UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the year ended December 31, 1996 Commission file Number 0-21750
PRIMESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1430030
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4350 Haddonfield Road, Suite 222, Pennsauken, N.J. 08109
(Address of Principal Executive Offices) (Zip Code)
(609)488-4888
Registrant's Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
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 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 )
As of March 14, 1997 the aggregate market value of the voting stock held by
nonaffiliates was approximately $50.5 million.
As of March 14, 1997 there were 6,514,779 shares of common stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (Item 10- Directors Only, and Items 11, 12 and
13 of Part III). The index of exhibits is located on page 33 of this document.
PART I.
ITEM I. BUSINESS
PrimeSource Corporation, previously Phillips & Jacobs, Incorporated, (the
"Company") is a major national distributor and systems integrator serving the
printing, publishing and graphic arts industries. For approximately 130 years,
the Company or its unincorporated predecessor has been servicing these
industries. The Company, which was incorporated under the laws of the
Commonwealth of Pennsylvania in 1954, was acquired as a wholly-owned subsidiary
of Tasty Baking Company ("TBC"), Philadelphia, Pennsylvania in 1965. On August
1, 1993, TBC spun-off 100% of the ownership of the Company in a dividend
distribution of the Company common stock to the shareholders of TBC. As a
result, the Company became an independent publicly-owned company whose shares
are traded on the Nasdaq Stock Market's National Market.
On September 1, 1994, Momentum Corporation, with two operating divisions,
Momentum and TK Gray, merged with the Company. Momentum Corporation had acquired
the TK Gray division, a regional distributor based in Minneapolis, on March 1,
1994. Annual sales for Momentum Corporation were approximately $165 million per
year. This merger increased the Company's coverage from less than 40% to
approximately 75% of the United States market.
In addition to the Momentum merger, the Company has acquired other graphics
distribution companies. In 1996, the Company acquired VGC Corporation's branch
operations in St. Louis, Missouri; Minneapolis, Minnesota; Milwaukee, Wisconsin;
Des Moines, Iowa; and Omaha, Nebraska. Except for the Omaha operation, these
operations were combined with existing Company businesses in these locations.
Sales from this acquisition are expected to approximate $55 million. In
addition, in 1996 and 1995, smaller acquisitions were made in Michigan and
Texas. The Company believes there will be a continuing consolidation of
distributors in the industry and the Company's business strategy will continue
to include pursuing such acquisitions which will either expand the Company's
presence in key markets and/or offer new products and services to the printing
and imaging industries.
In 1996, the Company completed a program of restructuring the Company's
infrastructure to align the business units geographically and where appropriate
centralize functions and expertise. This included a restructuring charge in 1995
for the consolidation of five distribution centers, the realignment of two
others and the centralization of certain financial and information services. In
1997, the Company's management information system will allow all of the
operations to interface between themselves and with customers and manufacturers,
producing a more efficient and effective distribution model.
The Company is headquartered in Pennsauken, New Jersey and currently has six
operating divisions consisting of CM Graphics, Dixie Type & Supply, Jetcom,
Momentum, P/J North, P/J South and TK Gray and one operating subsidiary, Dixie
Type & Supply, Co. Inc., with a total of 27 distribution locations. Consistent
with the changes in the Company's infrastructure, beginning in 1997, the
division locations will begin operating under the PrimeSource name.
The Company maintains a decentralized management structure which allows the
operating divisions broad discretion in the conduct of their respective
businesses, including responsibility for management of their suppliers,
customers and employees. Management is evaluated against their financial and
non-financial goals which are established on an annual basis. Beginning in 1996,
the Company began to emphasize return on net assets under its financial goals.
In order to provide shareholder value, the Company believes it must strive to
maximize its long-term return on the shareholders' investment. By quantifying
this objective and applying it at the operating level, the Company believes it
can best meet this goal. This emphasis contributed to improved earnings on lower
levels of employed capital in 1996, and accordingly, freed capital for growth
internally and through acquisitions. Management believes that this concept of
fostering and perpetuating the entrepreneurial drive of operating management
will continue to be a key factor in the Company's future success.
The Company presently represents over 500 suppliers, sells and supports more
than 50,000 products and has a customer base in excess of 25,000. No customer
accounted for more than 3% of the Company's net sales in 1996.
Consumable products, which include film, plates, proofing materials,
photographic chemicals, printing blankets and pressroom chemistry, presently
represent approximately 75% of total sales. The remaining 25% is derived from
sales of printing presses, electronic imaging equipment, desktop publishing,
electronic color proofing equipment, scanning systems, and other hardware and
software products. The industry is moving from an analog to a digital
environment. As a result of this transition, management expects sales of certain
types of sensitized film and paper products to continue trending down, while
sales of certain high-technology products and equipment used in the digital
process to increase.
In addition, there has been and continues to be a consolidation of the customer
base. Many printing and imaging customers want a single source for design,
pre-press preparation, and printing. Consolidation eliminates duplicate overhead
costs and creates larger entities capable of supporting more sophisticated
management techniques, from strategic planning through actual production.
Management expects to continue to see this consolidation of customers into
larger more sophisticated operations offering more services to their customers.
While the Company sells primarily the same products as its competitors,
generally at similar prices, the Company attempts to differentiate itself by
focusing on providing training, technical support, and products which will make
its customers more efficient and effective. In addition, the Company's broad
geographic presence provides an advantage in servicing regional and national
customers. Based on the changes which are occurring in the industry, management
believes this broad national presence, combined with the emphasis on technical
support, will provide significant added-value to its customers.
There are over 300 independent dealers in the United States competing in this
industry with no dealer accounting for more than 15% of the total industry
sales. The Company believes that it is one of the largest dealers in terms of
annual sales and covers a broader range of geographical markets in the United
States than any of its competitors. The Company has minimal foreign sales or
income.
The Company owns several trademarks and tradenames. To the extent trademarks,
tradenames, or patents are significant to the Company's business, they are owned
by the manufacturers the Company represents.
The Company has minimal backlog. The nature of its business is such that it
maintains substantial inventories in order to supply its customers immediately
upon receipt of an order. Approximately 25% of the Company's inventories are
consigned at various customer locations. Consignment has become a common
practice in this industry during the last decade. Usage of consigned inventories
is monitored at least monthly through a physical inventory taken by Company
personnel.
