UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
- --------------------------------------------------------------------------------
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, 1998 Commission file Number 000-21750
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:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock $.01 par value per share Nasdaq
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 24, 1999 the aggregate market value of the voting stock held by
nonaffiliates was approximately $36.7 million.
As of March 24, 1999 there were 6,536,018 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 34 of this document.
<PAGE>
PART I.
Certain statements contained in this annual 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
impact 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.
ITEM I. BUSINESS
PrimeSource Corporation (the "Company") is a major national distributor serving
the printing and publishing industry. For approximately 135 years, the Company
or its unincorporated predecessor has been servicing this industry. 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 National Market.
The Company has had three significant business combinations in the past five
years. In 1994, Momentum Corporation with sales of approximately $165 million
merged into the Company. In 1996, the Company acquired five of VGC Corporation's
branch operations with sales of approximately $55 million. In 1998, the Company
acquired the graphic imaging group of Bell Industries, Inc. with sales of
approximately $135 million. With these acquisitions, the Company has a
significant presence in all of the major markets in the United States. 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 publishing industry.
The Company is headquartered in Pennsauken, New Jersey. The operations are
divided into three geographic regions. The Company maintains a decentralized
management structure that allows the operating regions broad discretion in the
conduct of their respective businesses, including responsibility for management
of suppliers, customers and employees. Management is evaluated against their
financial and non-financial goals which are established on an annual basis. The
Company emphasizes sales growth as well as return on sales and net assets. In
order to provide shareholder value, the Company believes it must strive to
maximize its long-term return on capital employed. By quantifying this objective
and applying it at the operating level, the Company believes it can best meet
this goal. Management believes that the 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 30,000. No customer
accounted for more than 2% of the Company's net sales in 1998.
The Company offers consumables,such as films, plates, blankets, papers and
chemistries; scanners, servers, work stations, image setters, computer-to-plate
devices and other digital electronic equipmentand the applicable software; and
press, bindery and other finishing machinery. The Company is the U.S.
distributor for Xeikon, which manufacturers on-demand and variable data digital
color printing systems and supplies. With the product range and in-house
expertise, the Company feels it is a premiere provider of printing solutions.
The printing industry has transitioned and continues to move through a period of
rapid technological change. Accordingly, the Company's product mix continues to
evolve, however, it remains positioned through both product and process
knowledge to fully service this market.
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 operations offering more services to their customers.
<PAGE>
While the Company sells primarily the same products as its competitors,
generally at similar prices, the Company attempts to differentiate itself by
providing a value-added approach with products and training and technical
support that can make its customers more efficient and effective. In addition,
the Company's broad geographic presence provides an advantage in servicing
regional and national 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 it is one of the largest dealers in the United
States 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 30% of the Company's inventories are
consigned at various customer locations. 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 870 employees at December 31, 1998.
<PAGE>
<TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>
BUSINESS EXPERIENCE POSITION HELD
NAME AGE LAST FIVE YEARS SINCE
- ------------------------- ------ ---------------------------- ----------------------
<S> <C> <C> <C>
James F. Mullan 59 President and Chief Executive 1991-Present
President and Officer of Registrant
Chief Executive Officer
John H. Goddard, Jr. 51 Executive Vice President September, 1994-
Executive Vice President of Registrant Present
President, Chief Executive Officer 1992-1994
of Momentum Corporation
William A. DeMarco 53 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
Barry C. Maulding 53 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
</TABLE>
<PAGE>
ITEM 2. PROPERTIES
The locations and primary use of the physical properties of the Company are as
follows:
Approximate
Square
Location Footage
- --------------------------------------------------------------------------------
Corporate Headquarters
Pennsauken, NJ 7,400
Distribution/Sales Facilities
Atlanta, GA (Norcross) 23,200
Birmingham, AL 37,000
Boston, MA (Hingham) 13,500
Chicago, IL (Itasca) 49,600
Cincinnati, OH 35,000
Dallas, TX 17,500
Denver, CO 10,000
Des Moines, IA (Ankeny) 14,000
Houston, TX (Bellaire) 10,300
Jackson, MS (Richland) 6,000
Kalamazoo, MI 20,000
Kansas City, KS 16,800
Lancaster, PA (Lititz) 14,000
Las Vegas, NV 6,000
Los Angeles, CA 44,900
Miami, FL (Miramar) 14,700
Milwaukee, WI (New Berlin) 16,300
Minneapolis, MN (Mendota Heights) 53,600
Mobile, AL 5,100
Nashville, TN 16,000
New Orleans, LA (Harahan) 8,800
Omaha, NE 15,000
Orlando, FL 14,400
Pennsauken, NJ 32,000
Phoenix, AZ 11,500
Pittsburgh, PA 10,500
Portland, OR (Wilsonville) 8,800
Sacramento, CA 7,600
St. Louis, MO 22,000
St. Paul, MN 47,000
San Diego, CA 10,600
San Jose, CA 21,300
Seattle, WA (Auburn) 8,300
All of the properties are held under operating leases, except for the
Birmingham, Des Moines, Minneapolis, St. Louis and Seattle facilities which are
owned. 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.
<PAGE>
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
results of operations and cash flows 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 believes
its insurance will cover any costs incurred in this matter. 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.
<PAGE>
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq National Market under the symbol
PSRC.
The following quarterly stock price and dividend information is provided for
1998 and 1997.
<TABLE>
<CAPTION>
Stock Price
---------------------------- Cash Dividends
High Low Per Share
- ------------------------------------------------------------------------------
1998
<S> <C> <C> <C>
First Quarter $ 11.50 $ 9.37 $ .045
Second Quarter 11.50 8.25 .045
Third Quarter 9.75 7.87 .045
Fourth Quarter 8.06 6.25 .045
1997
First Quarter $ 8.75 $ 7.63 $ .045
Second Quarter 8.25 7.00 .045
Third Quarter 10.63 7.63 .045
Fourth Quarter 13.00 9.63 .045
</TABLE>
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 3,300 shareholders of record as of December 31, 1998.
