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 JUNE 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 August 7, 1998
- ----- ------------------------------
Common stock, par value $.01 6,526,269 shares
<PAGE>
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Item 1 - Financial Statements Page No.
--------
Consolidated Condensed Balance Sheets
<S> <C>
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income
Three Months and Six Months Ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 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 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-k 12
SIGNATURES 13
</TABLE>
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 and
other risks and uncertainties as set forth in the Company's periodic reports and
other filings with the Securities and Exchange Commission.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
<CAPTION>
June 30, December 31,
(Thousands of dollars) 1998 1997
- ---------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables ................................... $ 65,242 $ 60,536
Inventories ................................... 49,402 53,919
Other ......................................... 4,305 3,516
- ----------------------------------------------------------------------------
Total Current Assets ............................ 118,949 117,971
Property and equipment, net ..................... 12,251 12,315
Excess of cost over net assets
of businesses acquired, net .................. 4,484 4,217
Other assets .................................... 3,467 3,988
- ----------------------------------------------------------------------------
Total Assets .................................... $139,151 $138,491
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ...... $ 1,327 $ 1,362
Accounts payable .............................. 32,373 34,045
Book overdraft ................................ 5,293 5,609
Other accrued liabilities ..................... 8,359 7,804
- ----------------------------------------------------------------------------
Total Current Liabilities ....................... 47,352 48,820
Long-term obligations, net of current portion ... 33,168 32,788
Accrued pension liabilities and other liabilities 4,228 4,335
- ----------------------------------------------------------------------------
Total Liabilities ............................... 84,748 85,943
- ----------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value .................. 65 65
Additional paid in capital .................... 25,647 25,586
Retained earnings ............................. 28,691 26,897
- ----------------------------------------------------------------------------
Total Shareholders' Equity ...................... 54,403 52,548
- ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ...... $139,151 $138,491
============================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(Thousands of dollars, ------------------------ -----------------------
except per share amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales .................................. $ 104,846 $ 103,170 $ 206,374 $ 206,558
Cost of sales .............................. 85,268 84,763 168,344 169,848
- ----------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 16,734 15,627 32,709 31,398
- ----------------------------------------------------------------------------------------------------
Income from operations ..................... 2,844 2,780 5,321 5,312
Interest expense ........................... (774) (806) (1,454) (1,556)
Other income ............................... 92 48 180 133
- ----------------------------------------------------------------------------------------------------
Income before provision
for income taxes .......................... 2,162 2,022 4,047 3,889
Provision for income taxes ................. 892 846 1,665 1,608
- ----------------------------------------------------------------------------------------------------
Net income ................................. $ 1,270 $ 1,176 $ 2,382 $ 2,281
====================================================================================================
Per share of common stock:
Net income per basic and diluted share
Basic ................................... $ .19 $ .18 $ .37 $ .35
Diluted ................................. .19 .18 .36 .35
Cash dividends ............................. .045 .045 .09 .09
====================================================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Six Months Ended June 30,
(Thousands of dollars) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net income ........................................... $ 2,382 $ 2,281
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 937 1,019
Amortization ..................................... 186 229
Changes in assets and liabilities affecting operations (955) (6,120)
- ----------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .. 2,550 (2,591)
- ----------------------------------------------------------------------------------
Investing Activities:
Additions to property and equipment .................. (845) (911)
Payment for acquisition .............................. (1,700)
Net (increase) decrease in other assets .............. 493 (9)
- ----------------------------------------------------------------------------------
Net cash used in investing activities ................ (2,052) (920)
- ----------------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term obligations .................. 59,250 41,750
Repayment of long-term obligations ................... (58,905) (39,184)
Increase (decrease) in book overdraft ................ (316) 1,638
Dividends paid ....................................... (588) (587)
Purchase of common stock ............................. (106)
Proceeds from exercise of stock options .............. 61
- ----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .. (498) 3,511
- ----------------------------------------------------------------------------------
Net change in cash ................................... -- --
Cash, beginning of year .............................. -- --
- ----------------------------------------------------------------------------------
Cash, end of period .................................. $ -- $ --
==================================================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ........................................ $ 1,366 $ 1,665
Income taxes .................................... 2,140 2,137
==================================================================================
<FN>
See notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
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 three months ended June 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C> <C> <C>
used to compute basic earnings per share . 6,526,269 6,506,946 6,523,677 6,510,863
Dilutive effect of stock options ......... 145,483 73,889 161,904 84,620
- ---------------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share 6,671,752 6,580,835 6,685,581 6,595,483
- ---------------------------------------------------------------------------------------------------
Net income per share:
Basic .................................... $ .19 $ .18 $ .37 $ .35
Diluted .................................. .19 .18 .36 .35
===================================================================================================
</TABLE>
<PAGE>
4. Acquisition
In April 1998, the Company acquired the assets of Joseph Genstein, Inc.
("Genstein"), a printing products distributor in the Pittsburgh area. The
business has been combined into the Company's existing Pittsburgh operation. The
acquisition has been accounted for as a purchase and, accordingly, is included
in the Company's operating results from the acquisition date. The pro forma
results of this acquisition would not have had a significant impact on the
Company's consolidated results of operations.
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 derivatives, 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.