Company management does not believe that compliance with federal, state or local
laws relating to the protection of the environment will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
The Company employed 651 employees at December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
BUSINESS EXPERIENCE POSITION HELD
NAME AGE LAST FIVE YEARS SINCE
- ------------------------------------------- ---------------------------- -------------------
James F. Mullan 57 President and Chief Executive 1991-Present
President and Officer of Registrant
Chief Executive Officer
John H. Goddard, Jr. 49 Executive Vice President September, 1994-
Executive Vice President of Registrant Present
President, Chief Executive Officer 1992-1994
of Momentum Corporation
Senior Vice President of Momentum Corporation 1990-1992
William A. DeMarco 51 Vice President and Chief Financial Officer September, 1994-
Vice President and of Registrant Present
Chief Financial Officer Vice President of Finance, Treasurer, and 1993-1994
Secretary of Registrant
Vice President of Finance and Operations 1992-1993
of Phillips & Jacobs, Incorporated
Barry C. Maulding 51 Vice President, General Counsel September, 1994-
Vice President, and Corporate Secretary Present
General Counsel and of Registrant
Corporate Secretary Vice President Administration, 1993-1994
General Counsel and Corporate
Secretary of Momentum Corporation
General Counsel, Director of Administration and 1992-1993
Corporate Secretary of Momentum Corporation
ITEM 2. PROPERTIES
The locations and primary use of the physical properties of PrimeSource
Corporation and its subsidiary are as follows:
Approximate
Square
Location Footage Primary Facility Use
- ----------------------------------------------------------------------------------------------------------------
Atlanta, GA (Norcross) 23,200 Distribution/Div. Office
Baltimore, MD (Columbia) 2,300 Sales Office
Birmingham, AL 37,000 Distribution/Subsidiary Office
Boston, MA (Hingham) 13,500 Distribution
Chicago, IL (Itasca) 49,600 Distribution
Cincinnati, OH 35,000 Distribution/Div. Office
Dallas, TX 17,500 Distribution
Des Moines, IA (Ankeny) 14,000 Distribution
Detroit, MI (Plymouth) 11,600 Sales Office
Greenville, SC 600 Sales Office
Houston, TX 7,000 Distribution
Jackson, MS 6,000 Distribution
Kansas City, KS 16,800 Distribution
Kalamazoo, MI 20,000 Distribution
Lititz, PA 14,000 Distribution/Div. Office
Los Angeles, CA (Cerritos) 11,800 Distribution
Miami, FL (Miramar) 14,700 Distribution
Milwaukee, WI (New Berlin) 16,300 Distribution
Minneapolis, MN (three facilities) 57,100 Distribution
Minneapolis, MN (Mendota Heights) 53,600 Distribution/Div. Office
Mobile, AL 8,000 Distribution
Nashville, TN 16,000 Distribution
New Orleans, LA (Harahan) 14,400 Distribution
Omaha, NE 10,000 Distribution
Orlando, FL 14,400 Distribution
Pennsauken, NJ 7,400 Corporate Headquarters
Pennsauken, NJ 32,000 Distribution
Philadelphia, PA 14,000 Pressroom Products
Philadelphia, PA (Cherry Hill, NJ) 1,400 Sales/Div. Office
Pittsburgh, PA 10,480 Distribution
Portland, OR 7,800 Distribution
San Francisco, CA (South San Francisco) 10,000 Distribution
Seattle, WA (Tukwila) 20,000 Distribution/Div. Office
St. Louis, MO 22,900 Distribution
Winston-Salem, NC 400 Pressroom Products Sales
All of the properties are held under operating leases, except for the
Birmingham, Minneapolis (Mendota Heights), New Orleans, Philadelphia (pressroom
products facility), St. Louis and Seattle facilities which are owned and the Los
Angeles facility which is accounted for as a capital lease. Management believes
that the Company's properties are generally well maintained and adequate for
current operations and foreseeable expansion. The inability of the Company to
renew any short-term real property lease would not have a material effect on the
Company's results of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management believes that none of the litigation in
which the Company is currently involved would, individually or in the aggregate,
have a material effect on the Company's consolidated financial position or
quarterly or annual operating results when resolved in a future period.
The Company, along with many other potentially responsible parties, is a
defendant in a declaratory action to determine an allocation of costs for the
investigation and remediation of a Superfund cleanup site. The Company is also,
in general, subject to possible loss contingencies pursuant to federal or state
environmental laws and regulations. Although these contingencies could result in
future expenses or judgments, such expenses or judgments are not expected to
have a material effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the year.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq Stock Market's National Market
under the symbol PSRC.
The following quarterly stock price and dividend information is provided for
1995 and 1996.
Stock Price Cash Dividends
High Low Per Share
- ------------------------------------------------------------------------------
1995
First Quarter $ 11.00 $ 8.75 $ .1125
Second Quarter 9.50 7.75 .1125
Third Quarter 9.50 8.00 .1125
Fourth Quarter 9.25 5.50 .0450
1996
First Quarter 6.50 5.00 .0450
Second Quarter 7.50 5.00 .0450
Third Quarter 7.50 5.75 .0450
Fourth Quarter 8.13 6.00 .0450
The payment of future cash dividends will depend on the level and growth of the
Company's earnings and the Company's needs for cash.
There were approximately 3,700 shareholders of record as of December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data has been derived
from consolidated financial statements. On August 1, 1993, the Company was
spun-off from Tasty Baking Company ("TBC"). Accordingly, the historical data for
1993 and 1992, which include the operations of the Company when it was a
subsidiary of TBC, may not necessarily reflect the results of operations or
financial position that would have been obtained had the Company been an
independent publicly-held company during these entire periods. The operations of
Momentum Corporation (Momentum and TK Gray divisions) are included from
September 1, 1994, the date Momentum merged with the Company. This information
should be read in conjunction with the Company's consolidated financial
statements included herein.
Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
Statement of Income Data
Net Sales $ 366,657 $ 357,077 $ 238,154 $ 167,744 $ 158,748
Cost of sales 301,428 293,790 194,346 135,094 129,835
- ---------------------------------------------------------------------------------------------------------------
Gross profit 65,229 63,287 43,808 32,650 28,913
Operating expenses 57,033 58,615(1) 37,362 26,572(2) 22,843
- ---------------------------------------------------------------------------------------------------------------
Income from operations 8,196 4,672 6,446 6,078 6,070
Interest expense (1,915) (2,235) (1,113) (531) (515)
Other income-net 421 441 408 251 201
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Income before provision for income
taxes and cumulative effect of changes
in accounting principles 6,702 2,878 5, 741 5,798 5,756
Provision for income taxes 2,788 1,232 2, 210 2,399 2,248
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Income before cumulative effect of
changes in accounting principles 3,914 1,646 3, 531 3,399 3,508
Cumulative effect on prior years of
changes in accounting principles (1,306) (3)
- ---------------------------------------------------------------------------------------------------------------
Net income $ 3,914 $ 1,646 $ 3,531 $ 2,093 $ 3,508
===============================================================================================================
Per Share Data
Income before cumulative effect of
changes in accounting principles $ .60 $ .25 $ .71 $ .83 $ .86
Net income .60 .25 .71 .51 .86
Average number of shares outstanding (4) 6,558 6,567 4,964 4,098 4,057
===============================================================================================================
Balance Sheet Data
Working capital $ 67,040 $ 65,168 $ 60,987 $ 28,631 $ 16,858
Total assets 134,175 119,804 120,760 52,427 45,651
Total long-term obligations 36,250 32,202 29,094 12,747 2,943
Shareholders' equity 48,183 45,572 46,169 20,654 20,120
===============================================================================================================
<FN>
(1) Includes a one-time restructuring expense of $1,315,000 ($794,000 after
tax) relating to the consolidation of five distribution centers, the
realignment of two others, and the centralization of certain financial
and information services.
(2) Includes a one-time charge of $609,000 ($519,000 after tax) resulting
from costs associated with the spin-off from TBC consisting primarily of
legal, accounting and other professional fees.
(3) One-time after tax charge of $1,306,000 for the cumulative effect of
changes in methods of accounting for income taxes and postretirement
benefits other than pensions.
(4) Average number of shares outstanding information for 1993 and 1992 is
based on the average number of shares of TBC common shares outstanding
for each of these years converted to Company shares using the spin-off
ratio of two Company shares for every three shares of TBC common stock.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth for the years indicated certain items from the
Consolidated Statements of Income expressed as a percentage of net sales.
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.2 82.3 81.6
- --------------------------------------------------------------------------------------
Gross profit 17.8 17.7 18.4
Selling, general, and administrative expenses 14.8 15.2 14.9
Depreciation .5 .5 .6
Provision for doubtful accounts .3 .3 .2
Restructure expense .4
- --------------------------------------------------------------------------------------
Income from operations 2.2 1.3 2.7
Interest expense (.5) (.6) (.5)
Other income-net .1 .1 .2
- --------------------------------------------------------------------------------------
Income before provision for income taxes 1.8 .8 2.4
Provision for income taxes .7 .3 .9
- --------------------------------------------------------------------------------------
Net income 1.1% .5% 1.5%
======================================================================================
COMPARISON OF 1996 TO 1995
Net income for 1996 was $3,914,000, or $.60 per share compared to $1,646,000, or
$.25 per share for 1995. The results for 1995 include a one-time charge of
$1,315,000 ($794,000 after related tax benefit) for restructuring expenses.