For purposes of computing the aggregate market value of the voting stock of the
Company held by nonaffiliates, as shown on the cover page of this report, it has
assumed that all the outstanding shares were held by nonaffiliates except for
the shares held by directors and officers of the Company. However, this should
not be deemed to constitute an admission that all directors and officers of the
Company are, in fact, affiliates of the Company, or that there are not other
persons who may be deemed to be affiliates of the Company. Further information
concerning shareholdings of officers, directors and principal shareholders is
included in the Company's definitive proxy statement filed with the Securities
and Exchange Commission by April 30, 1999.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
This information should be read in conjunction with the Company's consolidated
financial statements included herein.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
(in thousands, except per share amounts) 1998(1) 1997(2) 1996 1995(3) 1994
- ----------------------------------------------------------------------------------------------------------------
Statement of Income Data
<S> <C> <C> <C> <C> <C>
Net sales $453,047 $414,867 $366,657 $357,077 $238,154
Cost of sales 369,844 343,116 301,428 293,790 194,346
- ---- ----------------------------------------------------------------------------------------------------------
Gross profit 83,203 71,751 65,229 63,287 43,808
Operating expenses 72,820 63,257 57,033 58,615 37,362
- ---------------------------------------------------------------------------------------------------------------
Income from operations 10,383 8,494 8,196 4,672 6,446
Interest expense (3,605) (2,913) (1,915) (2,235) (1,113)
Gain on sale of capital lease 3,658
Loss on business divestiture (401)
Other income-net 297 515 421 441 408
- ---------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 7,075 9,353 6,702 2,878 5,741
Provision for income taxes 2,975 3,862 2,788 1,232 2,210
- ---------------------------------------------------------------------------------------------------------------
Net income $ 4,100 $ 5,491 $ 3,914 $ 1,646 $ 3,531
===============================================================================================================
Per Share Data
Net income per basic share $.63 $.84 $.60 $.25 $.72
Net income per diluted share .62 .83 .60 .25 .71
Cash dividends per share .18 .18 .18 .38 .45
===============================================================================================================
Balance Sheet Data
Working capital $100,252 $ 69,151 $ 67,040 $ 65,168 $ 60,987
Total assets 191,047 138,491 134,175 119,804 120,760
Total long-term obligations 75,205 32,788 36,250 32,202 29,094
Shareholders' equity 55,611 52,548 48,183 45,572 46,169
===============================================================================================================
<FN>
(1) Income for 1998, includes a one-time restructure and other expense of
$1,050,000 ($634,000 after tax) relating to the reorganization of the
Company into three regions and the integration of an acquisition.
(2) Income for 1997, includes a charge to cost of sales for $2,300,000
($1,381,000 after tax) for the write-down of electronic equipment
inventory, a $3,658,000 ($2,183,000 after tax) gain on the sale of a
capital lease and a $401,000 ($241,000 after tax) loss on a business
divestiture.
(3) Income for 1995, includes a one-time restructure 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.
</FN>
</TABLE>
<PAGE>
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
accompanying Consolidated Statements of Income expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ........................................ 100.0% 100.0% 100.0%
Cost of sales .................................... 81.6 82.7 82.2
- --------------------------------------------------------------------------------
Gross profit ..................................... 18.4 17.3 17.8
Selling, general and administrative expenses ..... 15.2 14.5 14.7
Depreciation and amortization .................... .6 .6 .7
Provision for doubtful accounts .................. .1 .2 .2
Restructure and other ............................ .2
- --------------------------------------------------------------------------------
Income from operations ........................... 2.3 2.0 2.2
Interest expense ................................. (.8) (.7) (.5)
Gain on sale of capital lease .................... .9
Loss on business divestiture ..................... (.1)
Other income-net ................................. .1 .1 .1
- --------------------------------------------------------------------------------
Income before provision for income taxes ......... 1.6 2.2 1.8
Provision for income taxes ....................... .7 .9 .7
- --------------------------------------------------------------------------------
Net income ....................................... .9% 1.3% 1.1%
================================================================================
</TABLE>
COMPARISON OF 1998 TO 1997
In 1998, the Company reported record net sales of $453,047,000. This compares to
net sales of $414,867,000 in 1997, an increase of 9%. This sales increase is
primarily the result of the acquisition of Bell Industries' Graphic Imaging
Group ("Bell acquisition") in September 1998. Excluding the effect of the Bell
acquisition, sales of digital presses had strong growth and consumable sales
increased slightly. Sales of electronic prepress systems decreased, which tended
to offset most of the overall internal sales growth.
Excluding one-time items for both years, net income for 1998 was $4,734,000, or
$.71 per diluted share, which was slightly below the $4,930,000, or $.74 per
share for 1997.
After a one-time pre-tax restructure and other charge of $1.05 million recorded
in the fourth quarter due to completing the integration process for the recent
acquisition and aligning the Company into three regions, the Company reported
net income in 1998 of $4,100,000, or $.62 per share. This compares to net income
reported in 1997 of $5,491,000 or $.83 per share, which includes a $3.7 million
gain on the sale of a capital lease, a $2.3 million electronic equipment
inventory write-down and a $0.4 million loss on a business divestiture.
Gross profit as a percent of sales was 18.4% in 1998 compared to 17.8% in 1997,
before including the effect of the $2.3 million electronic equipment inventory
write-down in 1997. The improvement in 1998 is primarily the result of stronger
margins from systems sales, increased digital press sales with higher margins
and higher margins from the Bell business. Including the inventory write-down,
the gross profit percentage in 1997 was 17.3%.
Selling, general and administrative expenses as a percent of sales increased
from 14.5% in 1997 to 15.2% in 1998. This increase is primarily due to
additional personnel costs associated with electronic prepress sales. In
addition, the benefits of integrating the Bell acquisition will not occur until
the beginning of 1999.
<PAGE>
In the fourth quarter of 1998, the Company incurred a restructure and other
charge of $1.05 million related to reorganizing the Company into three regions
and integrating the Bell operations. The costs incurred were for employee
severances and closure of duplicate facilities. We anticipate the savings from
this reorganization will bring the percentage of selling, general and
administrative expenses to sales to levels consistent or lower than preceding
years.
In 1998, the provision for doubtful accounts decreased to $440,000 from $694,000
in 1997. The Company has benefited from strict credit policies and the current
strong economy.
Interest expense increased from $2,913,000 in 1997 to $3,605,000 in 1998. This
increase is attributable to the debt associated with the Bell acquisition.
In 1997, the Company sold a capital lease for a gain of $3.7 million and
disposed of a business operation for a loss of $0.4 million. In 1998, there were
no similar disposals.
The effective income tax rate increased from 41.3% in 1997 to 42% in 1998. The
higher rate in 1998 is primarily due to non-deductible expenses being a higher
percent of income in 1998 compared to 1997. 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.
COMPARISON OF 1997 TO 1996
Net income for 1997 was $5,491,000, or $.83 per diluted share compared to
$3,914,000, or $.60 per share in 1996. There were three significant items which
affected the results for 1997; a $2.3 million inventory write-down, a $3.7
million gain on the sale of a capital lease, and a $0.4 million loss on a
business divestiture. Excluding these items, net income for 1997 would have been
a record $4,930,000 ($.74 per share), a 26% increase over 1996 net income.
Net sales in 1997 were $414,867,000 compared to $366,657,000 in 1996, an
increase of 13.1%. This sales increase is primarily the result of the
acquisition of five VGC Corporation locations in 1996, one in August 1996 and
four in November 1996. Excluding the impact of the VGC acquisition, sales
increased modestly.
In 1997, the Company centralized the electronic equipment inventory. In
conjunction with this centralization, the Company expensed $2.3 million to cost
of sales for the write-down of the existing branch inventory to current market
value. This charge to cost of sales resulted in the gross profit percent
decreasing from 17.8% in 1996 to 17.3% in 1997. Excluding this charge, the 1997
gross profit percent would have been 17.8%, the same as in 1996.
Selling, general and administrative expenses as a percent of sales decreased
from 14.7% in 1996 to 14.5% in 1997. The Company benefited by the economies of
merging the VGC business into its existing business, plus the continued efforts
to reduce costs within the Company. These gains were partially offset by
additional staffing for systems sales.
Interest expense increased from $1,915,000 in 1996 to $2,913,000 in 1997. This
increase is primarily due to the debt associated with the VGC acquisition.
