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, 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
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(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) 486-2980
--------------
(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, 2000
----- --------------------------------
Common stock, par value $.01 6,360,706 shares
<PAGE>
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Information Page No.
--------
Condensed Balance Sheets
September 30, 2000 and December 31, 1999 3
Condensed Statements of Income
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows
Nine Months Ended September 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 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-k 12
SIGNATURES 13
Certain statements contained in this report are forward-looking. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully implement its business strategies including
successfully integrating business acquisitions, the effect of general economic
conditions and technological, competitive and other changes in the industry,
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)
September 30, December 31,
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables, net ................................... $ 91,551 $ 93,695
Inventories ........................................ 65,783 68,379
Other .............................................. 4,048 4,071
--------------------------------------------------------------------------------
Total Current Assets ................................. 161,382 166,145
Property and equipment, net .......................... 7,893 12,063
Excess of cost over net assets
of businesses acquired, net ....................... 19,039 16,427
Other assets ......................................... 3,150 2,172
--------------------------------------------------------------------------------
Total Assets ......................................... $191,464 $196,807
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ........... $ 54,104 $ 104
Notes payable ...................................... 3,614 953
Accounts payable ................................... 40,720 45,766
Book overdraft ..................................... 15,607 16,937
Other accrued liabilities .......................... 9,658 8,149
--------------------------------------------------------------------------------
Total Current Liabilities ............................ 123,703 71,909
Long-term obligations, net of current portion ........ 62,500
Accrued pension liabilities and other liabilities .... 2,315 2,853
--------------------------------------------------------------------------------
Total Liabilities .................................... 126,018 137,262
--------------------------------------------------------------------------------
Commitments and contingencies
Minority interest in subsidiary ...................... 3,850
Shareholders' Equity:
Common stock, $.01 par value ....................... 64 65
Additional paid in capital ......................... 25,081 25,725
Retained earnings .................................. 36,451 33,755
--------------------------------------------------------------------------------
Total Shareholders' Equity ........................... 61,596 59,545
--------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........... $191,464 $196,807
================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months
(Thousands of dollars, Ended September 30, Ended September 30,
except per share amounts) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................ $ 133,535 $ 132,537 $ 409,731 $ 405,326
Cost of sales ............................ 110,217 110,010 339,352 336,023
---------------------------------------------------------------------------------------------
Gross profit ............................. 23,318 22,527 70,379 69,303
Selling, administrative and other expenses 20,308 19,234 59,926 58,993
Gain on sale of property and equipment ... 384 384
---------------------------------------------------------------------------------------------
Income from operations ................... 3,394 3,293 10,837 10,310
Interest expense ......................... (1,565) (1,336) (4,444) (4,110)
Minority interest ........................ 50 50
Other income, net ........................ 103 51 270 118
---------------------------------------------------------------------------------------------
Income before provision
for income taxes ........................ 1,982 2,008 6,713 6,318
Provision for income taxes ............... 843 838 2,816 2,618
---------------------------------------------------------------------------------------------
Net income ............................... $ 1,139 $ 1,170 $ 3,897 $ 3,700
=============================================================================================
Per share of common stock:
Net income per basic share ............... $ .18 $ .18 $ .60 $ .57
Net income per diluted share ............. .18 .18 .60 .56
Cash dividends ........................... .0475 .045 .1425 .135
=============================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
(Thousands of dollars) 2000 1999
-------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income ........................................... $ 3,897 $ 3,700
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 1,455 1,609
Amortization ..................................... 788 821
Other ............................................ (434)
Changes in assets and liabilities affecting operations 688 8,354
-------------------------------------------------------------------------------
Net cash provided by operating activities ............ 6,394 14,484
-------------------------------------------------------------------------------
