UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT Of 1934 FOR THE TRANSITION PERIOD
FROM _________ TO _________
Commission File Number 000-21750
PrimeSource Corporation
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1430030
- ------------ ----------
(State of incorporation) (I.R.S. Employer
Identification No.)
4350 Haddonfield Road, Suite 222, Pennsauken, NJ 08109
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(856) 488-4888
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at November 10, 1999
- ----- --------------------------------
Common stock, par value $.01 6,536,212 shares
<PAGE>
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Information Page No.
--------
Condensed Balance Sheets
September 30, 1999 and December 31, 1998 3
Condensed Statements of Income
Three and Nine Months Ended September 30, 1999 and 1998 4
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-k 11
SIGNATURES 12
Certain statements contained in this report are forward-looking. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully implement its business strategies including
successfully integrating business acquisitions, the effect of general economic
conditions and technological, competitive and other changes in the industry,
impact of year 2000 issues, as well as other risks and uncertainties as set
forth in the Company's periodic reports and other filings with the Securities
and Exchange Commission.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED BALANCE SHEETS (Unaudited)
<CAPTION>
September 30, December 31,
(Thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables, net ................................... $ 93,075 $ 83,575
Inventories ........................................ 63,496 69,111
Other .............................................. 3,941 3,814
- ----------------------------------------------------------------------------------
Total Current Assets ................................. 160,512 156,500
Property and equipment, net .......................... 12,542 13,123
Excess of cost over net assets
of businesses acquired, net ....................... 18,219 17,526
Other assets ......................................... 2,906 3,898
- ----------------------------------------------------------------------------------
Total Assets ......................................... $194,179 $191,047
==================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ........... $ 468 $ 1,128
Notes payable ...................................... 3,500
Accounts payable ................................... 49,317 33,745
Book overdraft ..................................... 11,657 9,195
Other accrued liabilities .......................... 6,755 8,680
- ----------------------------------------------------------------------------------
Total Current Liabilities ............................ 68,197 56,248
Long-term obligations, net of current portion ........ 64,104 75,205
Accrued pension liabilities and other liabilities .... 3,448 3,983
- ----------------------------------------------------------------------------------
Total Liabilities .................................... 135,749 135,436
- ----------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value ....................... 65 65
Additional paid in capital ......................... 25,725 25,724
Retained earnings .................................. 32,640 29,822
- ----------------------------------------------------------------------------------
Total Shareholders' Equity ........................... 58,430 55,611
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........... $194,179 $191,047
==================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF INCOME (Unaudited)
<CAPTION>
Three Months Nine Months
(Thousands of dollars, Ended September 30, Ended September 30,
except per share amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................ $ 132,537 $ 109,486 $ 405,326 $ 315,860
Cost of sales ............................ 110,010 89,878 336,023 258,222
- ---------------------------------------------------------------------------------------------
Gross profit ............................. 22,527 19,608 69,303 57,638
Selling, administrative and other expenses 19,234 17,166 58,993 49,875
- ---------------------------------------------------------------------------------------------
Income from operations ................... 3,293 2,442 10,310 7,763
Interest expense ......................... (1,336) (834) (4,110) (2,288)
Other income, net ........................ 51 105 118 285
- ---------------------------------------------------------------------------------------------
Income before provision
for income taxes ........................ 2,008 1,713 6,318 5,760
Provision for income taxes ............... 838 711 2,618 2,376
- ---------------------------------------------------------------------------------------------
Net income ............................... $ 1,170 $ 1,002 $ 3,700 $ 3,384
=============================================================================================
Per share of common stock:
Net income per basic share ............... $ .18 $ .15 $ .57 $ .52
Net income per diluted share ............. .18 .15 .56 .51
Cash dividends ........................... .045 .045 .135 .135
=============================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Nine Months Ended September 30,
(Thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income ........................................... $ 3,700 $ 3,384
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 1,609 1,434
Amortization ..................................... 821 295
Changes in assets and liabilities affecting operations 8,354 4,230
- -------------------------------------------------------------------------------
Net cash provided by operating activities ............ 14,484 9,343
- -------------------------------------------------------------------------------
Investing Activities:
Additions to property and equipment .................. (1,028) (1,193)
Payment for acquisitions, net of cash acquired ....... (100) (32,338)
Change in other assets and liabilities ............... 324 302
- -------------------------------------------------------------------------------
Net cash used in investing activities ................ (804) (33,229)
- -------------------------------------------------------------------------------
Financing Activities:
Repayment of short-term debt ......................... (3,500)
Proceeds from long-term obligations .................. 34,936 115,900
Repayment of long-term obligations ................... (46,697) (88,600)
Increase (decrease) in book overdraft ................ 2,462 (2,610)
Dividends paid ....................................... (882) (882)
Proceeds from exercise of stock options .............. 1 78
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .. (13,680) 23,886
- -------------------------------------------------------------------------------
Net change in cash ................................... -- --
Cash, beginning of year .............................. -- --
- -------------------------------------------------------------------------------
Cash, end of period .................................. $ -- $ --
===============================================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ........................................ $ 4,284 $ 2,130
Income taxes .................................... 2,035 3,694
===============================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
PRIMESOURCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information pursuant to the rules and regulations of the Securities and Exchange
Commission and instructions to Form 10-Q. While these statements reflect all
adjustments (which consist of normal recurring accruals) which are, in the
opinion of management, necessary to a fair presentation of the results for the
interim periods presented, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. These statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's 1998 Annual Report on Form 10-K for further information.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
2. Inventory Pricing
Inventories consist primarily of purchased goods for sale. Inventories are
stated at the lower of cost or market. Cost is determined using the last-in,
first-out (LIFO) and first-in, first-out methods of accounting. Because the
inventory determination under the LIFO method can only be made at the end of
each fiscal year, interim financial results are based on estimated LIFO amounts
and are subject to final year-end LIFO inventory adjustments.