The effective income tax rate decreased from 41.6% in 1996 to 41.3% in 1997. The
lower rate in 1997 is primarily due to non-deductible expenses being a lesser
percent of income in 1997 compared to 1996.
Financial Condition and Liquidity
Cash used in operating activities was $2,302,000 and $1,795,000 in 1998 and
1997, respectively. Cash provided by operations was $7,701,000 in 1996.
Excluding the effect of changes in assets and liabilities, the cash provided was
$7.7, $4.9 and $7.2 million for 1998, 1997 and 1996, respectively. The Company
believes with the conversion of the Bell locations onto the Company business
system and an emphasis on managing assets, the working capital levels will
decrease in 1999, resulting in improved cash flows for the year.
Cash flow used by investing activities was $45,618,000 and $14,471,000 in 1998
and 1996, compared to cash provided by investing activities of $3,650,000 in
1997. The use of capital in 1998 and 1996 was primarily the result of acquired
businesses. In comparison, in 1997 the Company received $3.2 million on the sale
of a capital lease. In the three years, property and equipment expenditures
ranged between $1.5 and $1.9 million. The Company had no material capital
expenditure commitments at December 31, 1998. Capital expenditures for 1999 are
anticipated to be approximately $2 million.
<PAGE>
Cash flows from financing activities were $47,920,000 provided in 1998,
$1,855,000 used in 1997, and $6,770,000 provided in 1996. The cash provided in
1998 and 1996 was primarily from additional debt and was used for acquisitions.
The cash used in 1997 was primarily for the repayment of debt and was primarily
provided from the proceeds from the sale of the capital lease and the business
divestiture.
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million. In addition, the Company has an uncommitted
line that was $10 million at the end of the year and has subsequently been
increased to $15 million. Total borrowings under these lines were $78.3 million
at December 31, 1998. The Company believes these sources of borrowing, combined
with cash from operations, is sufficient to support the current capital
requirements of the Company.
Procedures for Year 2000 Issues
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 was scheduled to complete
the changes for testing by the Company by the end of January 1999. However, this
date has been extended to the end of February due to meeting delays between the
Company and the manufacturer as a result of timing conflicts with the conversion
of the Bell locations to the business system. Testing and implementation are
scheduled to be completed by the end of April.
The Company believes it has allowed adequate time, including time for any
additional delays, to complete the project prior to the year 2000. Accordingly,
at this time, 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 $120,000 had
been expended through December 31, 1998. No other significant information system
additions have been postponed as a result of this project.
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 is not aware of any compliance problem with any of its
significant suppliers and, in addition, the Company has access to competing
products for nearly any customer's needs.
With regard to the Company's customer base, the Company is not requesting any
specific information from its customers. The Company has over 30,000 customers
and does not feel the potential exposures justify the cost and problems
associated with 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.
The Company recognizes that some electronic equipment it sold in earlier years
may not be Year 2000 compliant and could result in claims against the Company as
well as the manufacturer of the equipment. The Company believes it would have
several defenses to any such claims, but it is unable to estimate what the
aggregate cost of defending and/or settling such claims would be.
With regard to other areas of exposure, the Company's facilities consist
primarily of leased warehouse facilities in large metropolitan areas using local
utilities. With regard to communication lines, the business system lines are
through a major supplier who has provided assurances they will be Year 2000
compliant. As the Company does not have any specific contract services with
power companies or other utilities or sophisticated production equipment, it is
not subject to many of the potential problems of manufacturing or certain
service environments. 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 whether the consequences of Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition.
<PAGE>
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes new procedures for accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. The
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 the Statement. The adoption is not expected
to have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
Market Sensitive Instruments and Risk Management
The Company utilizes derivative financial instruments to reduce interest rate
risks. The Company does not hold or issue financial instruments for trading or
speculative purposes. The counterparty is a major commercial bank. At December
31, 1998, the Company had one derivative financial instrument, an interest rate
swap agreement with a notional amount of $17 million. This swap agreement
effectively fixes the interest rate on a like amount of the Company's floating
rate debt at 6.16% plus the Company's LIBOR spread in effect at the time. The
effective rate was 7.41% at December 31, 1998. The swap expires on November 6,
2001. A 100 basis point downward parallel shift in the yield curve would not
have a material effect on the Company's results of operations, liquidity or
financial condition.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
PRIMESOURCE CORPORATION
Consolidated Statements of Income
<CAPTION>
Years Ended December 31,
---------------------------------------
(Thousands of dollars, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ........................................ $ 453,047 $ 414,867 $ 366,657
Cost of sales .................................... 369,844 343,116 301,428
- -------------------------------------------------------------------------------------------
Gross profit ..................................... 83,203 71,751 65,229
Selling, general, and administrative expenses .... 68,823 60,151 53,748
Depreciation and amortization .................... 2,507 2,412 2,420
Provision for doubtful accounts .................. 440 694 865
Restructure and other ............................ 1,050
- -------------------------------------------------------------------------------------------
Income from operations ........................... 10,383 8,494 8,196
Interest expense ................................. (3,605) (2,913) (1,915)
Gain on sale of capital lease .................... 3,658
Loss on business divestiture ..................... (401)
Other income-net ................................. 297 515 421
- -------------------------------------------------------------------------------------------
Income before provision for income taxes ......... 7,075 9,353 6,702
Provision for income taxes ....................... 2,975 3,862 2,788
- -------------------------------------------------------------------------------------------
Net income ....................................... $ 4,100 $ 5,491 $ 3,914
===========================================================================================
Net income per share
Basic ............................................ $ .63 $ .84 $ .60
Diluted .......................................... .62 .83 .60
===========================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
Consolidated Balance Sheets
<CAPTION>
December 31,
------------------------
(Thousands of dollars, except share information) 1998 1997
- -----------------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C>
Trade receivables, less allowances of $3,419 and $1,913, respectively $ 73,602 $ 53,861
Other receivables ................................................... 9,973 6,675
Inventories ......................................................... 69,111 53,919
Deferred income taxes ............................................... 2,852 2,361
Other ............................................................... 962 1,155
- -----------------------------------------------------------------------------------------------
Total Current Assets ................................................ 156,500 117,971
Property and equipment, net ......................................... 13,123 12,315
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $1,958 and $1,435, respectively 17,526 4,217
Deferred income taxes ............................................... 1,567 1,705
Long-term receivables ............................................... 697 824
Other assets ........................................................ 1,634 1,459
- -----------------------------------------------------------------------------------------------
Total Assets ........................................................ $ 191,047 $ 138,491
===============================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations ............................ $ 1,128 $ 1,362
Notes payable ....................................................... 3,500
Accounts payable .................................................... 33,745 34,045
Book overdraft ...................................................... 9,195 5,609
Accrued payroll and benefits ........................................ 3,745 3,434
Other accrued liabilities ........................................... 4,935 4,370
- -----------------------------------------------------------------------------------------------
Total Current Liabilities ........................................... 56,248 48,820
Long-term obligations, net of current portion ....................... 75,205 32,788
Accrued pension and other liabilities ............................... 2,070 2,387
Postretirement benefits other than pension .......................... 1,913 1,948