Investing Activities:
Additions to property and equipment .................. (1,351) (1,028)
Proceeds from sale of property and equipment ......... 4,450
Payments for acquisitions ............................ (100)
Net change in other assets ........................... (978) 324
-------------------------------------------------------------------------------
Net cash provided by (used in) investing activities .. 2,121 (804)
-------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in short-term debt ........... 2,661 (3,500)
Proceeds from long-term obligations .................. 188,550 34,936
Repayment of long-term obligations ................... (197,050) (46,697)
Increase (decrease) in book overdraft ................ (1,330) 2,462
Dividends paid ....................................... (921) (882)
Purchase of common stock ............................. (925)
Proceeds from minority cash investment in subsidiary . 500
Proceeds from exercise of stock options .............. 1
-------------------------------------------------------------------------------
Net cash used in financing activities ................ (8,515) (13,680)
-------------------------------------------------------------------------------
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 nine months ended September 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 nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C> <C> <C>
used to compute basic earnings per share . 6,391,106 6,536,147 6,442,930 6,536,059
Dilutive effect of stock options ......... 29,431 307 17,123
----------------------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share 6,391,106 6,565,578 6,443,237 6,553,182
----------------------------------------------------------------------------------------------
Net income per share:
Basic .................................... $ .18 $ .18 $ .60 $ .57
Diluted .................................. .18 .18 .60 .56
==============================================================================================
</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 $54 million was outstanding at
September 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. Formation of Canopy, LLC
Effective July 1, 2000, the Company entered into a joint venture with Xeikon to
form Canopy, LLC (Canopy). The Company's ownership share is 74% with Xeikon
owning 26%. The Company's contribution to the venture was a net asset investment
consisting primarily of inventory and equipment of $11.1 million. Xeikon's
investment consisted of a combination of cash and intangibles totaling $3.9
million. Intangibles will be amortized over an expected useful life of ten
years. Canopy's business focuses 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 are consolidated with those of the Company. Xeikon's interest in Canopy
are reported in the financial statements as a minority interest.
7. 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>
In 2000, the Financial Accounting Standards Board issued Interpretation No. 44
(FIN 44), Accounting for Certain Transactions involving Stock Compensation-an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB 25
for certain issues, including the definition of an employee, the treatment of
the acceleration of stock options and the accounting treatment for options
assumed in business combinations. FIN 44 became effective on July 1, 2000, but
is applicable for certain transactions dating back to December 1998. The
adoption is not expected to have a material effect on the Company's consolidated
results of operations, financial position or cash flows.
In 2000, the Financial Accounting Standards Board Emerging Issues Task Force
issued EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." This issue focuses on shipping and handling fees billed to customers and
costs incurred by those companies that sell goods. EITF Issue No. 00-10 is
effective for the fourth quarter of 2000. The adoption is not expected to have a
material effect on the Company's consolidated results of operations, financial
position or cash flows, however, the Company believes there will be certain
reclassification of amounts on the income statement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
---------------------
The Company had record sales for the quarter ended September 30, 2000 and record
sales and net income for the nine-month period ended September 30, 2000. Net
income for the quarter ended September 30, 2000 was $1,139,000 ($.18 per diluted
share) compared to net income of $1,170,000 ($.18 per share) for the same period
last year. For the nine months ended September 30, 2000, net income was
$3,897,000 ($.60 per diluted share) compared to net income of $3,700,000 ($.56
per diluted share) for 1999.
Net sales increased approximately 1% for both the quarter and nine-month period
ended September 30, 2000 compared to the same periods last year. The gross
margin percent also remained relatively constant, increasing from 17.1% to 17.2%
between the two nine-month periods.
Selling, administrative and other expenses as a percent of sales were 15.2% for
the quarter and 14.6% for the nine-months ended September 30, 2000, compared to
14.5% and 14.6%, respectively, for the same periods last year. The increase for
the quarter reflects the additional expenses for Canopy and a new branch in the
Cleveland, Ohio marketplace. Although both investments had a negative impact on
earnings for the quarter, the Company believes they will be strategically good
investments going forward. Canopy will position the Company to capitalize on the
anticipated rapid growth in digital printing and the Cleveland operation will
substantially strengthen the Company's position in a strong market area.