7. Subsequent Event
In July 1998, the Company signed a letter of intent to acquire the graphics arts
division of Bell Industries. The acquisition is anticipated to be completed
before the end of the year.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net income for the quarter ended June 30, 1998 was $1,270,000 ($.19 per diluted
share) on sales of $104,846,000 compared to net income of $1,176,000 ($.18 per
diluted share) on sales of $103,170,000 for the same period last year. For the
six months ended June 30, 1998, net income was $2,382,000 ($.36 per diluted
share) on sales of $206,374,000 compared to net income of $2,281,000 ($.35 per
diluted share) on sales of $206,558,000 for the same period last year.
Sales for the six-month period ended June 30, 1998 were level compared to the
same period last year. Sales were down by approximately 2% in the first quarter
with a corresponding increase in the second quarter. The first quarter decrease
was primarily attributable to a weakness in the industry in consumable sales in
the first two months of the quarter. During the second quarter, the Company's
consumable sales showed modest increases over 1997 sales. In addition to
improved consumable sales, the Company had increased digital printing sales over
prior quarters.
Gross profit as a percent of sales was 18.7% for the quarter and 18.4% for the
six-month period ended June 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 16% for
the quarter and 15.8% for the six-month period compared to 15.2% and 15.1%,
respectively, for the same periods last year. This increase is primarily
attributable to additional personnel costs within the systems group. These
additional costs have been partially offset by improved margins in systems sales
and the Company will need and anticipates increased sales to fully justify these
costs.
Interest expense was $774,000 and $1,454,000 for the three and six-month period
ended June 30, 1998 compared to $806,000 and $1,556,000, respectively, for the
same periods last year. The decrease is primarily attributable to lower debt
levels in 1998 as a result of proceeds from the sale of a capital lease and
other business assets in the fourth quarter of 1997.
The effective tax rates for the quarter and six-month period were 41.3% and
41.1%, respectively, compared to 41.8% 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 six months ended June 30, 1998
was $2,550,000 compared to net cash used of $2,591,000 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 $2,052,000 for the six months ended
June 30, 1998 compared to $920,000 for the same period last year. The increase
in 1998 is attributable to the acquisition of the assets of Genstein in April
1998. Additional capital expenditures for existing operations for the year, for
which there are no material commitments, are anticipated to be approximately
$1,100,000.
Net cash used in financing activities was $498,000 for the six-month period
ended June 30, 1998 compared to $3,511,000 provided from financing activities
for the same period last year. Debt increased $345,000 during the six months
ended June 30, 1998. The capital requirements during the period, including the
Genstein acquisition, were primarily provided for with the cash produced from
operating activities. For the same period last year, debt increased $2.6
million, which is primarily attributable to the cash used in operating
activities.
The Company's primary source of debt financing is a revolving credit agreement.
In April 1998, the commitment under the agreement was increased from $50 million
to $75 million of which $42.5 million was unused at June 30, 1998. In addition,
the Company has $10 million available under an uncommitted line. The Company
believes these facilities combined with future cash flow from operations will be
adequate to meet the ongoing capital requirements of the Company and fund future
acquisition needs.
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 Company has contracted with the software manufacturer to
work with the Company's management information system department to make the
necessary programming changes to correct this problem. This work has begun and
is scheduled to be completed by late 1998 or early 1999. The Company does not
anticipate the cost of the modifications will have a material impact on the
Company's results of operations or financial position. In addition, the Company
is in the process of initiating formal communications with its significant
suppliers and customers to determine the extent to which the Company might be
impacted by those third parties' failure to correct any year 2000 issues.
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 derivatives, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's annual meeting of shareholders was held on May 12, 1998.
b. Matters voted upon at the meeting and the results of those votes were as
follows:
Election of Directors
<TABLE>
<CAPTION>
For Against Withheld
---------------------------------------------------------
<S> <C> <C> <C>
Gary MacLeod .......5,323,656 -- 229,287
James F. Mullan ....5,332,163 -- 220,780
Klaus D. Oebel .....5,327,269 -- 225,674
</TABLE>
Other directors whose terms of office continued after the meeting are as
follows: Fred C. Aldridge, Jr., Philip J. Baur, Jr., Richard E. Engebrecht,
John H. Goddard, Jr., Edward N.Patrone and John M. Pettine
<TABLE>
<CAPTION>
Approval of Independent Auditors
For Against Abstain
-------------------------------------------------------------------------------------
Approval of Coopers & Lybrand L.L.P.,
Certified Public Accountants, as
<S> <C> <C> <C>
independent public auditors for 1998............... 5,514,480 124,361 15,451
</TABLE>
The foregoing matters are described in detail in the Company's proxy
statement dated April 9, 1998.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the quarter
ended June 30, 1998.
<PAGE>
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 August 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 59,889
<ALLOWANCES> 1,858
<INVENTORY> 49,402
<CURRENT-ASSETS> 118,949
<PP&E> 22,614
<DEPRECIATION> 10,363
<TOTAL-ASSETS> 139,151
<CURRENT-LIABILITIES> 47,352
<BONDS> 33,168
0
0
<COMMON> 65
<OTHER-SE> 54,338
<TOTAL-LIABILITY-AND-EQUITY> 139,151
<SALES> 206,374
<TOTAL-REVENUES> 206,374
<CGS> 168,344
<TOTAL-COSTS> 168,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (57)
<INTEREST-EXPENSE> 1,454
<INCOME-PRETAX> 4,047
<INCOME-TAX> 1,665
<INCOME-CONTINUING> 2,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,382
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