- -----------------------------------------------------------------------------------------------
Total Liabilities ................................................... 135,436 85,943
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $.01 par value, 24,000,000 shares authorized
6,536,018 and 6,516,620 issued and outstanding, respectively ........ 65 65
Additional paid-in capital .......................................... 25,724 25,586
Retained earnings ................................................... 29,822 26,897
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity .......................................... 55,611 52,548
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity .......................... $ 191,047 $ 138,491
===============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31,
------------------------------------
(Thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income ............................................. $ 4,100 $ 5,491 $ 3,914
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ........................................ 1,957 1,980 1,900
Amortization ........................................ 550 432 520
Provision for doubtful accounts ..................... 440 694 865
Gain on sale of capital lease ....................... (3,658)
Loss on business divestiture ........................ 401
Restructure and other expense ....................... 996
Other ............................................... (330) (391) 28
Changes in assets and liabilities, net of
effects from business combinations/divestitures:
Receivables ......................................... (1,075) (574) (4,751)
Inventories ......................................... 2,388 (7,754) 1,485
Other current assets ................................ 278 (484) 258
Income taxes ........................................ (668) 100 1,768
Accounts payable and other accrued liabilities ...... (10,803) 2,255 2,917
Pension and other postretirement benefits ........... (135) (287) (1,203)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .... (2,302) (1,795) 7,701
Investing Activities
Proceeds from sales of property and equipment .......... 163 565 218
Proceeds from sale of capital lease .................... 3,151
Purchase of property and equipment ..................... (1,743) (1,918) (1,530)
Proceeds from business divestitures .................... 2,388 2,235
Payments for business acquisitions, net of cash acquired (43,946) (14,394)
(Increase) decrease in long-term receivables ........... 127 71 (33)
Increase in other assets ............................... (185) (254) (732)
Other, net ............................................. (34) (353) (235)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities .... (45,618) 3,650 (14,471)
Financing Activities
Net increase in short-term borrowings .................. 3,500
Proceeds from long-term obligations .................... 144,300 74,600 142,924
Repayment of long-term obligations ..................... (102,429) (77,048) (138,532)
Increase in book overdraft ............................. 3,586 1,762 3,847
Dividends paid ......................................... (1,175) (1,172) (1,211)
Purchase of common stock ............................... (106) (258)
Proceeds from exercise of stock options ................ 138 109
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .... 47,920 (1,855) 6,770
- ----------------------------------------------------------------------------------------------
Net change in cash ..................................... -- -- --
Cash at beginning of year .............................. -- -- --
- ----------------------------------------------------------------------------------------------
Cash at end of year .................................... $ -- $ -- $ --
==============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
Consolidated Statements of Shareholders' Equity
<CAPTION>
Common Stock Unamortized
($.01 Par Value) Additional Restricted
(Thousands of dollars, ------------------------ Paid-in Retained Stock
except share information) Shares Amount Capital Earnings Awards Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............ 6,527,295 $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 ............ 25,000 137 137
Amortization of restricted
stock awards ..................... 29 29
Purchase of common stock ............ (37,500) (147) (111) (258)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 .......... 6,514,795 65 25,533 22,628 (43) 48,183
Net income .......................... 5,491 5,491
Cash dividends paid to
shareholders ($.18 per share) .... (1,172) (1,172)
Stock options exercised and related
tax benefit net of shares received
as payment upon exercise ......... 15,837 109 109
Amortization of restricted
stock awards ..................... 43 43
Purchase of common stock ............ (14,012) (56) (50) (106)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 .......... 6,516,620 65 25,586 26,897 -- 52,548
Net income .......................... 4,100 4,100
Cash dividends paid to
shareholders ($.18 per share) .... (1,175) (1,175)
Stock options exercised and related
tax benefit net of shares received
as payment upon exercise ......... 19,398 138 138
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 .......... 6,536,018 $65 $25,724 $29,822 $-- $55,611
========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PRIMESOURCE CORPORATION
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Consolidation
PrimeSource Corporation (the "Company") is a national distributor
serving the printing and publishing industries. The consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions
and accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments
purchased with a maturity of three months or less to be cash
equivalents. The Company's cash management program utilizes zero
balance accounts. Accordingly, in general, the Company has none or
minimal cash balances. Book overdraft balances have been reclassified
to a current liability in the accompanying Consolidated Balance Sheets.
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.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset.
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 (the "goodwill acquired") is being amortized
by the straight-line method over periods ranging from fifteen to forty
years. The Company's policy is to record an impairment loss against the
goodwill acquired in the period when it is determined the carrying
amount of the net assets may not be recoverable. The Company performs
this evaluation on a quarterly basis. This determination includes
evaluation of factors such as current market value, future asset
utilization, business climate and future net cash flows (undiscounted
and without interest) expected to result from the use of the net
assets.
Revenue Recognition
Revenue is recognized when products are shipped and title is passed to
the customer.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce
interest rate risks. The Company does not hold or issue financial
instruments for trading or speculative purposes. The counterparty is a
major commercial bank. Management believes losses related to credit
risk are remote. The instruments are accounted for on an accrual basis.
The net cash amounts paid or received under such agreements are accrued
and recognized as an adjustment to interest expense.
<PAGE>
Fair Value of Financial Instruments
The carrying value of the Company's short-term financial instruments,
such as receivables and notes and accounts payable, 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, approximates the market value based on the
estimated discounted value of future cash flows at December 31, 1998
and 1997. The fair value of derivative financial instruments is based
on the quoted settlement cost on the balance sheet date.
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.
Stock-Based Compensation
The Company applies the intrinsic value based method prescribed in
Accounting Principles Board Opinion No. 25 to account for options
granted to employees to purchase common shares. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" requires that companies electing to continue using the
intrinsic value method must make pro forma disclosures of net income
and net income per share as if the fair-value-based method of
accounting had been applied.
Pension and Other Postretirement Benefits
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The provisions of
SFAS No. 132 revise employers' disclosures about pensions and other
postretirement benefit plans. It does not change the measurement or
recognition of these plans. It standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent
practicable.
Income Taxes
Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets
and liabilities and their reported amounts.
Net Income Per Common Share
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period
adjusted for the number of shares that would have been outstanding if
the dilutive potential common shares had been issued.
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.
Reclassifications
Certain reclassifications of prior years' amounts have been made to
conform to the current year's presentation.
2. Business Acquisitions
In September 1998, the Company acquired the net assets of Bell
Industries' Graphic Imaging Group ("Bell acquisition") with thirteen
locations in the West, Southwest and Midwest for approximately $42.5
million. The excess of the acquisition costs over the net tangible
assets acquired is included in the Consolidated Balance Sheet and is
being amortized on a straight-line basis over 20 years. Assuming the
acquisition had occurred at the beginning of the year, unaudited
pro-forma sales and net income for the year ended December 31, 1998,
would have been approximately $552.7 million and $4.8 million ($.73 per
basic share and $.72 per diluted share), respectively. For the year
ended December 31, 1997, unaudited pro-forma sales and net income,
would have been approximately $571.2 million and $5.9 million ($.90 per
basic share and $.88 per diluted share), respectively. The sales
decrease between 1997 and 1998 reflects reduced sales in the Bell
business.