Excluding this restructure expense, net income for 1995 would have been
$2,440,000 ($.37 per share).
Net sales in 1996 were $366,657,000 compared to $357,077,000 in 1995, an
increase of 3%. This sales increase is primarily the result of the acquisition
of five VGC Corporation locations, one in August 1996 and four in November 1996.
Retained annual sales from this acquisition are expected to approximate $55
million. Excluding the impact of the VGC acquisition, sales were flat during the
year, with modest decreases in the first half of the year and modest increases
in the second half. Sales were negatively impacted during the year by the
Company's decision to terminate relationships with certain customers who
represented potential credit risks, or whose gross profit levels did not justify
the required investment in working capital. Gross profit as a percent of sales
remained stable between the two years, at 17.8% in 1996 and 17.7% in 1995.
Selling, general, and administrative expenses as a percent of sales decreased
from 15.2% in 1995 to 14.8% in 1996. As previously indicated, in 1995, the
Company incurred a restructuring charge of $1,315,000. This expense was incurred
in the consolidation of five distribution centers, the realignment of two
others, and the centralization of certain financial and information services.
The efficiencies in aligning operations by geographical area and consolidating
duplicate facilities and functions, combined with other cost reduction programs
resulted in a containment of expenses in 1996.
In 1996, the provision for doubtful accounts decreased from $1,090,000 to
$865,000. This decrease is primarily the result of the Company implementing more
stringent credit requirements.
Interest expense decreased from $2,235,000 in 1995 to $1,915,000 in 1996. Prior
to the acquisition of VGC in November, interest expense was lower during the
year as a result of a decrease in the Company's debt levels due to improved
utilization of working capital. With the acquisition of VGC, the debt levels
increased, which will reflect in higher interest costs in future periods.
The effective income tax rate decreased from 42.8% in 1995 to 41.6% in 1996. The
lower rate in 1996 is primarily due to non-deductible expenses being a lesser
percent of income in 1996 compared to 1995. The difference between the effective
tax rates and the federal statutory rate of 34% for both years is primarily
attributable to the effect of state income taxes and non-deductible expenses.
The Company anticipates further sales and increased earnings through internal
growth and acquisitions. The Company believes there will continue to be
consolidation within the distribution channel as well as the customer base and a
continued transition from analog to digital technology in the graphic arts
industry. With the benefit of its national presence and its continued emphasis
on serving customer needs, the Company believes it is in a good position to
provide added value and differentiate itself in the market place.
COMPARISON OF 1995 TO 1994
Net income for 1995 was $1,646,000 or $.25 per share, compared to $3,531,000, or
$.71 per share, in 1994. The results for 1995 include a one-time charge of
$1,315,000 ($794,000 after related tax benefit) for restructuring expenses.
Excluding this restructure expense, net income for 1995 would have been
$2,440,000 ($.37 per share).
The results include a full year of operations of Momentum Corporation (Momentum
and TK Gray divisions) for 1995 and four months of operations in 1994, from
September 1, 1994, the date Momentum merged into the Company in a stock exchange
of .71 share of the Company common stock for each share of Momentum Corporation
common stock. The total number of additional shares issued as a result of the
merger was approximately 2,385,000.
Net sales in 1995 were $357,077,000 compared to $238,154,000 in 1994, an
increase of 50%. Including a full year's sales of the Momentum and TK Gray
divisions for 1994, the sales increase was 3%.
Gross profit as a percent of sales decreased from 18.4% in 1994 to 17.7% in
1995. This decrease was primarily due to changes in product mix, competitive
pressures and declines in manufacturers' rebates.
Selling, general, and administrative expenses as a percent of sales increased
from 14.9% in 1994 to 15.2% in 1995. This increase is primarily due to the
inclusion of Momentum for an entire year in 1995, which had a higher percentage
of operating expenses to sales.
In 1995, the provision for doubtful accounts increased from $626,000 to
$1,090,000. This increase is primarily due to the inclusion of Momentum for an
entire year.
Interest expense increased from $1,113,000 in 1994 to $2,235,000 in 1995. This
increase is primarily due to the debt assumed with the Momentum merger along
with higher interest rates in 1995.
The effective income tax rate increased from 38.5% in 1994 to 42.8% in 1995. The
higher rate in 1995 is primarily due to non-deductible expenses being a larger
percent of income in 1995 compared to 1994. The difference between the effective
tax rates and the federal statutory rate of 34% for both years is primarily
attributable to the effect of state income taxes and non-deductible expenses.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided from operating activities was $11,548,000 and $3,024,000 in 1996
and 1995, respectively, and cash used in operating activities in 1994 was
$5,171,000. The improvement in 1996 compared to 1995 and 1994 is due to
increased cash generated from operating income and better utilization of working
capital. Excluding the effect of changes in assets and liabilities, cash
provided from operations increased from $6.2 and $6.3 million in 1995 and 1994,
respectively, to $7.2 million in 1996. Excluding the effect of business
acquisitions and dispositions, working capital levels decreased, creating
additional cash in 1996 of approximately $4.3 million, compared to increases in
working capital levels in 1995 and 1994 of approximately $3.1 and $11.5 million,
respectively.
The decrease in working capital levels, in part, reflects the Company's emphasis
in 1996 of measuring performance based on return on net assets. As a result of
this focus, the turnover of inventory increased and the number of days of
receivables outstanding decreased. In addition, the Company terminated certain
businesses in 1996 that did not produce an adequate return on net assets. This
improvement was partially offset by increases in accounts receivable from new
sales from the VGC acquisition. The Company did not acquire the accounts
receivable with this acquisition.
Cash flows used in investing activities were $14,471,000, $1,062,000, and
$1,327,000 in 1996, 1995, and 1994, respectively. In 1996, the Company incurred
a net cash expenditure on the acquisition and sale of businesses of $12.2
million, primarily in the acquisition of VGC. The balance of the activities for
1996 and for 1995 and 1994 were primarily for the acquisition of property and
equipment. The Company had no material capital expenditure commitments at
December 31, 1996. Capital expenditures for 1997 are anticipated to be
approximately $2 million. In addition, the Company's business strategy is to
continue to acquire regional distributors within the Company's current markets
or companies that offer new products and services to the printing and imaging
industries.
Cash flows from financing activities were $2,923,000 provided in 1996,
$2,580,000 used in 1995, and $6,883,000 provided in 1994. In 1996, $4.4 million
was provided from debt financing. These funds were used to finance the $14.4
million of business acquisitions, net of cash generated primarily from operating
activities. In 1995 and 1994, debt decreased $.1 million and increased $8.9
million, respectively. The other primary component of financing activities was
dividend payments of $1.2, $2.5 and $2.1 million in 1996, 1995 and 1994,
respectively.
