UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
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 Number 000- 21750
PrimeSource Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1430030
- ------------------------ ----------------
(State of incorporation) (I.R.S. Employer
Identification No.)
4350 Haddonfield Road, Suite 222, Pennsauken, NJ 08109
- -------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(609) 488-4888
(Registrant's telephone number, including area code)
Indicate by a 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 the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at November 9, 1998
- ---------------------------- -------------------------------
Common stock, par value $.01 6,529,357 shares
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements Page No.
--------
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 5 - Other Matters 12
Item 6 - Exhibits and Reports on Form 8-k 12
SIGNATURES 13
Certain statements contained in this report are forward-looking. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully implement its business strategies including
successfully integrating business acquisitions, the effect of general economic
conditions and technological, competitive and other changes in the industry, the
effect of year 2000 issues, and other risks and uncertainties as set forth in
the Company's periodic reports and other filings with the Securities and
Exchange Commission.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(Thousands of dollars, September 30, December 31,
except per share information) 1998 1997
- ---------------------------------------------------------------------------
ASSETS
Current Assets:
Receivables, net .............................. $ 83,477 $ 60,536
Inventories ................................... 65,968 53,919
Other ......................................... 4,187 3,516
- ----------------------------------------------------------------------------
Total Current Assets ............................ 153,632 117,971
Property and equipment, net ..................... 13,231 12,315
Excess of cost over net assets
of businesses acquired, net .................. 16,941 4,217
Other assets .................................... 4,313 3,988
- ----------------------------------------------------------------------------
Total Assets .................................... $188,117 $138,491
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ...... $ 1,316 $ 1,362
Accounts payable .............................. 43,832 34,045
Payable on acquisition ........................ 15,100
Book overdraft ................................ 2,999 5,609
Other accrued liabilities ..................... 5,188 7,804
- ----------------------------------------------------------------------------
Total Current Liabilities ....................... 68,435 48,820
Long-term obligations, net of current portion ... 60,446 32,788
Accrued pension liabilities and other liabilities 4,108 4,335
- ----------------------------------------------------------------------------
Total Liabilities ............................... 132,989 85,943
- ----------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value .................. 65 65
Additional paid in capital .................... 25,664 25,586
Retained earnings ............................. 29,399 26,897
- ----------------------------------------------------------------------------
Total Shareholders' Equity ...................... 55,128 52,548
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ...... $188,117 $138,491
=============================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months
(Thousands of dollars, Ended September 30, Ended September 30,
except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
Net sales .................................. $ 109,486 $ 102,462 $ 315,860 $ 309,020
Cost of sales .............................. 89,878 84,183 258,222 254,031
- ------------------------------------------------------------------------------------------------
Gross profit ............................... 19,608 18,279 57,638 54,989
Selling, general and administrative expenses 17,166 15,560 49,875 46,958
- ------------------------------------------------------------------------------------------------
Income from operations ..................... 2,442 2,719 7,763 8,031
Interest expense ........................... (834) (779) (2,288) (2,335)
Other income ............................... 105 158 285 291
- ------------------------------------------------------------------------------------------------
Income before provision
for income taxes .......................... 1,713 2,098 5,760 5,987
Provision for income taxes ................. 711 865 2,376 2,473
- ------------------------------------------------------------------------------------------------
Net income ................................. $ 1,002 $ 1,233 $ 3,384 $ 3,514
=================================================================================================
Per share of common stock:
Net income per basic and diluted share
Basic ................................... $ .15 $ .19 $ .52 $ .54
Diluted ................................. .15 .19 .51 .53
Cash dividends ............................. .045 .045 .135 .135
================================================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
(Thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
Operating Activities:
Net income ........................................... $ 3,384 $ 3,514
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 1,434 1,551
Amortization ..................................... 295 333
Other ............................................ (127)
Changes in assets and liabilities affecting operations 4,230 (2,544)
- --------------------------------------------------------------------------------
Net cash provided by operating activities ........... 9,343 2,727
- --------------------------------------------------------------------------------
Investing Activities:
Additions to property and equipment .................. (1,193) (1,568)
Payment for acquisitions, net of cash acquired ....... (32,338)
Proceeds from sale of property and equipment ......... 547
Net (increase) decrease in other assets .............. 302 (456)
- --------------------------------------------------------------------------------
Net cash used in investing activities ................ (33,229) (1,477)
- --------------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term obligations .................. 115,900 61,700
Repayment of long-term obligations ................... (88,600) (59,516)
Decrease in book overdraft ........................... (2,610) (2,468)
Purchase of common stock ............................. (106)
Dividends paid ....................................... (882) (879)
Proceeds from exercise of stock options .............. 78 19
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities . 23,886 (1,250)
- --------------------------------------------------------------------------------
Net change in cash ................................... -- --
Cash, beginning of year .............................. -- --
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Cash, end of period .................................. $ -- $ --
================================================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ........................................ $ 2,130 $ 2,465
Income taxes .................................... 3,694 2,937
================================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
PRIMESOURCE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to the rules and regulations of the Securities
and Exchange Commission and instructions to Form 10-Q. While these statements
reflect all adjustments (which consist of normal recurring accruals) which are,
in the opinion of management, necessary to a fair presentation of the results
for the interim periods presented, they do not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements. These statements should be read in conjunction
with the consolidated financial statements and footnotes thereto included in the
Company's 1997 Annual Report on Form 10-K for further information.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
2. Inventory Pricing
Inventories consist primarily of purchased goods for sale. 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 methods of accounting. Because the
inventory determination under the LIFO method can only be made at the end of
each fiscal year, interim financial results are based on estimated LIFO amounts
and are subject to final year-end LIFO inventory adjustments.
