UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2000
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 August 10, 2000
----- ------------------------------
Common stock, par value $.01 6,411,106 shares
<PAGE>
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Information Page No.
--------
Condensed Balance Sheets
June 30, 2000 and December 31, 1999 3
Condensed Statements of Income
Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 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 4 - Submission of Matters to a Vote of Security Holders 11
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>
<CAPTION>
PRIMESOURCE CORPORATION
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables, net ................................... $ 88,907 $ 93,695
Inventories ........................................ 76,093 68,379
Other .............................................. 4,435 4,071
--------------------------------------------------------------------------------
Total Current Assets ................................. 169,435 166,145
Property and equipment, net .......................... 9,593 12,063
Excess of cost over net assets
of businesses acquired, net ....................... 15,985 16,427
Other assets ......................................... 1,881 2,172
--------------------------------------------------------------------------------
Total Assets ......................................... $196,894 $196,807
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ........... $ 63,104 $ 104
Notes payable ...................................... 953
Accounts payable ................................... 47,394 45,766
Book overdraft ..................................... 13,702 16,937
Other accrued liabilities .......................... 9,254 8,149
--------------------------------------------------------------------------------
Total Current Liabilities ............................ 133,454 71,909
Long-term obligations, net of current portion ........ 62,500
Accrued pension liabilities and other liabilities .... 2,487 2,853
--------------------------------------------------------------------------------
Total Liabilities .................................... 135,941 137,262
--------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value ....................... 64 65
Additional paid in capital ......................... 25,233 25,725
Retained earnings .................................. 35,656 33,755
--------------------------------------------------------------------------------
Total Shareholders' Equity ........................... 60,953 59,545
--------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........... $196,894 $196,807
================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Six Months
(Thousands of dollars, Ended June 30, Ended June 30,
except per share amounts) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................ $ 135,191 $ 133,355 $ 276,196 $ 272,789
Cost of sales ............................ 111,566 110,051 229,135 226,013
---------------------------------------------------------------------------------------------
Gross profit ............................. 23,625 23,304 47,061 46,776
Selling, administrative and other expenses 19,850 19,764 39,618 39,759
---------------------------------------------------------------------------------------------
Income from operations ................... 3,775 3,540 7,443 7,017
Interest expense ......................... (1,443) (1,342) (2,879) (2,774)
Other income, net ........................ 81 14 167 67
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Income before provision
for income taxes ........................ 2,413 2,212 4,731 4,310
Provision for income taxes ............... 1,016 917 1,973 1,780
---------------------------------------------------------------------------------------------
Net income ............................... $ 1,397 $ 1,295 $ 2,758 $ 2,530
=============================================================================================
Per share of common stock:
Net income per basic share ............... $ .22 $ .20 $ .43 $ .39
Net income per diluted share ............. .22 .20 .43 .39
Cash dividends ........................... .0475 .045 .095 .09
=============================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income ........................................... $ 2,758 $ 2,530
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 967 1,066
Amortization ..................................... 442 543
Other ............................................ (35)
Changes in assets and liabilities affecting operations (923) 8,750
-------------------------------------------------------------------------------
Net cash provided by operating activities ............ 3,209 12,889
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Investing Activities:
Additions to property and equipment .................. (935) (665)
Proceeds from sale of property and equipment ......... 2,473
Net decrease in other assets ......................... 291 312
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Net cash provided by (used in) investing activities .. 1,829 (353)
-------------------------------------------------------------------------------
Financing Activities:
Net decrease in short-term debt ...................... (953) (3,500)
Proceeds from long-term obligations .................. 106,400
Repayment of long-term obligations ................... (105,900) (6,561)
Decrease in book overdraft ........................... (3,235) (1,887)
Dividends paid ....................................... (617) (588)
Purchase of common stock ............................. (733)
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Net cash used in financing activities ................ (5,038) (12,536)
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Net change in cash ................................... -- --
Cash, beginning of year .............................. -- --
-------------------------------------------------------------------------------
Cash, end of period .................................. $ -- $ --
===============================================================================
<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 1999 Annual Report on Form 10-K for further information.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
2. Inventory Pricing
Inventories consist primarily of purchased goods for sale. Inventories are
stated at the lower of cost or market. Cost is determined using the last-in,
first-out (LIFO) and first-in, first-out methods of accounting. Because the
inventory determination under the LIFO method can only be made at the end of
each fiscal year, interim financial results are based on estimated LIFO amounts
and are subject to final year-end LIFO inventory adjustments.