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $50 million of which $17.5 million was available at
December 31, 1996. The Company believes this source of borrowing, combined with
cash from operations, is sufficient to support the current capital requirements
of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRIMESOURCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
-----------------------------------------------------
(Thousands of dollars, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Net sales $ 366,657 $ 357,077 $ 238,154
Cost of sales 301,428 293,790 194,346
- ------------------------------------------------------------------------------------------------------------
Gross profit 65,229 63,287 43,808
Selling, general, and administrative expenses 54,268 54,204 35,367
Depreciation 1,900 2,006 1,369
Provision for doubtful accounts 865 1,090 626
Restructure expense 1,315
- ------------------------------------------------------------------------------------------------------------
Income from operations 8,196 4,672 6,446
Interest expense (1,915) (2,235) (1,113)
Other income-net 421 441 408
- ------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 6,702 2,878 5,741
Provision for income taxes 2,788 1,232 2,210
- ------------------------------------------------------------------------------------------------------------
Net income $ 3,914 $ 1,646 $ 3,531
============================================================================================================
Average number of shares outstanding 6,557,989 6,567,066 4,963,534
Net income per share $ .60 $ .25 $ .71
============================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------------------------------
(Thousands of dollars) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Trade receivables, less allowances of $1,787 and $1,372, respectively $ 54,044 $ 50,434
Income taxes receivable 1,047
Other receivables 6,612 5,993
Inventories 48,741 41,581
Deferred income taxes 1,982 1,537
Other 671 929
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 112,050 101,521
Property and equipment, net 13,719 10,358
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $1,102 and $825, respectively 4,487 4,942
Deferred income taxes 1,763 1,486
Long-term receivables 895 862
Other assets 1,261 635
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 134,175 $ 119,804
===================================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations $ 1,550 $ 1,206
Accounts payable 33,628 28,624
Accrued payroll and benefits 2,587 2,417
Other accrued liabilities 7,245 4,106
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 45,010 36,353
Long-term obligations, net of current portion 36,250 32,202
Accrued pension and other liabilities 2,577 3,421
Postretirement benefits other than pension 2,155 2,256
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 85,992 74,232
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $.01 par value, 24,000,000 shares authorized
6,514,779 and 6,527,295 issued, respectively 65 65
Additional paid-in capital 25,533 25,543
Retained earnings 22,628 20,036
Unamortized restricted stock awards (43) (72)
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 48,183 45,572
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 134,175 $ 119,804
===================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
-------------------------------------------------
(Thousands of dollars) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 3,914 $ 1,646 $ 3,531
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,900 2,006 1,369
Amortization 520 657 372
Provision for doubtful accounts 865 1,090 626
Other 28 756 421
Changes in assets and liabilities, net of effects
from business combinations/disposition:
Receivables (4,751) (6,658) (4,838)
Inventories 1,485 2,499 (7,826)
Other current assets 258 (173) 163
Income taxes receivable, accrued and deferred 1,768 2,064 (669)
Accounts payable and other accrued liabilities 6,764 288 2,445
Payment of pension and other postretirement benefits (1,203) (1,151) (765)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 11,548 3,024 (5,171)
Investing Activities
Proceeds from sales of property and equipment 218 473 112
Purchase of property and equipment (1,530) (1,713) (1,074)
Payments for business combinations, net of cash acquired (14,394) (954) (682)
Proceeds from sale of business 2,235
(Increase) decrease in long-term receivables (33) 777 189
(Increase) decrease in other assets (732) 479 128
Other, net (235) (124)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,471) (1,062) (1,327)
Financing Activities
Net increase (decrease) in short-term borrowings (3,000) 1,905
Proceeds from long-term obligations 142,924 102,925 81,614
Repayment of long-term obligations (138,532) (100,050) (74,581)
Dividends paid (1,211) (2,497) (2,121)
Purchase of common stock (258)
Proceeds from exercise of stock options 42 66
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,923 (2,580) 6,883
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash --- (618) 385
Cash at beginning of year 618 233
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $ --- $ --- $ 618
===================================================================================================================
Net cash paid (received) during the year for:
Interest $ 1,826 $ 2,223 $ 1,085
Income taxes 2,314 (644) 2,682
===================================================================================================================
<FN>
Supplemental disclosure of non-cash investing and financing activities: In 1994,
net assets of Momentum Corporation of $23,855,000 were merged into the Company
in exchange for 2,385,466 shares of common stock.
See accompanying notes to consolidated financial statements
</FN>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Common Unamortized
Stock Additional Restricted
($.01 Par Paid-in Retained Stock
(Thousands of dollars) Value) Capital Earnings Awards Total
- -------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $ 41 $ 1,255 $ 19,477 $ (119) $ 20,654
Net income 3,531 3,531
Cash dividends paid to
shareholders ($.45 per share) (2,121) (2,121)
Shares issued under
noncompete agreement 100 100
Shares issued in merger
with Momentum Corporation 24 23,927 (104) 23,847
Restricted stock awards and
related amortization (4) 81 77
Stock options exercised and
related tax benefit 81 81
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 65 25,359 20,887 (142) 46,169
Net income 1,646 1,646
Cash dividends paid to
shareholders ($.3825 per share) (2,497) (2,497)
Shares issued under
noncompete agreement 142 142
Restricted stock awards and
related amortization 70 70
Stock options exercised and
related tax benefit 42 42
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 65 25,543 20,036 (72) 45,572
Net income 3,914 3,914
Cash dividends paid to
shareholders ($.18 per share) (1,211) (1,211)
Shares issued under
acquisition agreement 137 137
Amortization of restricted
stock awards 29 29
Purchase of common stock (147) (111) (258)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 65 $ 25,533 $ 22,628 $ (43) $ 48,183
===================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization
PrimeSource Corporation (the "Company") through its P/J North, P/J
South, Jetcom, Momentum, TK Gray and CM Graphics divisions, and its
subsidiary Dixie Type & Supply Company, Inc. ("Dixie Type"), is a
national distributor and systems integrator serving the printing,
publishing, and graphics arts industries. In 1997, the Company will
begin operating its divisions under the PrimeSource name.
On September 1, 1994, Momentum Corporation was merged into the Company
in a tax-free stock exchange. Effective with this combination of
companies, the Company's name was changed from Phillips & Jacobs,
Incorporated to PrimeSource Corporation.
On August 1, 1993, Tasty Baking Company ("TBC") distributed to the TBC
shareholders 100% of the outstanding shares of the Company's common
stock. As a result of the execution of this plan of distribution, the
Company became an independent publicly-owned company whose shares are
traded on the Nasdaq Stock Market's National Market.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) and first-in, first-out
(FIFO) methods.
Property and Equipment
Property and equipment are carried at cost. Costs of major additions,
replacements and betterments are capitalized and maintenance and
repairs which do not extend the life of the respective assets are
expensed as incurred. When property is retired or otherwise disposed,
the cost of the property and the related accumulated depreciation are
removed from the accounts and any resulting gains or losses are
reflected in current operations. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets
which range from three to ten years for machinery and equipment and ten
to thirty years for buildings and improvements.
Capital leases are included under property and equipment with the
corresponding amortization included in depreciation. The related
financial obligations under the capital leases are included in
long-term obligations. Capital leases are amortized over the useful
lives of the respective assets.
Excess of Cost Over Net Assets of Businesses Acquired
The excess of the total acquisition cost over the fair value of net
tangible assets acquired is being amortized by the straight-line method
over periods ranging from fifteen to forty years. At each balance sheet
date, the Company evaluates the recoverability of its goodwill using
certain financial indicators, including historical and future ability
to generate income from operations.
Fair Value of Financial Instruments
The carrying value of the Company's short-term financial instruments
such as receivables and payables approximate their fair values, based
on the short-term maturities of these instruments. The carrying value
of long-term investments, consisting primarily of long-term notes
receivable, and long-term debt obligations, consisting primarily of
revolving credit debt with interest rates based on current short-term
market rates, approximate the market value based on the estimated
discounted value of future cash flows.
Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its geographic dispersion.
Ongoing credit evaluations of customers' financial condition are
performed and, generally, no collateral is required. The Company
maintains reserves for potential credit losses and such losses have not
exceeded management's expectations.
Incentive Stock Awards
The Company applies the intrinsic value based method prescribed in
Accounting Principles Board Opinion No. 25 (APB 25) to account for
options granted to employees and directors to purchase common shares.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) requires that companies electing
to continue using the intrinsic value method must make pro forma
disclosures of net income and earnings per share as if the
fair-value-based method of accounting had been applied. No compensation
expense is recognized on the grant date since, at that date, the option
price equals the market price of the underlying common shares.