<PAGE>
In April 1998, the Company acquired the assets of Joseph Genstein,
Inc., a graphics distributor in the Pittsburgh area, for approximately
$1.5 million, with an additional $100,000 payable after one year if
certain sales levels are met. In 1996, the Company acquired the
operating assets of KPM, a graphics distributor in Michigan, and VGC
Corporation's branch operations in St. Louis, Missouri; Minneapolis,
Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha, Nebraska
for an aggregate purchase price of approximately $14.4 million. The
excess of the acquisition costs over the net tangible assets acquired
for these acquisitions is included in the Consolidated Balance Sheet
and is being amortized on a straight-line basis over 15 years. The
pro-forma results of these acquisitions would not have had a
significant impact on the Company's consolidated results of operations.
These acquisitions have been accounted for as purchases and,
accordingly, are included in operations from their respective
acquisition dates.
3. Restructure and Other
In the fourth quarter of 1998, the Company reorganized the operations
into three regions. This included integrating the Bell acquisition
operations into the applicable regions and, where appropriate,
combining Bell facilities with existing PrimeSource facilities in the
area. In conjunction with this reorganization, the Company incurred
$1,050,000 in restructure and other expenses composed of $600,000 for
employee severance compensation for 36 employees, $350,000 in the
write-down of a building to be sold in 1999 to net realizable value,
and $100,000 for lease costs on vacated leased facilities. At December
31, 1998, $54,000 of the severance compensation had been paid.
4. Sale of Capital Lease
In October 1997, the Company sold its rights to a building lease in the
Los Angeles California area for $3,151,000. The lease had been
accounted for as a capital lease. The pretax gain on the sale, after
eliminating the associated net financial basis of the lease assets of
$695,000 and the liability for future lease payments of $1,202,000, was
$3,658,000. Subsequent to the sale, the Company's operations previously
located in the facility were moved to a new leased facility in the
area.
5. Business Divestitures
In 1997, the Company completed the sale of a pressroom material
converting operation. The pretax loss on the sale was $401,000. In
conjunction with the sale, the Company entered into a supplier
agreement with the buyer. In 1996, the Company sold substantially all
of the assets of its Rochester, New York subsidiary, Onandaga Litho
Supply, Co., Inc. There was no gain or loss on this sale.
6. Cash Flow Information
Cash payments for interest and income taxes (net of refunds) for the
years ended December 31, consisted of:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Interest .......................... $3,368 $2,742 $1,826
Income taxes ...................... 3,760 3,878 2,314
==========================================================================
</TABLE>
Excluded from the accompanying Consolidated Statements of Cash Flows
for years ended December 31, are the following effects of certain
non-cash investing and financing activities:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired ..... $55,314 $-- $14,801
Liabilities assumed or created .... 11,368 407
==========================================================================
</TABLE>
<PAGE>
7. Inventories
Inventories, which are primarily finished goods, at December 31,
consisted of:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
--------------------------------------------------------
<S> <C> <C>
Last-in, first-out (LIFO) .... $33,631 $30,168
First-in, first-out (FIFO) ... 35,480 23,751
--------------------------------------------------------
Total inventories ............ $69,111 $53,919
========================================================
</TABLE>
The current replacement costs of inventories exceeds LIFO values by
approximately $5,660,000 and $5,432,000 at December 31, 1998 and 1997,
respectively.
In 1997, the Company expensed $2.3 million to write-down electronic
equipment inventory to current market value. This amount has been
recorded in cost of sales in the Consolidated Income Statements.
8. Property and Equipment
Property and equipment, net, at December 31, consisted of:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
----------------------------------------------------------------------------
<S> <C> <C>
Land ........................................... $ 1,354 $ 1,354
Buildings and improvements ..................... 7,731 7,605
Leased property ................................ 399 399
Machinery, equipment and other ................. 14,623 12,460
----------------------------------------------------------------------------
24,107 21,818
Less accumulated depreciation and amortization . (10,984) (9,503)
----------------------------------------------------------------------------
Property and equipment, net ...................... $ 13,123 $12,315
============================================================================
</TABLE>
9. Debt Obligations
The long-term obligations of the Company at December 31, consisted of:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement ................................. $74,800 $31,500
Term loan (interest rate of 6.03%), principal payments of
$167 plus interest due quarterly through January, 2000 ... 667 1,333
Term loan (interest rate of 6.03%), principal payments of,
$134 plus interest due quarterly through January, 2000 ... 535 1,070
Other miscellaneous obligations ............................ 331 247
--------------------------------------------------------------------------------------
76,333 34,150
Less current portion ....................................... (1,128) (1,362)
--------------------------------------------------------------------------------------
Net long-term obligations .................................. $75,205 $32,788
======================================================================================
</TABLE>
Maturities of long-term obligations are $1,128,000 in 1999, $405,000
in 2000, $74,800,000 in 2001 and none thereafter.
The Company has an uncollateralized $75 million revolving credit
agreement which expires in January 2001. 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
.50% to 1.70% depending on certain specified performance levels.
The Company has an uncommitted line with a bank for $10 million, of
which $3.5 million was outstanding at December 31, 1998. The weighted
average interest rate for 1998, which is based on an internal rate
established by the bank, was 7%. There were no outstanding balances on
this line in 1997 or 1996.
<PAGE>
The loan agreements provide, among other terms, various requirements
for tangible net worth and leverage and fixed charge coverage ratios.
As a result of the debt incurred with the Bell acquisition, the Company
was not in compliance with a leverage ratio at December 31, 1998. The
lender has waived the violation and amended the requirement for future
periods to incorporate the effect of the Bell acquisition.
In November 1997, the Company entered into an interest rate swap
agreement with a notional amount of $17 million. This swap agreement
effectively fixed the interest rate on a like amount of the Company's
floating rate debt at 6.16% plus the Company's LIBOR spread in effect
at the time. The effective rate was 7.41% at December 31, 1998. The
swap expires on November 6, 2001. The fair value of the swap agreement,
based on the quoted settlement cost to close the contract at December
31, 1998, is a liability of $490,000. The fair value of the swap
agreement is not recognized in the consolidated financial statements
since it is accounted for as a hedge.
Under terms of certain insurance policies and claims handling
agreements, the Company is required to maintain certain standby letters
of credit. At December 31, 1998 and 1997, these totaled $200,000.