3. Income Per Common Share
The following is a reconciliation of the average shares of common stock used to
compute basic income per share to the shares used to compute diluted income per
share as shown on the consolidated condensed statements of income:
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute basic earnings per share . 6,528,409 6,503,470 6,525,254 6,508,398
Dilutive effect of stock options ......... 120,193 144,367 148,000 104,536
- -------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share 6,648,602 6,647,837 6,673,254 6,612,934
- -------------------------------------------------------------------------------------------
Net income per share:
Basic .................................... $ .15 $ .19 $ .52 $ .54
Diluted .................................. .15 .19 .51 .53
===========================================================================================
4. Acquisition
On September 14, 1998, the Company acquired the net assets of Bell Industries'
graphic arts division ("Bell acquisition") with thirteen locations in the west,
southwest and midwest. The final purchase price, which is based on a final
balance sheet and certain guaranties regarding receivables and inventory, will
be between $40 and $45 million. At September 30, 1998, $30.6 million had been
paid with the adjusted balance to be paid prior to March 31, 1999. Assuming the
acquisition had occurred at the beginning of the period, the estimated unaudited
sales and net income for the nine months ended September 30, 1998 would have
been approximately $415.5 million and $3,662,000 ($.56 per basic share and $.55
per diluted share), respectively. For the nine months ended September 30, 1997,
estimated pro-forma sales and net income would have been approximately $427.2
million and $3,698,000 ($.57 per basic share and $.56 per diluted share),
respectively. The decrease in pro-forma sales from 1997 to 1998, is the result
of a decrease in Bell sales.
In April 1998, the Company acquired the assets of Joseph Genstein, Inc.
("Genstein"), a printing products distributor in the Pittsburgh area for
approximately $1.7 million. The business has been combined into the Company's
existing Pittsburgh operation. The pro forma results of this acquisition would
not have had a significant impact on the Company's consolidated results of
operations.
These acquisitions have been accounted for as a purchases and, accordingly, are
included in the Company's operating results from the acquisition dates.
5. New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Financial
statement disclosures for prior periods are required to be restated. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company is in the process of evaluating the applicable disclosure requirements.
The adoption of this statement is not expected to have any impact on the
Company's consolidated results of operations, financial position or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement significantly
changes current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Some of the more
significant effects of SFAS No. 132 are that it: (i) standardizes the disclosure
requirements for pensions and other postretirement benefits and presents them in
one footnote; (ii) requires additional information be disclosed regarding
changes in the benefit obligation and fair values of plan assets; (iii)
eliminates certain disclosures that are no longer considered useful, including
general descriptions of the plans; (iv) permits the aggregation of information
about certain plans; (v) revises disclosures about defined contribution plans;
and (vi) changes disclosures relating to multi-employer plans. SFAS No. 132 does
not change the existing measurement or recognition provisions of SFAS Nos. 87,
88 or 106. This statement is effective for fiscal years beginning after December
15, 1997. The Company is in the process of evaluating the applicable disclosure
requirements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes new procedures for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. This statement is effective for fiscal years
beginning after June 15, 1999. The Company currently uses interest rate swap
agreements ("swaps") to effectively fix the interest rate on a portion of the
Company's floating rate debt. Under current accounting standards, no gain or
loss is recognized on changes in the fair value of these swaps. Under this
statement, gains or losses will be recognized based on changes in the fair value
of the swaps which generally occur as a result of changes in interest rates. The
Company is currently evaluating the financial impact of adoption of this
statement. The adoption is not expected to have a material effect on the
Company's consolidated results of operations, financial position or cash flows.