Income Per Common Share
Income per common share is based on the weighted average number of
common shares and equivalent common shares outstanding during the year.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). This Statement establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. This Statement is
effective for financial statements issued for periods ending after
December 15, 1997, earlier application is not permitted. This statement
requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS
128 will have on its financial statements.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. Business Combinations
Momentum Corporation
On September 1, 1994, Momentum Corporation merged into the Company.
Each common share of Momentum stock was converted into .71 share of the
Company's common stock, with any fractional share paid in cash. The
equivalent Company common stock issued in exchange for the Momentum
common stock was 2,385,466 shares at a fair value as of the transaction
date of $10 per share, or $23,855,000. In addition, the Company
incurred merger costs of approximately $660,000. The excess of the
acquisition cost over the net tangible assets acquired of approximately
$3,335,000 is being amortized on a straight-line basis over 15 years.
Effective March 1, 1994, Momentum Corporation purchased substantially
all of the assets and assumed certain of the liabilities of TK Gray,
Inc. for approximately $15.4 million. Assuming both the acquisition of
TK Gray, Inc. by Momentum Corporation and the merger of Momentum
Corporation into the Company had occurred at the beginning of the year,
unaudited pro-forma sales and net income for the year ended December
31, 1994 would have been approximately $348.3 million and $1,737,000
($.26 per share), respectively.
VGC
The Company acquired VGC Corporation's branch operations in St. Louis,
Missouri on August 26, 1996 and Minneapolis, Minnesota; Milwaukee,
Wisconsin; Des Moines, Iowa; and Omaha, Nebraska on November 1, 1996.
The acquisition cost was approximately $11,977,000 for which the
Company acquired buildings and land in Minneapolis and Des Moines, and
inventory and other operating assets in all of the locations. None of
the acquisition costs were applied to intangible assets. Except for the
Omaha operation, these operations were combined with existing Company
businesses in these locations.
KPM
On May 28, 1996, the Company acquired the operating assets of KPM for
approximately $2,417,000. The excess of the acquisition cost over the
net tangible assets acquired of approximately $221,000 is being
amortized on a straight-line basis over 15 years.
Other Acquisitions
In 1995, the Company acquired substantially all of the operating assets
of Turner Products, Inc. ("Turner") and Litho Supply and Service
Company's supply distribution business ("Litho Supply") for
approximately $1,010,000. The excess of the acquisition cost over the
net tangible assets acquired of approximately $89,000 is being
amortized on a straight-line basis over 15 years.
In 1994, the Company acquired the operating assets of Lanman Systems
for approximately $310,000. The excess of the acquisition cost over the
net tangible assets acquired of approximately $200,000 is being
amortized on a straight-line basis over 15 years.
All of the business combinations have been accounted for as purchases
and, accordingly, are included in operations from their respective
acquisition dates.
The pro forma results of the VGC, KPM, Turner, Litho Supply, and Lanman
Systems Group acquisitions would not have had a significant impact on
the Company's consolidated results of operations.
4. Disposition
On July 1, 1996, the Company sold substantially all of the assets of
its Rochester, New York subsidiary, Onandaga Litho Supply, Co., Inc.,
for approximately $2.2 million which approximated the financial basis
of the assets at the time of the sale. This transaction did not have a
significant impact on the Company's operating results.
5. Inventories
Inventories, which are primarily finished goods, at December 31
consisted of:
(Thousands of dollars) 1996 1995
----------------------------------------------------------------------
Last-in, first-out (LIFO) $ 25,838 $ 21,838
First-in, first-out (FIFO) 22,903 19,743
----------------------------------------------------------------------
Total inventories $ 48,741 $ 41,581
======================================================================
The current replacement costs of inventories exceeds LIFO values by
approximately $5,591,000 and $5,208,000 at December 31, 1996 and 1995,
respectively.
6. Property and Equipment
Property and equipment, net, at December 31 consisted of:
(Thousands of dollars) 1996 1995
-----------------------------------------------------------------------
Land $ 1,549 $ 1,191
Buildings and improvements 9,017 6,225
Leased property 1,418 886
Machinery, equipment and other 10,883 10,140
-----------------------------------------------------------------------
22,867 18,442
Less accumulated depreciation
and amortization (9,148) (8,084)
-----------------------------------------------------------------------
Property and equipment, net $ 13,719 $ 10,358
=======================================================================
7. Long-term Obligations
The long-term obligations of the Company at December 31 consisted of:
(Thousands of dollars) 1996 1995
----------------------------------------------------------------------------------------------------------
Revolving credit agreements $ 32,450 $ 27,200
Term loan (interest rate of 6.03%), principal payment of
$167 plus interest due quarterly through December, 1999 2,000 2,571
Term loan (interest rate of 6.03%), principal payment of
$134 plus interest due quarterly through December, 1999 1,604 2,033
Capitalized lease obligation (imputed interest rate of 8.38%)
payable in monthly installments through August, 2002 1,352 1,538
Capitalized lease obligation (imputed interest rate of 8.97%)
payable in monthly installments through August, 1999 348
Other miscellaneous notes 46 66
----------------------------------------------------------------------------------------------------------
37,800 33,408
Less current portion (1,550) (1,206)
-----------------------------------------------------------------------------------------------------------
Net long-term obligations $ 36,250 $ 32,202
==========================================================================================================
Maturities of long-term obligations for each of the five years
beginning January 1, 1997 and thereafter are as follows:
Capitalized Other
Lease Long-term
(Thousands of dollars) Obligations Obligations
----------------------------------------------------------------------------------------------------------
1997 $ 460 $ 1,223
1998 460 1,225
1999 409 1,202
2000 308 32,450
2001 308
Thereafter 155
----------------------------------------------------------------------------------------------------------
2,100 36,100
Less imputed interest on capitalized lease (400)
----------------------------------------------------------------------------------------------------------
$ 1,700 $ 36,100
==========================================================================================================
In November 1996, the Company entered into an uncollateralized $50
million revolving credit agreement which expires in January, 2000.
Under the terms of the agreement, which includes three banks, the
Company can borrow at the prime rate or the London Interbank Offered
Rate (LIBOR) plus between .75% to 1.05% depending on certain specified
performance levels. The loan agreement provides, among other terms,
various requirements for tangible net worth and leverage and fixed
charge coverage ratios. This agreement replaced three revolving
agreements with a total commitment of $27.5 million.
Under terms of certain insurance policies and claims handling
agreements, the Company is required to maintain certain standby letters
of credit. At December 31, 1996 these totaled approximately $300,000.
8. Provision for Income Taxes
The income tax provision for the years ended December 31 consisted of:
(Thousands of dollars) 1996 1995 1994
----------------------------------------------------------------------------------------------------------
Current:
Federal $ 2,571 $ 1,015 $ 1,701
State 586 143 305
----------------------------------------------------------------------------------------------------------
3,157 1,158 2,006
Deferred:
Federal (264) 58 154
State (105) 16 50
----------------------------------------------------------------------------------------------------------
(369) 74 204
----------------------------------------------------------------------------------------------------------
Provision for income taxes $ 2,788 $ 1,232 $ 2,210
==========================================================================================================
Reconciliation of the provision for income taxes computed at the
federal statutory rate of 34% to the actual provision for income taxes
for the years ended December 31 consisted of:
(Thousands of dollars) 1996 1995 1994
----------------------------------------------------------------------------------------------------------
Statutory tax provision $ 2,279 $ 979 $ 1,952
State income taxes, net of federal income tax benefit 334 95 201
Expenses for which there are no tax benefits 154 178 75
Other, net 21 (20) (18)
----------------------------------------------------------------------------------------------------------
Provision for income taxes $ 2,788 $ 1,232 $ 2,210
==========================================================================================================
Deferred income taxes represent the future tax consequences of
differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end. Significant components of
the Company's deferred tax assets (liabilities) at December 31,
consisted of:
(Thousands of dollars) 1996 1995
----------------------------------------------------------------------------------------------------------
Pension and employee benefit costs $ 979 $ 1,214
Postretirement benefits other than pensions 853 893
Vacation accrual 408 315
Provision for doubtful accounts 634 558
Depreciation (424) (784)
Other, net 1,295 827
----------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 3,745 $ 3,023
==========================================================================================================
9. Defined Benefit Pension Plans
Employees of the Company are covered under two defined benefit pension
plans. The Momentum Retirement Plan (the "Momentum Plan") covers the
employees of the Momentum and TK Gray divisions. The PrimeSource
Pension Plan (the "PrimeSource Plan") covers substantially all other
employees of the Company. Effective January 1, 1997, the Momentum Plan
was combined into the PrimeSource Plan.