3. Income Per Common Share
The following is a reconciliation of the average shares of common stock used to
compute basic income per share to the shares used to compute diluted income per
share as shown on the consolidated condensed statements of income for the three
and six months ended June 30:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C> <C> <C>
used to compute basic earnings per share . 6,428,739 6,536,014 6,468,841 6,536,015
Dilutive effect of stock options ......... 15,686 461 10,969
----------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share 6,428,739 6,551,700 6,469,302 6,546,984
----------------------------------------------------------------------------------------------
Net income per share:
Basic .................................... $ .22 $ .20 $ .43 $ .39
Diluted .................................. .22 .20 .43 .39
==============================================================================================
</TABLE>
<PAGE>
4. Restructure and Other
In 1998, the Company incurred a restructure and other expense charge of
$1,050,000. At December 31, 1999, the remaining balance was a $430,000
write-down of a building to net realizable value. In February 2000, this
building was sold.
5. Debt
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million of which $63 million was outstanding at June
30, 2000. This revolver expires in May, 2001. The Company is reviewing financing
alternatives to determine the financing that will best serve its needs. Based on
alternatives reviewed to date, the Company believes there is available financing
at reasonable rates to meet the Company's finance requirements.
6. New Accounting Standards
In 1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Deferral of the Effective Date of SFAS
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. SFAS No. 133 establishes new procedures for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. 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.
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
#101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 is effective for the fourth
quarter of 2000. The Company is currently evaluating the impact SAB 101 will
have on its financial statements.
7. Subsequent Event
Effective July 1, 2000, the Company entered into a joint venture with Xeikon to
form Canopy LLC (Canopy). The Company's contribution to the venture is a net
asset investment consisting primarily of inventory of $11.1 million. The
Company's ownership share will be 74% with Xeikon owning 26%. Canopy's business
will focus on the sales, installation, and ongoing service and support of
digital color and monochrome printing systems in the U.S. and Canada. These
systems are utilized primarily by commercial, database, packaging, and
transactional printers. Canopy is a separate and distinct legal entity from the
Company. For financial reporting purposes, Canopy's assets, liabilities and
earnings will be consolidated with those of the Company, and Xeikon's interest
in Canopy will be included in the Company's financial statements as minority
interest.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
---------------------
Net income for the quarter ended June 30, 2000 was $1,397,000 ($.22 per diluted
share) compared to net income of $1,295,000 ($.20 per share) for the same period
last year. For the six months ended June 30, 2000, net income was $2,758,000
($.43 per diluted share) compared to net income of $2,530,000 ($.39 per diluted
share) for 1999. This 9% increase in net income is the result of modest
improvements in sales and operating efficiencies. These results are records for
the periods for both sales and income.
Net sales increased slightly more than 1% for both the quarter and six-month
period ended June 30, 2000 compared to the same periods last year. Gross profits
for the six-month period increased from $46,776,000 in 1999 to 47,061,000 in
2000, an increase of .6%. The gross margin percent decreases from 17.1% in 1999
to 17% in 2000.
Selling, administrative and other expenses as a percent of sales were 14.7% for
the quarter and 14.3% for the six-months ended June 30, 2000, compared to 14.8%
and 14.6%, respectively, for the same periods last year. This decrease reflects
continued measures by the Company to control operating costs.
Interest expense was $1,443,000 and 2,879,000 for the quarter and six-month
period ended June 30, 2000 compared to $1,342,000 and $2,774,000, respectively,
for the same periods last year. This increase is due to increased interest rates
that were partially offset by decreased debt levels.
The effective income tax rate increased from 41.5% to 42.1% for the six months
ended June 30, 2000 and 1999, respectively. This increase is due to
non-deductible expenses being a higher percent to income in 2000 compared to
1999. 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.
To increase shareholder value, the Company implemented a dividend increase and
stock buy-back program effective for 2000. Beginning with the first quarterly
dividend paid in 2000, the dividend per share was increased from $.045 to $.0475
per share. In addition, the Company's board of directors authorized a stock
repurchase program to acquire up to 325,000 shares of the Company's common
stock. As of June 30, 2000, the Company had acquired and retired 125,106 of
these shares. Based on the current stock price, the Company feels the stock is
substantially undervalued and represents a good investment for the Company.