The Company sold two buildings during the year, one in Minneapolis, Minnesota
and the other in Seattle, Washington. Total proceeds for the two sales were
approximately $4.4 million with a gain of approximately $380,000.
Interest expense was $1,565,000 and $4,444,000 for the quarter and nine-month
period ended September 30, 2000 compared to $1,336,000 and $4,110,000,
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 41.4% to 41.9% for the nine months
ended September 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.
The Company implemented a dividend increase beginning with the first quarterly
dividend paid in 2000. The dividend per share was increased from $.045 to $.0475
per share. In addition, because the Company believes its stock is undervalued in
the marketplaces and the repurchase of the stock at the current market levels
represents an excellent value for the Company and its shareholders, the board of
directors, in March 2000, authorized a stock repurchase program to acquire up to
325,000 shares of the Company's common stock. As of September 30, 2000, the
Company had acquired and retired 163,706 of these shares.
<PAGE>
Financial Condition and Liquidity
---------------------------------
Net cash provided by operating activities for the nine months ended September
30, 2000 was $6,394,000 compared to $14,484,000 for the same period last year.
For 1999, decreased working capital levels accounted for approximately $8.4
million of the cash flow generated compared to approximately $.7 million in
2000. In 1999, the Company made a concerted effort to more efficiently utilize
its working capital resulting in the substantial decrease in the total working
capital investment. In 2000, the Company has been able to build on this improved
level in spite of additional working capital investments for Canopy and the new
Cleveland branch. Excluding the effect of changes in assets and liabilities, the
cash flow was $6,130,000 in 1999 to $5,706,000 in 2000.
Net cash provided by investing activities was $2,121,000 for the nine months
ended September 30, 2000 compared to net cash used of $804,000 for the same
period last year. The primary difference between the two years, was $4.4 million
received on the sale of property and equipment in 2000, consisting primarily of
the proceeds from the sale of the Minneapolis and Seattle facilities. Capital
expenditures were $1,351,000 and $1,028,000 for the nine-months ended September
30, 2000 and 1999, respectively. Additional capital expenditures for the year,
for which there are no material commitments, are anticipated to be approximately
$700,000.
Net cash used by financing activities was $8,515,000 and $13,680,000 for the
nine months ended September 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 $5.8 million compared to $15.3 million for
1999. The book overdraft decreased by $1.3 million in 2000 and increased by $2.5
million in 1999. Expenditures for dividends increased from $882,000 to $921,000
as a result of the increase in the dividend rate and, in 2000, the Company
expended $925,000 for the repurchase of Company stock. In addition, in 2000, the
Company received cash of $500,000 as part of a minority ownership in Canopy, a
new joint venture established in July 2000.
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million of which $54 million was outstanding at
September 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.
<PAGE>
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.
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.
In 2000, the Financial Accounting Standards Board issued Interpretation No. 44
(FIN 44), Accounting for Certain Transactions involving Stock Compensation-an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB 25
for certain issues, including the definition of an employee, the treatment of
the acceleration of stock options and the accounting treatment for options
assumed in business combinations. FIN 44 became effective on July 1, 2000, but
is applicable for certain transactions dating back to December 1998. The
adoption is not expected to have a material effect on the Company's consolidated
results of operations, financial position or cash flows.
In 2000, the Financial Accounting Standards Board Emerging Issues Task Force
issued EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." This issue focuses on shipping and handling fees billed to customers and
costs incurred by those companies that sell goods. EITF Issue No. 00-10 is
effective for the fourth quarter of 2000. The adoption is not expected to have a
material effect on the Company's consolidated results of operations, financial
position or cash flows, however, the Company believes there will be certain
reclassification of amounts on the income statement.
<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, 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 November 13, 2000