Employees of the P/J North and P/J South divisions were included in the
Tasty Baking Retirement Plan (the "TBC Plan") through December 31,
1994. The pension expense and contributions to the TBC Plan were
allocated between TBC and the Company based on the actuarial attributes
of each company's respective participants.
Benefits under the plans are generally based on the employees' years of
service and compensation during the years preceding retirement.
Contributions to the plans are based on funding standards established
by the Employee Retirement Income Security Act of 1974 (ERISA).
The plans' net pension expense for the years ended December 31 included
the following components:
(Thousands of dollars) 1996 1995 1994
----------------------------------------------------------------------------------------------------------
Service cost of benefits earned during the year $ 1,000 $ 732 $ 120
Interest cost on projected benefit obligation 1,718 1,572 366
Actual (return) loss on plan assets (3,082) (5,118) 262
Net amortization and deferral 821 3,297 (734)
Allocated expense from TBC Plan 254
----------------------------------------------------------------------------------------------------------
Net pension expense $ 457 $ 483 $ 268
==========================================================================================================
The plans' funded status and the amounts recognized in the Company's
consolidated balance sheet at December 31 were:
PrimeSource Plan Momentum Plan
(Thousands of dollars) 1996 1995 1996 1995
----------------------------------------------------------------------------------------------------------
Actuarial present value of plan benefit obligations
Vested $ 5,931 $ 5,488 $ 15,424 $ 15,526
Non-vested 74 91 361 325
----------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 6,005 5,579 15,785 15,851
Effect of future salary increases 1,565 1,501 753 852
----------------------------------------------------------------------------------------------------------
Projected benefit obligation 7,570 7,080 16,538 16,703
Plan assets at fair value 6,295 5,140 19,591 17,893
----------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation (1,275) (1,940) 3,053 1,190
Unrecognized prior service cost (205) (345)
Unrecognized net loss (gain) (356) 650 (2,903) (1,378)
-----------------------------------------------------------------------------------------------------------
Net pension asset (liability) $ (1,836) $ (1,635) $ 150 $ (188)
===========================================================================================================
For both plans, the actuarial present value of benefits and projected
benefit obligations were determined using a discount rate of 7.75%,
7.25% and 8.5% for the years ending December 31, 1996, 1995 and 1994,
respectively. The expected long-term rate of return on assets was 10%
and the rate of compensation increase used to measure the projected
benefit obligation was 4% for both plans.
The plans' assets are invested in undivided interests in several funds
structured to duplicate the performance of various stock and bond
indexes.
10. Defined Contribution Pension Plans
The Company sponsors a number of defined contribution pension plans in
the form of IRC 401(k) plans. Participation in one of these plans is
available to substantially all employees. Company contributions to
these plans are based on a percentage of the employee contributions not
to exceed certain maximum levels. The cost of these plans was $220,000,
$222,000 and $170,000 for the years 1996, 1995, and 1994, respectively.
11. Postretirement Benefits Other Than Pensions
The Company has two retiree health benefit plans, the Phillips & Jacobs
Retiree Health Plan (the "P/J Retiree Plan") which covers retirees
primarily from the P/J North and P/J South divisions and the Momentum
Retiree Medical Plan (the "Momentum Retiree Plan") which covers
retirees from the Momentum division. Both plans provide health care
benefits through a health care administrator and contracts with health
service providers. In addition, the P/J Retiree Plan provides life
insurance benefits through an insurance company. The Company's policy
is to fund the plans as benefits are paid.
The plans are contributory with ceilings on the Company's contribution.
In addition, under the Momentum Retiree Plan, employees who were under
the age of 55 on December 31, 1992 receive no contribution from the
Company under the plan.
Net postretirement benefit expense (benefit) for the years ended
December 31 included the following components:
(Thousands of dollars) 1996 1995 1994
----------------------------------------------------------------------------------------------------------
Service cost of benefits earned during the year $ 17 $ 19 $ 19
Interest cost on projected benefit obligation 86 106 74
Amortization of net gain (107) (100) (106)
-----------------------------------------------------------------------------------------------------------
Net expense (benefit) $ (4) $ 25 $ (13)
===========================================================================================================
The plans' funded status and the amounts recognized in the Company's
consolidated balance sheet at December 31 were:
(Thousands of dollars) 1996 1995
----------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Fully eligible plan participants $ (146) $ (187)
Other active plan participants (76) (114)
Retirees and vested terminated employees (830) (1,136)
-----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (1,052) (1,437)
Unrecognized net gain (1,103) (819)
-----------------------------------------------------------------------------------------------------------
Postretirement benefit liability $ (2,155) $ (2,256)
===========================================================================================================
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.75%, 7.25% and 8.5% for the years ending December
31, 1996, 1995 and 1994, respectively. The health care cost trend rates
used were 8.12% (7.45% for health maintenance organizations(HMO's)),
8.56% (7.73% for HMO's), and 9% (8% for HMO's) for the years 1996,
1995, and 1994, respectively, gradually declining to 5% in 2003 (2005
for HMO's) and remaining at that level thereafter. Due to the ceilings
on Company contributions, the effect of increases in health care cost
trend rates do not have a material effect on the liability or expense.
12. Incentive Stock Awards
Stock Options
The Company's stock incentive plans provide for the awarding of stock
options to directors, officers and other key employees. All granted
options lapse at the earlier of the expiration of the option term (not
more than ten years from the grant date) or within three months
following the date on which employment with the Company or its
subsidiaries terminates.
Changes in options outstanding for the three years ended December 31,
1996 are:
Option Prices
------------------------------
Options Average Range
-----------------------------------------------------------------------------------
Outstanding at December 31, 1993 219,748 $ 11.50 $ 11.50
-----------------------------------------------------------------------------------
Granted 170,471 8.56 5.92 - 13.03
Exercised (9,922) 6.68 6.34 - 6.91
-----------------------------------------------------------------------------------
Outstanding at December 31, 1994 380,297 10.35 5.92 - 13.03
-----------------------------------------------------------------------------------
Granted 65,350 6.11 6.11
Exercised (3,195) 6.34 6.34
Canceled (19,009) 10.07 6.34 - 12.32
-----------------------------------------------------------------------------------
Outstanding at December 31, 1995 423,443 9.74 5.92 - 13.03
-----------------------------------------------------------------------------------
Granted 344,756 6.30 6.11 - 6.97
Canceled (303,350) 11.04 5.92 - 13.03
-----------------------------------------------------------------------------------
Outstanding at December 31, 1996 464,849 $ 6.34 $ 6.11 - 8.06
===================================================================================
At December 31, 1996, there were 140,751 options exercisable and
147,500 options available for grant. The weighted-average remaining
contractual life of outstanding options at December 31, 1996 and 1995
was 8.3 and 7 years, respectively.