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The adoption of this statement did not have any impact on
the Company's consolidated results of operations, financial position or cash
flows.
6. Reclassifications
Certain reclassifications have been made to the 1997 consolidated condensed
financial statements to conform to the 1998 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net income for the quarter ended September 30, 1998 was $1,002,000 ($.15 per
diluted share) on sales of $109,486,000 compared to net income of $1,233,000
($.19 per diluted share) on sales of $102,462,000 for the same period last year.
For the nine months ended September 30, 1998, net income was $3,384,000 ($.51
per diluted share) on sales of $315,860,000 compared to net income of $3,514,000
($.53 per diluted share) on sales of $309,020,000 for the same period last year.
Sales for the three and nine-month period ended June 30, 1998 increased 7% and
2%, respectively, compared to the same periods last year. The majority of this
increase was due to the Bell acquisition in mid-September. Continuing annual
sales from this acquisition are expected to be approximately $135 million.
Excluding the effect of the acquisition, the Company had sales growth in
consumable products and digital presses. This increase was partially offset by
decreased electronic systems sales. The Company expects improved electronic
sales as customers take advantage of the continuing technological improvements
in the industry.
Gross profit as a percent of sales was 17.9 % for the quarter and 18.2% for the
nine-month period ended September 30, 1998 compared to 17.8% for the same
periods last year. This increase is primarily the result of improved margins in
system sales and digital printing sales which provide a higher margin.
Selling, general and administrative expenses as a percent of sales were 15.7%
for the quarter and 15.8% for the nine-month period compared to 15.2% for the
same periods last year. This increase is primarily attributable to additional
personnel costs within the systems group. The Company expects the Bell
acquisition to decrease the percent of operating expenses to sales as a result
of the fixed administrative costs being applied to a larger sales base and the
elimination of certain duplicate facility and administrative costs.
Interest expense was $834,000 and $2,288,000 for the three and nine-month period
ended September 30, 1998, respectively, compared to $779,000 and $2,335,000 for
the same periods last year, respectively. Interest expense will increase
substantially in future periods as a result of the Bell.
The effective tax rates for the quarter and nine-month period were 41.5% and
41.3%, respectively, compared to 41.2% and 41.3%, respectively, for the same
periods last year. The difference between the effective tax rates and the
federal statutory rate of 34% is attributable to the effect of state income
taxes and non-deductible expenses, which also effect the rate differences
between periods.
Financial Condition and Liquidity
Net cash provided by operating activities for the nine months ended September
30, 1998 was $9,343,000 compared to $2,727,000 provided for the same period last
year. This improvement is attributable to improved management of working capital
in 1998 compared to 1997.
Net cash used in investing activities was $33,229,000 for the nine months ended
September 30, 1998 compared to $1,477,000 for the same period last year. The
increase in 1998 is primarily attributable to the Bell acquisition in September
1998. In addition to the $30.6 million paid in September 1998 for this
acquisition, an additional amount of between $10 and $15 million will be paid by
March 31, 1999. Additional capital expenditures for the year, for which there
are no material commitments, are anticipated to be approximately $800,000.
Net cash used in financing activities was $23,886,000 for the nine-month period
ended September 30, 1998 compared to $1,250,000 provided from financing
activities for the same period last year. The cash provided for 1998 was from
increased debt as a result of the Bell acquisition.
The Company's primary source of debt financing is a $75 million revolving credit
agreement of which $15.2 million was unused at September 30, 1998. In addition,
the Company has $10 million available under an uncommitted line.
Procedures for the Year 2000 Issue
The Company's business system will require program modifications prior to the
year 2000, for what is commonly referred to as the "Year 2000 Issue". Similar to
other systems, the system currently abbreviates the year to a two-digit number.
As currently programmed, this abbreviation will cause many of the functions
within the system which are date sensitive to operate improperly or malfunction
in the year 2000.
The business system was initially installed in 1990. The system was
acquired from a software manufacturer and was modified to meet certain Company
requirements. Since the initial installation, the software manufacturer has made
several upgrades to the product, including making the software year 2000
compliant. Historically, the Company has elected not to install the available
system upgrades because of the potential additional programming costs of making
any required changes to the custom modifications made. To become year 2000
compliant and, in addition, to take advantage of other enhancements in the
software, the Company has decided to install the manufacturer's software
upgrades. In addition, the Company has contracted with the manufacturer to make
the necessary programming changes required as a result of the Company's separate
custom modifications to the program. The manufacturer is scheduled to complete
the changes for testing by the Company by the end of January, 1999. The Company
expects the final testing of the updated software to be completed by the end of
March, 1999.