10. Provision for Income Taxes
The income tax provision for the years ended December 31, consisted of:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
-----------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal .................. $2,450 $3,349 $2,571
State .................... 644 791 586
-----------------------------------------------------------------
3,094 4,140 3,157
Deferred:
Federal .................. (93) (229) (264)
State .................... (26) (49) (105)
-----------------------------------------------------------------
(119) (278) (369)
-----------------------------------------------------------------
Provision for income taxes $2,975 $3,862 $2,788
=================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax provision ............................. $2,406 $3,180 $2,279
State income taxes, net of federal income tax benefit 408 490 334
Expenses for which there are no tax benefits ........ 190 172 154
Other, net .......................................... (29) 20 21
-----------------------------------------------------------------------------------------
Provision for income taxes .......................... $2,975 $3,862 $2,788
=========================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Inventory reserves ............................. $ 712 $ 890
Pension and employee benefit costs ............. 774 772
Provision for doubtful accounts ................ 764 677
Postretirement benefits other than pensions .... 758 867
Vacation accrual ............................... 434 276
Goodwill ....................................... 313 267
Depreciation ................................... (422) (408)
Other, net ..................................... 1,086 725
-----------------------------------------------------------------------
Total deferred tax assets ...................... $4,419 $4,066
=======================================================================
</TABLE>
<PAGE>
11. Net Income Per Share
The following is a reconciliation of the average shares of common stock
used to compute basic net income per share to the shares used to
compute diluted net income per share as shown on the Consolidated
Statements of Income for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C> <C>
used to compute basic net income per share ..... 6,526,805 6,509,083 6,538,279
Dilutive effect of stock options ............... 122,611 126,751 19,710
---------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted net income per share ... 6,649,416 6,635,834 6,557,989
---------------------------------------------------------------------------------------
Net income per share:
Basic .......................................... $ .63 $ .84 $ .60
Diluted ........................................ .62 .83 .60
=======================================================================================
</TABLE>
In 1998, additional option to purchase 254,556 shares of common stock
at a range of prices from $6.81 to $11.18 were outstanding but were
not included in the computation of the diluted net income per share
amount because the options' exercise prices were greater than the
average market price of the common stock.
12. Defined Benefit Pension Plan
The Company has a defined benefit pension plan ("Plan") that covers
substantially all of the Company's employees. In general, an employee
becomes vested after completing five years of service, and the benefit
is based on the employee's years of service and compensation during the
ten years preceding retirement. Contributions to the Plan are based on
funding standards established by the Employee Retirement Income
Security Act of 1974.
The components of the net pension expense (benefit) for the years
ended December 31, were:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the year . $ 982 $ 728 $ 1,000
Interest cost on projected benefit obligation ... 1,872 1,734 1,718
Expected return on Plan assets .................. (2,980) (2,524) (2,284)
Amortization of prior service cost .............. (9) (9) (9)
Transition amortization ......................... 5 5 5
Recognized net actuarial (gain) loss ............ (88) (124) 27
----------------------------------------------------------------------------------------
Net pension expense (benefit) ................... $ (218) $ (190) $ 457
========================================================================================
Assumptions:
Discount rate ................................... 6.50% 7.00% 7.75%
Expected return on Plan assets .................. 10.00% 10.00% 10.00%
Rate of compensation increase ................... 4.00% 4.00% 4.00%
========================================================================================
</TABLE>
<PAGE>
The change in the financial status of the Plan and amounts recognized
in the Company's Consolidated Balance Sheets at December 31, were:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
--------------------------------------------------------------------------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year ........ $26,689 $25,244
Service cost ................................... 982 728
Interest cost .................................. 1,872 1,734
Actuarial gain ................................. 2,627 308
Benefits paid .................................. (1,365) (1,325)
--------------------------------------------------------------------------
Benefit obligation at end of year .............. 30,805 26,689
--------------------------------------------------------------------------
Change in Plan assets:
Fair value of Plan assets at beginning of year . 30,507 25,886
Actual return on Plan assets ................... 6,953 5,930
Employer contribution .......................... 16 16
Benefits paid .................................. (1,365) (1,325)
--------------------------------------------------------------------------
Fair value of Plan assets at end of year ....... 36,111 30,507
--------------------------------------------------------------------------
Funded Status .................................. 5,306 3,818
Unrecognized net gain .......................... (6,354) (5,096)
Unrecognized prior service cost ................ (209) (218)
Unrecognized transition obligation ............. 14 18
--------------------------------------------------------------------------
Net pension asset (liability) .................. $(1,243) $(1,478)
==========================================================================
</TABLE>
The Plan's assets are invested in undivided interests in several funds
structured to duplicate the performance of various stock and bond
indexes.
13. 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 $290,000,
$296,000 and $220,000 for the years 1998, 1997, and 1996, respectively.
14. Postretirement Benefits Other Than Pensions
The Company has two retiree health benefit plans, the Phillips & Jacobs
Retiree Health Plan (the "P/J Retiree Plan") that primarily covers
retirees and employees who previously participated in theTasty Baking
Company's Retiree Medical Plan prior to the Company's spin-off from
Tasty Baking Company in 1993, and the Momentum Retiree Medical Plan
(the "Momentum Retiree Plan"), that primarily covers retirees and
employees who were previously employed by Momentum Corporation prior to
the merger with the Company in 1994. 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 life
insurance premium contribution is limited to $20,000 of coverage per
retiree, with the retiree paying the premium for any coverage beyond
the $20,000. 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:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the year ... $ 20 $ 16 $ 17
Interest cost on projected benefit obligation ..... 80 89 86
Recognized actuarial gain ......................... (76) (103) (107)
------------------------------------------------------------------------------------------
Net expense (benefit) ............................. $ 24 $ 2 $ (4)
==========================================================================================
</TABLE>
<PAGE>
The change in the financial status of the Plan and amounts recognized
in the Company's Consolidated Balance Sheets at December 31, were:
<TABLE>
<CAPTION>
(Thousands of dollars) 1998 1997
---------------------------------------------------------------------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year ..... $ 1,160 $ 1,052
Service cost ................................ 20 16
Interest cost ............................... 80 89
Actuarial gain .............................. 325 212
Benefits paid ............................... (59) (209)
--------------------------------------------------------------------
Benefit obligation at end of year ........... 1,526 1,160
--------------------------------------------------------------------
Plan assets ................................. -- --
--------------------------------------------------------------------
Funded Status ............................... (1,526) (1,160)
Unrecognized net gain ....................... (387) (788)
--------------------------------------------------------------------
Net pension asset (liability) ............... $(1,913) $(1,948)
====================================================================
<FN>
Assumptions:
Discount rate
---------------
1998 6.50%
1997 7.00%
1996 7.75%
Medical Trend
--------------
Indemnity Plan 7.23% in 1998 grading to 5% in 2003
HMO 6.91% in 1998 grading to 5% in 2005
</FN>
</TABLE>
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.
15. Stock Compensation
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, which vest over a four year period, 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 terminates.
Changes in options outstanding for the three years ended December 31,
1998 are:
<TABLE>
<CAPTION>
Option Prices
-------------------------
Weighted
Options Average Range
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 ....... 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
-------------------------------------------------------------------------------
Granted .............................. 56,500 11.18 11.18
Exercised ............................ (15,853) 6.15 6.11- 6.97
Canceled ............................. (7,115) 6.15 6.11- 6.97
-------------------------------------------------------------------------------
Outstanding at December 31, 1997 ..... 498,381 6.89 6.11-11.18
-------------------------------------------------------------------------------
Granted .............................. 101,500 7.41 6.81-11.18
Exercised ............................ (20,194) 6.25 6.11- 6.97
Canceled ............................. (16,085) 7.58 6.11-11.18
-------------------------------------------------------------------------------
Outstanding at December 31, 1998 ..... 563,602 $ 6.99 $6.11-11.18
-------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, there were 255,874 options exercisable with a
weighted-average option price of $6.63 and a range from $6.11 to $11.18
and 33,940 options available for grant. The weighted-average remaining
contractual life of outstanding options at December 31, 1998 and 1997
was 7.3 and 7.7 years, respectively.