The Company has not recognized compensation expense in connection with
stock option grants. Had compensation expense been determined based on
the fair value on the grant date of options granted after December 31,
1994, the Company's net income and earnings per share on a pro forma
basis would have been reduced for the years ended December 31 as
follows:
(Thousands of dollars, except per share data) 1996 1995
-----------------------------------------------------------------------------------
Net Income:
As reported $ 3,914 $ 1,646
Pro forma 3,813 1,631
===================================================================================
Earnings Per Share:
As reported $ .60 $ .25
Pro forma .58 .25
===================================================================================
The weighted-average fair value per share for options granted in 1996
and 1995 was $2.51 and $1.92, respectively. The fair value was
estimated using the Black-Scholes option-pricing model. For options
granted in 1996, a dividend yield rate of 2.6%, expected stock
volatility of 37%, expected option life of seven years and risk-free
interest rate of 6.75% were used in estimating the value. For options
granted in 1995, a dividend yield rate of 2.9%, expected stock
volatility of 34%, expected option life of seven years and risk-free
interest rate of 5.5% were used.
Restricted Stock Awards
The Company's stock incentive plans provide for the awarding of
restricted stock to officers and key employees. The fair market value
of the stock at the date of grant establishes the compensation amount
which is amortized to operations over the restriction period. At
December 31, 1996, there was an unamortized expense for shares awarded
of $43,000 and an additional 61,880 shares available for future awards.
13. Leases
The Company leases certain distribution and office facilities,
machinery and equipment, and automotive equipment under various
noncancelable lease agreements. The Company expects that in the normal
course of business, leases that expire will be renewed or replaced by
other leases.
Minimum annual rentals payable under noncancelable operating leases
with a remaining term of more than one year from December 31, 1996 are
as follows:
Years Ending December 31,
(Thousands of dollars)
-----------------------------------------------------------------------
1997 $ 2,031
1998 1,565
1999 1,044
2000 602
2001 174
Thereafter 264
-----------------------------------------------------------------------
Total minimum lease payments $ 5,680
=======================================================================
Rent expense, net of noncancelable sublease income of $5,000, $98,000,
and $61,000 in 1996, 1995, and 1994, respectively, was $2,182,000,
$2,382,000 and $1,388,000 for 1996, 1995, and 1994, respectively.
The Company leases a distribution facility from two employees. Rent
expense incurred in connection with this lease was approximately
$63,000 in 1996, and $60,000 in 1995 and 1994.
14. Restructure Expense
The Company recognized a restructuring expense of $1,315,000 in 1995
relating to the consolidation of five distribution centers, the
realignment of two others, and the centralization of certain financial
and information services. The expense consisted of $875,000 for
employee severance compensation and $440,000 for costs associated with
the closure of facilities. Except for continuing lease commitments for
closed facilities, substantially all of the costs were paid in 1995.
15. Commitments and Contingencies
The Company is subject to various legal proceedings and claims which
have arisen in the ordinary course of its business. The Company does
not believe that the ultimate resolution of such matters will have a
material effect on the Company's consolidated financial position or
results of operations.
The Company, along with many other potentially responsible parties, is
a defendant in a declaratory action to determine an allocation of costs
for the investigation and remediation of a Superfund cleanup site. The
Company is also, in general, subject to possible loss contingencies
pursuant to federal or state environmental laws and regulations.
Although these contingencies could result in future expenses or
judgments, such expenses or judgments are not expected to have a
material effect on the Company's consolidated financial position or
results of operations.
16. Quarterly Financial Information (unaudited)
Summarized unaudited quarterly financial data for the years ended
December 31, 1996 and 1995 are:
(Thousands of dollars
except per share data) First Second Third Fourth(1) Total
----------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Net sales $ 86,959 $ 87,898 $ 89,344 $ 102,456 $ 366,657
Gross profit 15,182 15,576 16,062 18,409 65,229
Net income 829 916 924 1,245 3,914
Net income per share $ .13 $ .14 $ .14 $ .19 $ .60
Year Ended December 31, 1995
Net sales $ 89,577 $ 89,158 $ 88,156 $ 90,186 $ 357,077
Gross profit 15,870 16,059 15,248 16,110 63,287
Net income (loss) 626 (285)(2) 451 854 1,646
Net income (loss) per share (3) $ .10 $ (.04) $ .07 $ .13 $ .25
(1) The operations of the VGC acquisition are included from the
November 1, 1996 acquisition date.
(2) Includes a one-time restructuring expense of $1,315,000 ($794,000
after tax) relating to the consolidation of five distribution
centers, the realignment of two others, and the centralization of
certain financial and information services.
(3) Due to changes in the number of outstanding shares during the year
and rounding, the sum of the quarterly incomes per share for each
year will not equal the net income per share for the year.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors
of PrimeSource Corporation
We have audited the accompanying consolidated balance sheets of PrimeSource
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. We have also
audited the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. These financial statements and this financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and this financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PrimeSource Corporation and its subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 19, 1997
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the definitive proxy statement to be filed with
the Securities and Exchange Commission by April 30, 1997, except information
regarding executive officers which appears under Part I.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1997.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements have been included as part of this
report:
Form 10-K
Page
Consolidated Statements of Income 12
Consolidated Balance Sheets 13
Consolidated Statements of Cash Flows 14
Consolidated Statements of Shareholders' Equity 15
Notes to Consolidated Financial Statements 16
Report of Independent Accountants 27
(a)(2) Financial Statement Schedule
(a) The following financial statement schedule is submitted herewith:
-Schedule II Valuation of Qualifying Accounts and Reserves All other
schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) Exhibits
The required exhibits are included at the back of this Form 10-K and are
described in the Exhibit Index immediately preceding the first exhibit.
(b) Reports on Form 8-K
On November 13, 1996, the Registrant filed a Form 8-K to report the
Registrant's acquisition of VGC Corporation's branch operations in
Minneapolis, Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha,
Nebraska on November 1, 1996.
PRIMESOURCE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
Classification Balance at Charged to Balance
Beginning Charged to Other Deductions at End
(thousands of dollars) of Period Expenses Accounts Write-offs of Period
- --------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1996
Allowance for doubtful accounts $ 1,372 $ 865 $ (450) $ 1,787
Amortization of goodwill 825 316 $ (39)(1) 1,102
Inventory reserves 1,752 364 1,754 (2) (698) 3,172
- --------------------------------------------------------------------------------------------------------------
3,949 1,545 1,715 (1,148) 6,061
- --------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1995
Allowance for doubtful accounts $ 1,457 $ 1,090 $ (1,175) $ 1,372
Amortization of goodwill 519 306 825
Inventory reserves 1,563 561 624 (3) (996) 1,752
- --------------------------------------------------------------------------------------------------------------
3,539 1,957 624 (2,171) 3,949
- --------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1994
Allowance for doubtful accounts $ 937 $ 626 $ 603 (3) $ (709) $ 1,457
Amortization of goodwill 379 140 519
Inventory reserves 232 316 1,362 (3) (347) 1,563
- --------------------------------------------------------------------------------------------------------------
1,548 1,082 1,965 (1,056) 3,539
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Reserve disposed of with the sale of the assets of Onondaga Litho Supply,
Inc.
(2) Related to the acquisition of VGC Corporation's branch operations in St.
Louis, Missouri; Minneapolis, Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa;
and Omaha, Nebraska.
(3) Related to the merger with Momentum Corporation and acquisition of Lanman
Systems Group.
</FN>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated March 28, 1997
/s/ James F. Mullan
James F. Mullan
President and
Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on the behalf of the registrant
and in the capacity and on the date indicated.