The Company believes it has allowed adequate time, including time for unexpected
delays, to complete the project prior to the year 2000. Accordingly, at this
point the Company has not made any formal contingency plans.
The total cost of the system improvements, which incorporate the Year 2000
compliance, are estimated to be $300,000 of which approximately $40,000 had been
expended through September 30, 1998, with the balance expected to be incurred by
the end of the first quarter of 1999.
With regard to potential implications to the Company of suppliers not being year
2000 compliant, the Company through questionnaires and direct contact with major
suppliers, is in the process of reviewing the status of their compliance. At
this time, the Company does not believe there will be a compliance problem with
any of its significant suppliers.
With regard to the Company's customer base, the Company is not requesting any
specific information from its customers. The Company has over 25,000 customers
and does not feel the potential exposures justify the cost of surveying this
customer base. The Company does share information electronically with certain
customers and is working with these customers with regard to potential
transmission problems.
With regard to other areas of exposure, the Company's facilities consist
primarily of leased warehouse facilities in large metropolitan areas using local
utilities. Each location is responsible for contacting the local utilities to
verify their compliance. With regard to communication lines, the business system
lines are through a major supplier who has provided assurances they will be 2000
compliant. Locations are responsible for local phone service compliance. As the
Company does not have any specific contract services with power companies or
other utilities or sophisticated production equipment, they are not subject to
many of the potential problems of a manufacturing or service environment.
However, due to the interdependence of telecommunication, power and other
utility services and the other general uncertainties of this issue, the Company
is unable to determine at this time whether the consequences of year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Financial
statement disclosures for prior periods are required to be restated. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company is in the process of evaluating the applicable disclosure requirements.
The adoption of this statement is not expected to have any impact on the
Company's consolidated results of operations, financial position or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement significantly
changes current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Some of the more
significant effects of SFAS No. 132 are that it: (i) standardizes the disclosure
requirements for pensions and other postretirement benefits and presents them in
one footnote; (ii) requires additional information be disclosed regarding
changes in the benefit obligation and fair values of plan assets; (iii)
eliminates certain disclosures that are no longer considered useful, including
general descriptions of the plans; (iv) permits the aggregation of information
about certain plans; (v) revises disclosures about defined contribution plans;
and (vi) changes disclosures relating to multi-employer plans. SFAS No. 132 does
not change the existing measurement or recognition provisions of SFAS Nos. 87,
88 or 106. This statement is effective for fiscal years beginning after December
15, 1997. The Company is in the process of evaluating the applicable disclosure
requirements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes new procedures for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. This statement is effective for fiscal years
beginning after June 15, 1999. The Company currently uses interest rate swap
agreements ("swaps") to effectively fix the interest rate on a portion of the
Company's floating rate debt. Under current accounting standards, no gain or
loss is recognized on changes in the fair value of these swaps. Under this
statement, gains or losses will be recognized based on changes in the fair value
of the swaps which generally occur as a result of changes in interest rates. The
Company is currently evaluating the financial impact of adoption of this
statement. The adoption is not expected to have a material effect on the
Company's consolidated results of operations, financial position or cash flows.
PART II. OTHER INFORMATION
Item 5. Other Information
Shareholders of the Company are entitled to submit proposals on matters
appropriate for shareholder action consistent with regulations of the
Securities and Exchange Commission ("SEC") and the Company's bylaws.
Should a shareholder wish to have a proposal considered for inclusion
in the proxy statement for the Company's 1999 annual meeting, under
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), such proposal must be received by the Company on or
before December 29, 1998.
In connection with the Company's 1999 annual meeting and pursuant to
recently amended Rule 14a-4 under the Exchange Act, if the
shareholder's notice is not received by the Company on or before
December 29, 1998, the Company (through management proxy holders) may
exercise discretionary voting authority when the proposal is raised at
the annual meeting without any reference to the matter in the proxy
statement.
The above summary, which sets forth only the procedures by which
business may be properly brought before and voted upon at the Company's
annual meeting, is qualified in its entirety by reference to the
Company's bylaws.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
none
b. Reports on Form 8-K
On September 28, 1998, the Registrant filed a Form 8-K to report the
acquisition of Bell Industries' graphics arts division.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESOURCE CORPORATION
(REGISTRANT)
BY /s/ WILLIAM A. DEMARCO
William A. DeMarco
Vice President of Finance and
Chief Financial Officer
(principal financial and accounting officer)
DATE November 16, 1998