3. Income Per Common Share
The following is a reconciliation of the average shares of common stock used to
compute basic net income per share to the shares used to compute diluted net
income per share as shown on the consolidated condensed statements of income for
the three and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C> <C> <C>
used to compute basic earnings per share . 6,536,147 6,528,409 6,536,059 6,525,254
Dilutive effect of stock options ......... 29,431 120,193 17,123 148,000
- ------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share 6,565,578 6,648,602 6,553,182 6,673,254
- ------------------------------------------------------------------------------------------
Net income per share:
Basic .................................... $ .18 $ .15 $ .57 $ .52
Diluted .................................. .18 .15 .56 .51
==========================================================================================
</TABLE>
<PAGE>
4. Business Acquisitions
In September 1998, the Company acquired the net assets of Bell Industries'
Graphic Imaging Group ("Bell acquisition") with 13 locations in the West,
Southwest and Midwest. Annual sales from this acquisition are expected to be
approximately $135 million. In 1999, the allocation of the purchase price was
adjusted based on final fair values of the assets acquired. In April 1998, the
Company acquired the assets of Joseph Genstein, Inc. ("Genstein acquisition"), a
graphics distributor in the Pittsburgh area with annual sales of approximately
$4 million.
5. Restructure and Other
In 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 a restructure and other expense charge of $1,050,000 of which $54,000
was expended in 1998. The following table sets forth the components of the
accrual balance at December 31, 1998 and the expenditures through September 30,
1999.
<TABLE>
<CAPTION>
Balance Balance
December 31, Cash September 30,
(Thousands of dollars) 1998 Expenditures 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee severance .......... $546 $546 $ 0
Lease obligations ........... 100 68 32
Asset write-downs ........... 350 350
- --------------------------------------------------------------------------------
Total ...................... $996 $614 $382
================================================================================
</TABLE>
6. New Accounting Standards
In July 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Deferral of the Effective Date of FAS 133" which defers the effective date
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is currently evaluating the financial impact of adoption of SFAS No.
133. The adoption is not expected to have a material effect on the Company's
results of operations, financial position or cash flows.
7. Reclassifications
Certain reclassifications have been made to the 1998 condensed financial
statements to conform to the 1999 presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Results of Operations
Net income for the quarter ended September 30, 1999 was $1,170,000 ($.18 per
diluted share) on sales of $132,537,000 compared to net income of $1,002,000
($.15 per diluted share) on sales of $109,486,000 for the same period last year.
For the nine months ended September 30, 1999, net income was $3,700,000 ($.56
per diluted share) on sales of $405,326,000 compared to net income of $3,384,000
($.51 per diluted share) on sales of $315,860,000 for 1998.
Compared to the same periods last year, net sales increased 21% for the quarter
and 28% for the nine months ended September 30, 1999. This sales growth is
primarily attributable to acquisitions in 1998. The Company has experienced
solid growth in digital press and national accounts. Sales of certain capital
goods, consisting of electronic prepress equipment and press & bindery
machinery, however, have not met expectations. Based on current customer
interest, the Company feels these sales will begin to improve over the balance
of the year and into year 2000.
Gross profit as a percent of sales was 17% for the quarter and 17.1% for the
nine-month period ended September 30, 1999 compared to 17.9% and 18.2%,
respectively, for the same periods last year. This decrease is the result of
changes in product and customer mix, lower manufacturer rebates as a percent of
sales and a similar reduction in purchase discounts as a result of decreasing
inventory levels during the year.
Selling, administrative and other expenses as a percent of sales were 14.5% for
the quarter and 14.6% for the nine-month period compared to 15.7% and 15.8%,
respectively, for the same periods last year. This decrease reflects the cost
savings from the integration of the Bell acquisition operations and the cost
reductions realized from the reorganization of the Company.