<PAGE>
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 net income per share on a pro forma
basis would have been reduced for the years ended December 31, as
follows:
<TABLE>
<CAPTION>
(Thousands of dollars,
except per share data) 1998 1997 1996
---------------------------------------------------------------------------
Net Income:
<S> <C> <C> <C>
As reported ........................ $4,100 $5,491 $3,914
Pro forma .......................... 3,917 5,360 3,813
===========================================================================
Net Income Per Share:
As reported
Basic ............................ $.63 $.84 $.60
Diluted .......................... .62 .83 .60
Pro forma
Basic ............................ .60 .82 .58
Diluted .......................... .59 .81 .58
===========================================================================
</TABLE>
The weighted-average fair value per share for options granted was
$2.50, $5.23 and $2.51 for 1998, 1997 and 1996, respectively. The fair
value was estimated using the Black-Scholes option-pricing model. For
options granted in 1998, a dividend yield rate of 2.5%, expected stock
volatility of 32% and risk-free interest rate of 5.4% were used. For
options granted in 1997, a dividend yield rate of 1.6%, expected stock
volatility of 45% and risk-free interest rate of 5.8% were used in
estimating the value. For options granted in 1996, a dividend yield
rate of 2.6%, expected stock volatility of 37% and risk-free interest
rate of 6.75% were used in estimating the value. For all years, an
expected option life of seven years was 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
that is amortized to operations over the restriction period. At
December 31, 1998, all awards were fully amortized an additional 61,280
shares were available for future awards.
16. 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, 1998 are
as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
(Thousands of dollars)
-------------------------------------
<S> <C>
1999 ....................... $2,197
2000 ....................... 1,852
2001 ....................... 1,071
2002 ....................... 720
2003 ....................... 352
Thereafter ................. 187
-------------------------------------
Total minimum lease payments $6,379
=====================================
</TABLE>
Rent expense, net of noncancelable sublease income of $10,000, none and
$5,000 in 1998, 1997, and 1996, respectively, was $2,851,000,
$2,219,000 and $2,182,000 for 1998, 1997, and 1996, respectively.
The Company leases a distribution facility from two employees. Rent
expense incurred in connection with this lease was $65,000 in 1998 and
1997 and $63,000 in 1996.
<PAGE>
17. New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes new procedures for accounting
for derivatives and hedging activities and supersedes and amends a
number of existing standards. The 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 the 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.
18. 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 has a commitment to purchase certain inventory from a
supplier through December 1999. This commitment is not expected to
surpass usage requirements through this period.
The Company, along with many other potentially responsible parties, is
a defendant in declaratory actions to determine the allocation of costs
for the investigation and remediation of a Superfund cleanup site. The
Company believes its insurance will cover any costs incurred in this
matter. 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.
19. Quarterly Financial Information (unaudited)
Summarized unaudited quarterly financial data for the years ended
December 31, 1998 and 1997 are:
<TABLE>
<CAPTION>
(Thousands of dollars
except per share data) First Second Third Fourth Total
--------------------------------------------------------------------------------------
Year Ended December 31, 1998 (1)
<S> <C> <C> <C> <C> <C>
Net sales ...................... $101,528 $104,846 $109,486 $137,187 $453,047
Gross profit ................... 18,452 19,578 19,608 25,565 83,203
Net income ..................... 1,112 1,270 1,002 716 4,100
Net income per share
Basic ........................ $ .17 $ .19 $ .15 $ .11 $ .63
Diluted ...................... .17 .19 .15 .11 .62
Year Ended December 31, 1997 (2)
Net sales ...................... $103,388 $103,170 $102,462 $105,847 $414,867
Gross profit ................... 18,303 18,407 18,279 16,762 71,751
Net income ..................... 1,105 1,176 1,233 1,977 5,491
Net income per share
Basic ........................ $ .17 $ .18 $ .19 $ .30 $ .84
Diluted ...................... .17 .18 .19 .29 .83
<FN>
(1) The operations of the Bell acquisition are included from the
September 14, 1998 acquisition date. Income for the quarter and
year ended December 31, 1998 includes a restructure and other
expense of $1,050,000 ($634,000 after tax) for the reorganizing of
the operations into three divisions and the integration of the
Bell locations. The total of the basic net incomes per share for
the quarters does not equal the basic net income per share for the
year due to rounding.
(2) Income for the quarter and year ended December 31, 1997, includes
$2,300,000 ($1,381,000 after tax) write-down of electronic
equipment inventory to market, $3,658,000 ($2,183,000 after tax)
gain on the sale of a capital lease and $401,000 ($241,000 after
tax) loss on a business divestiture.
</FN>
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors
of PrimeSource Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 29 of this Form 10-K present fairly, in
all material respects, the financial position of PrimeSource Corporation and
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, PA 19103
February 23, 1999
<PAGE>
PART III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 1999, 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, 1999.
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, 1999.
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, 1999.
<PAGE>
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:
<TABLE>
<CAPTION>
Form 10-K
Page
---------
<S> <C>
Consolidated Statements of Income 13
Consolidated Balance Sheets 14
Consolidated Statements of Cash Flows 15
Consolidated Statements of Shareholders' Equity 16
Notes to Consolidated Financial Statements 17
Report of Independent Accountants 27
</TABLE>
(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.
Report of Independent Accountants on Financial Statement Schedule
(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 September 28, 1998, the Registrant filed a Form 8-K to report the
acquisition of Bell Industries' graphic imaging group. On November 26,
1998, the Registrant filed a Form 8-K/A to amend the above filing to
include the financial information required under item 7 of Form 8-K
which was not available at the time of the original filing.
.
<PAGE>
PRIMESOURCE CORPORATION AND SUBSIDIARIES
<TABLE>
SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
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, 1998
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts ...... $ 1,913 $ 440 $ 1,295 (A) $ (229)(E) $ 3,419
Amortization of goodwill ............. 1,435 523 1,958
Inventory reserves ................... 4,664 233 2,000 (A) (1,483)(F) 5,414
- -------------------------------------------------------------------------------------------------------------------
$ 8,012 $ 1,196 $ 3,295 $(1,712) $ 10,791
------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997
Allowance for doubtful accounts ...... $ 1,787 $ 694 $ (568)(E) $ 1,913
Amortization of goodwill ............. 1,102 333 1,435
Inventory reserves ................... 3,172 2,602 $ (137)(B) (973)(F) 4,664
------------------------------------------------------------------------------------------------------------------
$ 6,061 $ 3,629 $ (137) $(1,541) $ 8,012
------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1996
Allowance for doubtful accounts ...... $ 1,372 $ 865 $ (450)(E) $ 1,787
Amortization of goodwill ............. 825 316 $ (39)(C) 1,102
Inventory reserves ................... 1,752 364 1,754 (D) (698)(F) 3,172
------------------------------------------------------------------------------------------------------------------
$ 3,949 $ 1,545 $ 1,715 $(1,148) $ 6,061
------------------------------------------------------------------------------------------------------------------
<FN>
(A) Related to the acquisition of Bell Industries' Graphic Imaging Group.
