, we terminated the interest
rate swap because of increases in the LIBOR-based variable rate and incurred a one time
termination fee of $1.3 million of which $0.6 million was included in interest expense
for the six months ended June 30, 2005.


Item 4.
Controls and Procedures


Our
Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures, (as defined in 17 CRF 240.13(a)  15(e) and 240.15(d) 
15(e)) are effective based upon their evaluation of these controls and procedures as of
the end of the period covered by this report.


There
has been no change in our internal controls over financial reporting that occurred during
the six months and three months ended June 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.


PART II
 OTHER INFORMATION


Item 1. Legal
Proceedings.


We
are not a party to any legal proceedings, other than claims and lawsuits arising in the
normal course of our business. Although the outcome of claims and lawsuits against us can
not be accurately predicted, we do not believe that any of the claims and lawsuits
described 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.


Item 2. Change in
Securities and Use of Proceeds.


None.Item 3.
Defaults upon Senior Securities.


None.Item 4. Submission of
Matters to a Vote of Security Holders.


NoneItem 5. Other
Information.


None.17
Item 6.
Exhibits.


Exhibits.
Exhibits filed as part of this report are listed below:10.1
Third
Amendment to Amended and Restated Loan and Security Agreement dated June 6, 2005 by and
among Phoenix Color Corp., PCC            Express, Inc., Technigraphix, Inc., Phoenix
(MD.) Realty, LLC, Phoenix Color Fulfillment, Inc. and Wachovia Bank, National
           Association, as administrative agent.10.2
Second
Amendment to Loan Agreement dated May 26, 2005 by and between the Department of Business
and Economic Development, a principal Department of the State of Maryland, and Phoenix
Color Corp.10.3
Promissory
Note Modification Agreement dated May 26, 205 between the Department of Business and
Economic Development, a principal Department of the State of Maryland, and Phoenix Color
Corp.31.1
Certification
of the Chief Executive Officer pursuant to Rule 13(a)-14(a)/15(d)-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification
of the Chief Financial Officer pursuant to Rule 13(a)-14(a)/15(d)-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.


DATE: August 10, 2005



PHOENIX
      COLOR CORP.
      By: /s/ Louis LaSorsa
             
             Louis LaSorsa, Chairman
             and Chief Executive Officer
      By: /s/ Edward Lieberman
             
             Edward Lieberman
             Chief Financial Officer
             and Chief Accounting Officer18