Financial Condition and Liquidity
---------------------------------
Net cash provided by operating activities for the six months ended June 30, 2000
was $3,209,000 compared to cash provided of $12,889,000 for the same period last
year. In 1999, the Company benefited from a substantial decrease in working
capital, whereas in 2000, the Company had an increase in working capital. The
Company does not anticipate it will be able to match the working capital
improvements obtained in 1999, although it will continue to emphasize maximizing
return on these assets. Excluding the effect of changes in assets and
liabilities, the cash flow was $4,139,000 in 1999 to $4,132,000 in 2000.
<PAGE>
Net cash provided by investing activities was $1,829,000 for the six months
ended June 30, 2000 compared to net cash used of $353,000 for the same period
last year. The primary difference between the two years, was $2.5 million
received on the sale of property and equipment in 2000, consisting primarily of
proceeds from the sale of a facility in Minneapolis. Capital expenditures were
$935,000 and $665,000 for the six-months ended June 30 2000 and 1999,
respectively. Additional capital expenditures for the year, for which there are
no material commitments, are anticipated to be approximately $1,000,000.
Net cash used by financing activities was $5,038,000 and $12,536,000 for the six
months ended June 30, 2000 and 1999, respectively. The cash used was provided by
the net cash generated from the operating and investing activities. For 2000,
total debt decreased by $453,000 compared to $10.1 million for 1999. The book
overdraft decreased by $3.2 million and $1.9 million in 2000 and 1999,
respectively. Expenditures for dividends increased from $588,000 to $617,000 as
a result of the increase in the dividend rate and in 2000, the Company expended
$733,000 for the repurchase of Company stock.
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million of which $63 million was outstanding at June
30, 2000. This revolver expires in May, 2001. The Company is reviewing financing
alternatives to determine the financing that will best serve its needs. Based on
alternatives reviewed to date, the Company believes there is available financing
at reasonable rates to meet the Company's finance requirements.
Year 2000 Issues
----------------
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.
To date, the Company has not identified any significant Year 2000 problems,
however it realizes problems could still arise during the year. With regard to
suppliers, customers and service providers, the Company does not presently plan
on any additional testing of their readiness throughout the remainder of the
year unless problems start to evolve or such companies indicate they have
concerns about their systems.
If claims related to equipment sold to customers were to occur, the Company
believes it would have several defenses to such claims, but it is presently
unable to estimate what the aggregate cost, if any, of defending and/or settling
any such claims would be.
<PAGE>
New Accounting Standards
------------------------
In 1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Deferral of the Effective Date of SFAS
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. SFAS No. 133 establishes new procedures for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. 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.
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
#101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 is effective for the fourth
quarter of 2000. The Company is currently evaluating the impact SAB 101 will
have on its financial statements.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's annual meeting of shareholders was held on May 9, 2000.
b. Matters voted upon at the meeting and the results of those votes were
as follows:
<TABLE>
<CAPTION>
Election of Directors
For Against Withheld
-------------------------------------------------------------------------------------
<S> <C> <C>
Fred C. Aldridge, Jr. 5,482,735 --- 18,595
John H. Goddard, Jr. 5,483,393 --- 20,937
John M. Pettine 5,482,415 --- 18,915
Other directors whose terms of office continued after the meeting
are as follows:Phillip J.Baur, Jr., Richard E.Engebrecht, Gary MacLeod,
James F. Mullan, Klaus D. Oebel, Edward N. Patrone.
Approval of Independent Auditors
For Against Withheld
-------------------------------------------------------------------------------------
Approval of PricewaterhouseCoopers LLP,
Certified Public Accountants, as
independent public auditors for 2000 5,340,288 155,505 5,536
</TABLE>
The foregoing matters are described in detail in the Company's proxy statement
dated April 10, 2000.
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 June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESOURCE CORPORATION
(REGISTRANT)
BY /s/ WILLIAM A. DEMARCO
----------------------
William A. DeMarco
Vice President of Finance and
Chief Financial Officer
(principal financial and accounting officer)
DATE August 10, 2000