(B) Reserve disposed of with the sale of the pressroom material converting
operation.
(C) Reserve disposed of with the sale of the assets of Onandaga Litho Supply,
Inc.
(D) Related to the acquisition of VGC Corporation's branch operations in St.
Louis, Missouri; Minneapolis, Minnesota; Milwaukee, Wisconsin; Des Moines,
Iowa; and Omaha, Nebraska.
(E) Doubtful accounts written off, net of any recoveries.
(F) The disposal of obsolete inventory, net of any recoveries.
</FN>
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders and the Board of Directors
of PrimeSource Corporation
Our audits of the consolidated financial statements of PrimeSource Corporation
and subsidiaries referred to in our report dated February 23, 1999 appearing in
Item 14(a)(1) on page 29 of this Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)(2) on page 29 of this Form
10-K. In our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 23, 1999
<PAGE>
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 26, 1999
/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 26, 1999
/s/ William A. DeMarco
William A. DeMarco
Vice President, Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Capacity Date
- -----------------------------------------------------------------------------------
<S> <C> <C>
/s/ Richard E. Engebrecht Chairman of the Board and March 2, 1999
- -------------------------------------- Director of PrimeSource
Richard E. Engebrecht Corporation
/s/ Fred C. Aldridge, Jr. Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
Fred C. Aldridge, Jr.
/s/ Philip J. Baur, Jr. Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
Philip J. Baur, Jr.
/s/ John H. Goddard, Jr. Executive Vice President and March 2, 1999
- -------------------------------------- Director of PrimeSource
John H. Goddard, Jr. Corporation
/s/ Gary MacLeod Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
Gary MacLeod
/s/ James F. Mullan President, Chief Executive March 2, 1999
- -------------------------------------- Officer and Director of
James F. Mullan PrimeSource Corporation
/s/ Klaus D. Oebel Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
Klaus D. Oebel
/s/ Edward N. Patrone Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
Edward N. Patrone
/s/ John M. Pettine Director of PrimeSource March 2, 1999
- -------------------------------------- Corporation
John M. Pettine
</TABLE>
<PAGE>
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.
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)
2.5 Asset Purchase Agreement between PrimeSource Corporation and Bell
Industries, Inc. dated August 28, 1998 for the purchase of
substantially all the assets and certain liabilities of the Graphic
Imaging Group of Bell Industries, Inc. (filed as exhibit 2 to Form
8-K dated September 28, 1998, File No. 000-21750)
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 effective
May 7, 1997. (filed as Exhibit 10.18 to Form 10-K, File No. 0-21750,
dated March 28, 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)*
<PAGE>
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 the Registrant and W.A. DeMarco dated
December 31, 1996 (filed as Exhibit 10.5 to Form 10-K, File No.
0-21750, dated March 28, 1997)*
10.5 Employment Agreement between the Registrant and J.F. Mullan dated
December 31, 1996 (filed as Exhibit 10.6 to Form 10-K, File No.
0-21750, dated March 28, 1997)*
10.6 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)
10.7 Amendment No. 1 to Agreement among Employers Participating in Certain
Qualified Plans (filed as Exhibit 10.14 to theProxy/Prospectus
included within registration statement No. 33-54913 on Form S-4 filed
by the Registrant on August 4, 1994)*
10.8 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)*
10.9 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)*
10.10 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)*
10.11 Employment Agreement between the Registrant and John H. Goddard, Jr.
dated December 24, 1996 (filed as Exhibit 10.14 to Form 10-K, File
No. 0-21750 dated March 25, 1998)*
10.12 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)*
10.13 PrimeSource Corporation Pension Plan (filed as Exhibit 10.23 to Form
10-K, File No. 0-21750, dated March 26, 1996)*
10.14 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 (filed as Exhibit 10.18 to Form 10-K,
File No. 0-21750, dated March 28, 1997)
10.15 Employment Agreement between the Registrant and Edward Padley dated
December 31, 1997 (filed as Exhibit 10.19 to Form 10-K, File No.
0-21750 dated March 25, 1998)*
10.16 Employment Agreement between the Registrant and D. James Purcell
dated December 31, 1997(filed as Exhibit 10.20 to Form 10-K, File No.
0-21750 dated March 25, 1998)*
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27 Financial Data Schedule for the year ended December 31, 1998
99.1 Undertakings
*Management contracts and/or compensatory plans, contracts or arrangements in
which a director and/or a named executive officer participates.
There is no parent of the registrant.
The Registrant owns 100% of the outstanding capital stock of the following
subsidiary:
Business Name of Corporation Jurisdiction of Incorporation
Dixie Type & Supply Company, Inc. Alabama
(merged into Registrant effective January 1, 1998)
The aforementioned is included in the Consolidated Financial Statements of the
Registrant filed herewith.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
PrimeSource Corporation and subsidiaries (the "Company") on Forms S-8 (File Nos.
33-71638 and 33-87360) of our reports dated February 23, 1999, on our audits of
the consolidated financial statements and financial statement schedule of the
Company as of December 31, 1998 and 1997, and for the three years in the period
ended December 31, 1998, which reports are included in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 77,021
<ALLOWANCES> 3,419
<INVENTORY> 69,111
<CURRENT-ASSETS> 156,500
<PP&E> 24,107
<DEPRECIATION> 10,984
<TOTAL-ASSETS> 191,047
<CURRENT-LIABILITIES> 56,248
<BONDS> 75,205
0
0
<COMMON> 65
<OTHER-SE> 55,546
<TOTAL-LIABILITY-AND-EQUITY> 191,047
<SALES> 453,047
<TOTAL-REVENUES> 453,047
<CGS> 369,844
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EXHIBIT 99.1
TO BE INCORPORATED BY REFERENCE INTO FORM S-8
REGISTRATION STATEMENTS NO. 33-71638 AND 33-87360
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) To include
any prospectus required by section 10(a)(3) of the Securities Act of
1933; (ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in the registration statement; (iii) To include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; Provided, however, that
paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8 and the information required to be
included in a post-effective amendment by those paragraphs is contained
in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) Filings incorporating subsequent Exchange Act documents by reference.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus
is sent or given a copy of the registrant's annual report to
stockholders for its last fiscal year, unless such employee otherwise
has received a copy of such report, in which case the registrant shall
state in the prospectus that it will promptly furnish, without charge,
a copy of such report on written request of the employee. If the last
fiscal year of the registrant has ended within 120 days prior to the
use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 days
period the annual report for the last fiscal year will be furnished to
each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not
otherwise receive such material as stockholders of the registrant, at
the time and in the manner such material is sent to its stockholders,
copies of all reports, proxy statements and other communications
distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be
transmitted promptly, without charge, to any participant in the plan
who makes a written request, a copy of the then latest annual report of
the plan filed pursuant to section 15(d) of the Securities Exchange Act
of 1934 (Form 11-K). If such report is filed as part of the
registrant's annual report on Form 10-K, that entire report (excluding
exhibits) shall be delivered upon written request. If such report is
filed as part of the registrant's annual report to stockholders
delivered pursuant to paragraph (1) or (2) of this undertaking,
additional delivery shall not be required.
(i) Acceleration of effectiveness.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other that the payment by the registrant of expenses incurred or paid
by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