Dated March 28, 1997
/s/ William A. DeMarco
William A. DeMarco
Vice President,
Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
- -----------------------------------------------------------------------------------------
/s/ Richard E. Engebrecht Chairman of the Board and March 4, 1997
- --------------------------------------
Richard E. Engebrecht Director of PrimeSource
Corporation
/s/ James F. Mullan President, Chief Executive March 4, 1997
- --------------------------------------
James F. Mullan Officer and Director of
PrimeSource Corporation
/s/ John H. Goddard, Jr. Executive Vice President and March 4, 1997
- --------------------------------------
John H. Goddard, Jr. Director of PrimeSource
Corporation
/s/ Fred C. Aldridge, Jr. Director of PrimeSource March 4, 1997
- --------------------------------------
Fred C. Aldridge, Jr. Corporation
/s/ Philip J. Baur, Jr. Director of PrimeSource March 4, 1997
- --------------------------------------
Philip J. Baur, Jr. Corporation
/s/ Gary MacLeod Director of PrimeSource March 4, 1997
- --------------------------------------
Gary MacLeod Corporation
/s/ Edward N. Patrone Director of PrimeSource March 4, 1997
- --------------------------------------
Edward N. Patrone Corporation
/s/ John M. Pettine Director of PrimeSource March 4, 1997
- --------------------------------------
John M. Pettine Corporation
/s/ Andrew V. Smith Director of PrimeSource March 4, 1997
- --------------------------------------
Andrew V. Smith Corporation
EXHIBIT INDEX
Exhibit Number and Description
The following Exhibit Numbers refer to Regulation S-K, Item 601. All other
exhibits are omitted because they are inapplicable. (Exhibits identified in
parentheses are on file with the Securities and Exchange Commission and are
incorporated herein by reference as exhibits hereto.)
(2.1) Agreement and Plan of Reorganization dated as of May 27, 1994 by and
between MOMENTUM CORPORATION and PHILLIPS & JACOBS, INCORPORATED
(filed as Annex A to the Proxy/Prospectus included within
registration statement No. 33-54913 on Form S-4 filed by the
Registrant on August 4, 1994)
(2.2) Form of Plan of Merger (filed as Annex B to the Proxy/Prospectus
included within registration statement No. 33-54913 on Form S-4 filed
by the Registrant on August 4, 1994)
(2.3) Asset Purchase Agreement By And Among VGC Corp., VGC Holding USA,
Inc., NV Koninklijke KNP BT and PrimeSource dated November 1, 1996,
for the purchase of the operating assets (excluding accounts
receivable) of VGC Corporation's branch operations in Minneapolis,
Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha,
Nebraska. (filed as exhibit 2 to Form 8-K dated November 13, 1996,
File No. 0-21750)
(2.4) Asset Purchase Agreement By And Among Momentum Corporation And TK
Gray, Inc. And Its Shareholders dated April 15, 1994, for the
purchase of substantially all of the assets and certain of the
liabilities of TK Gray, Inc. (filed as exhibit 2(i) to Form 8-K dated
May 2, 1994, File No. 0-18112)
(3.1) Amended and Restated Articles of Incorporation of the Registrant
(filed as Annex C to the Proxy/Prospectus included within
registration statement No. 33-54913 on Form S-4 filed by the
Registrant on August 4, 1994)
(3.2) Amended and Restated By-laws of the Registrant (filed as Annex D to
the Proxy/Prospectus included within registration statement No.
33-54913 on Form S-4 filed by the Registrant on August 4, 1994)
3.3 Amendment to Amended and Restated By-laws of the Registrant which
will be effective May 7, 1997.
(4.1) Form of Common Stock Certificate (filed with Form 10 filed by
Registrant on May 12, 1993, (File No. 0-21750 and as subsequently
amended on Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993
and Form 8 filed on July 13, 1993)
(4.2) Form of Common Stock Certificate, effective September 1, 1994 (filed
as Exhibit 4.2 to Form 10-K, File No. 0-21750, dated March 30, 1995)
(10.1) Form of Phillips & Jacobs, Inc. 1993 Long Term Incentive Plan (filed
as Exhibit 10.1 to Form 10-K, File No. 0-21750, dated March 30, 1995)
(10.2) Form of Phillips & Jacobs, Incorporated Indemnification Agreement
(filed with Form 10 filed by Registrant on May 12, 1993, (File No.
0-21750) and as subsequently amended on Form 8 filed on May 28, 1993,
Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993)*
(10.3) Form of Supplemental Executive Retirement Plan Agreement (filed with
Form 10 filed by Registrant on May 12, 1993, (File No. 0-21750) and
as subsequently amended on Form 8 filed on May 28, 1993, Form 8 filed
on July 6, 1993 and Form 8 filed on July 13, 1993)*
(10.4) Employment Agreement between Registrant and D.M. Zewiske dated July
1, 1988 (filed with Form 10 filed by Registrant on May 12, 1993,
(File No. 0-21750) and as subsequently amended on Form 8 filed on May
28, 1993, Form 8 filed on July 6, 1993 and Form 8 filed on July 13,
1993)*
10.5 Employment Agreement between the Registrant and W.A. DeMarco dated
December 31, 1996*
10.6 Employment Agreement between the Registrant and J.F. Mullan dated
December 31, 1996*
(10.7) Form of Tax Matters Agreement (filed with Form 10 filed by Registrant
on May 12, 1993, (File No. 0-21750) and as subsequently amended on
Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993 and Form 8
filed on July 13, 1993)
(10.8) Amendment No. 1 to Agreement among Employers Participating in Certain
Qualified Plans (filed as Exhibit 10.14 to the Proxy/Prospectus
included within registration statement No. 33-54913 on Form S-4 filed
by the Registrant on August 4, 1994)*
(10.9) 1993 Replacement Option Plan (P&J Spin-off) for Directors (filed as
Annex I to the Proxy/Prospectus included within registration
statement No. 33-54913 on Form S-4 filed by the Registrant on August
4, 1994)*
(10.10) Phillips & Jacobs, Incorporated 401(k) Savings Plan and Trust
Agreement (filed as Exhibit 10.14 to Form 10-K, File No. 0-21750,
dated March 28, 1994)*
(10.11) 1989 Long-Term Incentive Stock Plan (filed with Registration
Statement on Form S-8 on December 8, 1994, File No. 33-87360)*
(10.12) Restated Momentum Distribution Inc. Supplemental Benefits Plan,
effective April 22, 1991 (filed as Exhibit 10.13 to Form 10-K, File
No. 0-18112 dated March 30 1993)*
(10.13) Momentum Retirement Plan (filed as Exhibit 10.18 to Form 10-K, File
No. 0-21750, dated March 30, 1995)*
(10.14) Amended and Restated Revolving Credit and Loan Agreement executed
February 17, 1995 effective as of December 31, 1994 among PrimeSource
Corporation, Dixie Type & Supply Company, Inc., and Onondaga Litho
Supply Co., Inc. as Borrowers and First Fidelity Bank, N.A. as Bank
(filed as Exhibit 10.19 to Form 10-K, File No. 0-21750, dated March
30, 1995)
(10.15) Form of Indemnification Agreement for Directors and certain officers
effective September 1, 1994 and executed in January, 1996 (filed as
Exhibit 10.22 to Form 10-K, File No. 0-21750, dated March 26, 1996)*
(10.16) PrimeSource Corporation Pension Plan (filed as Exhibit 10.23 to Form
10-K, File No. 0-21750, dated March 26, 1996)*
(10.17) Orlando, FL facility lease dated March 31, 1986 and August 14, 1995
Lease Extension between the Registrant and Dennis M. Zewiske as
co-lessor (filed as Exhibit 10.25 to Form 10-K, File No. 0-21750,
dated March 26, 1996)*
10.18 Credit Agreement dated as of November 1, 1996 by and among
PrimeSource Corporation, Dixie Type & Supply Company, Inc., Onondaga
Litho Supply Co., Inc. and The Banks Party Hereto and PNC Bank,
National Association, As Agent
11.1 Computation of Per Share Income
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants
27 Financial data schedule
99.1 Undertakings
*Management contracts and/or compensatory plans, contracts or
arrangements in which a director and/or a named executive officer
participates.