-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BkdGfo5q/vDQBvOSP1Wwu0pwh873lzg9GqkBMihebiY8ecawrKgEfj48Wn+zbP9V H73tKyG0DmjXK/qwbMRwYg== 0000904816-99-000002.txt : 19990330 0000904816-99-000002.hdr.sgml : 19990330 ACCESSION NUMBER: 0000904816-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIMESOURCE CORP CENTRAL INDEX KEY: 0000904816 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 231430030 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21750 FILM NUMBER: 99575729 BUSINESS ADDRESS: STREET 1: 4350 HADDONFIELD RD STREET 2: SUITE 222 CITY: PENNSAUKEN STATE: NJ ZIP: 08109 BUSINESS PHONE: 6094884888 MAIL ADDRESS: STREET 1: FAIRWAY CORPORATE CENTER SUITE 222 STREET 2: 4350 HADDONFIELD ROAD CITY: PENNSAUKEN STATE: NJ ZIP: 08109 FORMER COMPANY: FORMER CONFORMED NAME: PHILLIPS & JACOBS INC DATE OF NAME CHANGE: 19930514 10-K 1 PRIMESOURCE FORM 10-K 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 - -------------------------------------------------------------------------------- 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. 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. 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. EXECUTIVE OFFICERS OF THE REGISTRANT
BUSINESS EXPERIENCE POSITION HELD NAME AGE LAST FIVE YEARS SINCE - ------------------------- ------ ---------------------------- ---------------------- 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
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. 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. 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.
Stock Price ---------------------------- Cash Dividends High Low Per Share - ------------------------------------------------------------------------------ 1998 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
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. ITEM 6. SELECTED FINANCIAL DATA This information should be read in conjunction with the Company's consolidated financial statements included herein.
Years Ended December 31, ----------------------------------------------------------------------- (in thousands, except per share amounts) 1998(1) 1997(2) 1996 1995(3) 1994 - ---------------------------------------------------------------------------------------------------------------- Statement of Income Data 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 =============================================================================================================== (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.
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.
Years Ended December 31, ------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- 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% ================================================================================
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. 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. 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PRIMESOURCE CORPORATION Consolidated Statements of Income
Years Ended December 31, --------------------------------------- (Thousands of dollars, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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 =========================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Balance Sheets
December 31, ------------------------ (Thousands of dollars, except share information) 1998 1997 - ----------------------------------------------------------------------------------------------- Assets Current Assets 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 =============================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Statements of Cash Flows
Years Ended December 31, ------------------------------------ (Thousands of dollars) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Operating Activities 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 .................................... $ -- $ -- $ -- ============================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Statements of Shareholders' Equity
Common Stock Unamortized ($.01 Par Value) Additional Restricted (Thousands of dollars, ------------------------ Paid-in Retained Stock except share information) Shares Amount Capital Earnings Awards Total - ------------------------------------------------------------------------------------------------------------------------ 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 ======================================================================================================================== See accompanying notes to consolidated financial statements.
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. 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. 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:
(Thousands of dollars) 1998 1997 1996 -------------------------------------------------------------------------- Interest .......................... $3,368 $2,742 $1,826 Income taxes ...................... 3,760 3,878 2,314 ==========================================================================
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:
(Thousands of dollars) 1998 1997 1996 -------------------------------------------------------------------------- Fair value of assets acquired ..... $55,314 $-- $14,801 Liabilities assumed or created .... 11,368 407 ==========================================================================
7. Inventories Inventories, which are primarily finished goods, at December 31, consisted of:
(Thousands of dollars) 1998 1997 -------------------------------------------------------- Last-in, first-out (LIFO) .... $33,631 $30,168 First-in, first-out (FIFO) ... 35,480 23,751 -------------------------------------------------------- Total inventories ............ $69,111 $53,919 ========================================================
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:
(Thousands of dollars) 1998 1997 ---------------------------------------------------------------------------- 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 ============================================================================
9. Debt Obligations The long-term obligations of the Company at December 31, consisted of:
(Thousands of dollars) 1998 1997 -------------------------------------------------------------------------------------- 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 ======================================================================================
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. 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:
(Thousands of dollars) 1998 1997 1996 ----------------------------------------------------------------- Current: 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 =================================================================
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:
(Thousands of dollars) 1998 1997 1996 ----------------------------------------------------------------------------------------- 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 =========================================================================================
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:
(Thousands of dollars) 1998 1997 ----------------------------------------------------------------------- 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 =======================================================================
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:
1998 1997 1996 ---------------------------------------------------------------------------------------- Average shares of common stock outstanding 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 =======================================================================================
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:
(Thousands of dollars) 1998 1997 1996 ---------------------------------------------------------------------------------------- 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% ========================================================================================
The change in the financial status of the Plan and amounts recognized in the Company's Consolidated Balance Sheets at December 31, were:
(Thousands of dollars) 1998 1997 -------------------------------------------------------------------------- Change in benefit obligation: 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) ==========================================================================
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:
(Thousands of dollars) 1998 1997 1996 ------------------------------------------------------------------------------------------ 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) ==========================================================================================
The change in the financial status of the Plan and amounts recognized in the Company's Consolidated Balance Sheets at December 31, were:
(Thousands of dollars) 1998 1997 --------------------------------------------------------------------- Change in benefit obligation: 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) ==================================================================== 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
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:
Option Prices ------------------------- Weighted Options Average Range ------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------
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. 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:
(Thousands of dollars, except per share data) 1998 1997 1996 --------------------------------------------------------------------------- Net Income: 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 ===========================================================================
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:
Years Ending December 31, (Thousands of dollars) ------------------------------------- 1999 ....................... $2,197 2000 ....................... 1,852 2001 ....................... 1,071 2002 ....................... 720 2003 ....................... 352 Thereafter ................. 187 ------------------------------------- Total minimum lease payments $6,379 =====================================
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. 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:
(Thousands of dollars except per share data) First Second Third Fourth Total -------------------------------------------------------------------------------------- Year Ended December 31, 1998 (1) 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 (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.
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 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. 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:
Form 10-K Page --------- 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
(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. . PRIMESOURCE CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
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 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 ------------------------------------------------------------------------------------------------------------------ (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.
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 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) 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.
Signature Capacity Date - ----------------------------------------------------------------------------------- /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
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)* 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. EX-21 2 PARENTS & SUBSIDIARIES OF THE REGISTRANT 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. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS 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 EX-27 4 FDS --
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 0 0 77,021 3,419 69,111 156,500 24,107 10,984 191,047 56,248 75,205 0 0 65 55,546 191,047 453,047 453,047 369,844 369,844 0 440 3,605 7,075 2,975 4,100 0 0 0 4,100 .63 .62
EX-99 5 INCORPORATION BY REFERENCE INTO FORM S-8 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. -----END PRIVACY-ENHANCED MESSAGE-----