Interest expense was $1,336,000 and $4,110,000 for the quarter and nine-month
period ended September 30, 1999 compared to $834,000 and $2,288,000,
respectively, for the same periods last year. This increase is primarily
attributable to the Bell acquisition in September 1998.
The effective tax rates for the nine months ended September 30, 1999 and 1998,
remained relatively constant at 41.4% and 41.3%, respectively. The difference
between the effective tax rates and the federal statutory rate of 34% for both
periods is attributable to state income taxes and non-deductible expenses.
Financial Condition and Liquidity
Net cash provided by operating activities for the nine months ended September
30, 1999 was $14,484,000 compared to $9,343,000 for the same period last year.
This increase is primarily attributable to decreased levels of working capital
in 1999. Changes in assets and liabilities resulted in an $8.4 million inflow of
cash in 1999 compared to an inflow of $4.2 million in 1998. Excluding the effect
of changes in assets and liabilities, the cash flow increased by 20% from
$5,113,000 to $6,130,000.
<PAGE>
Net cash used in investing activities was $804,000 for the nine months ended
September 30, 1999 compared to $33,229,000 for the same period last year. In
1998, the Company expended $33.2 million for the Bell and Genstein acquisitions
compared to a $100,000 expenditure in 1999 related to a final acquisition
contingent payment. Property and equipment expenditures for the nine months in
1999 were $1,028,000 compared to $1,193,000 for the same period last year.
Additional capital expenditures for the year, for which there are no material
commitments, are anticipated to be approximately $500,000.
Net cash used in financing activities was $13,680,000 for the nine-month period
ended September 30, 1999 compared to net cash provided of $23,886,000 for the
same period last year. During the nine-month period ended September 30, 1999,
debt decreased $15.3 million compared to an increase of $27.3 million for the
same period last year. The decrease in 1999 is primarily attributable to the
cash generated from operating activities. The increase in 1998 is primarily
attributable to acquisitions expenditures in 1998. The change in the book
overdraft resulted in cash provided of $2.5 million in 1999 and cash used of
$2.6 million in 1998. These changes reflect temporary differences in the timing
of check clearings by the banks. For both periods, dividends were $882,000.
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million of which $64 million was outstanding at
September 30, 1999. In addition, the Company has $10 million in credit lines
with no outstanding balances at September 30, 1999. The Company believes these
facilities combined with future cash flow from operations will be adequate to
meet the ongoing capital requirements of the Company.
Procedures for the Year 2000 Issue
The Company's business system required program modifications prior to the year
2000 for what is commonly referred to as the "Year 2000 Issue". Similar to other
systems, the Company's system had to be modified to change the date for years
from an abbreviated two-digit number to a four-digit number. Without this
modification, the abbreviated two-digit number would have caused many of the
functions within the system to operate improperly or malfunction in the year
2000.
The above modification was part of an extensive system enhancement. The cost for
the complete enhancement was approximately $300,000. No other significant
information system additions have been postponed as a result of this project.
The Company believes that its worst-case scenario would be the loss of power in
Seattle, Washington where its business system is located. The Company plans to
have a back-up generator available at January 1, 2000 to provide power if
needed.
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.
<PAGE>
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 presently unable to estimate what
the aggregate cost of defending and/or settling any 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 telecommunications supplier that has provided assurances it 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.
New Accounting Standards
In July 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Deferral of the Effective Date of FAS 133" which defers the effective date
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is currently evaluating the financial impact of adoption of SFAS No.
133. The adoption is not expected to have a material effect on the Company's
results of operations, financial position or cash flows.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
none
b. Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the quarter
ended September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESOURCE CORPORATION
(REGISTRANT)
BY /s/ WILLIAM A. DEMARCO
William A. DeMarco
Vice President of Finance and
Chief Financial Officer
(principal financial and accounting officer)
DATE November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 87,768
<ALLOWANCES> 3,174
<INVENTORY> 63,496
<CURRENT-ASSETS> 160,512
<PP&E> 25,064
<DEPRECIATION> 12,522
<TOTAL-ASSETS> 194,179
<CURRENT-LIABILITIES> 68,197
<BONDS> 64,104
0
0
<COMMON> 65
<OTHER-SE> 58,365
<TOTAL-LIABILITY-AND-EQUITY> 194,179
<SALES> 405,326
<TOTAL-REVENUES> 405,326
<CGS> 336,023
<TOTAL-COSTS> 336,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 773
<INTEREST-EXPENSE> 4,110
<INCOME-PRETAX> 6,318
<INCOME-TAX> 2,618
<INCOME-CONTINUING> 3,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,700
<EPS-BASIC> .57
<EPS-DILUTED> .56
</TABLE>
