10-K 1 0001.txt PRIMESOURCE CORPORATION 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, 2000 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) (856)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. ( _ ) As of March 26, 2001 the aggregate market value of the voting stock held by nonaffiliates was approximately $25.7 million. As of March 26, 2001 there were 6,357,806 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 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. Since becoming a public company, the Company has had three significant business combinations. 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 regions in the United States. In addition, in 2000, the Company entered into a joint venture with Xeikon, a leading manufacturer of on-demand and variable-data digital printing systems, to form Canopy, LLC ("Canopy"). The Company's ownership interest in Canopy is 74%, with Xeikon owning the remaining 26%. Canopy's business focuses on the sales, installation, training and ongoing service and support of Xeikon printing systems in the United States and Canada. The Company is headquartered in Pennsauken, New Jersey. The Company utilizes a decentralized structure that allows management broad discretion in the conduct of their respective responsibilities, including management of their 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 and return on sales and net assets. 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. Management believes a key factor in the Company's future success is the continued fostering and perpetuating of this entrepreneurial drive. The Company presently represents over 500 suppliers, provides more than 200,000 line items and has a customer base in excess of 20,000. No customer accounted for more than 5% of the Company's net sales in 2000. 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 equipment and the applicable software; and press, bindery and other finishing machinery. 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, prepress 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 for the most part 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 25% 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 including Canopy employed approximately 740 employees at December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT BUSINESS EXPERIENCE POSITION HELD NAME AGE LAST FIVE YEARS SINCE ------------------------ ----- ---------------------------- --------------- James F. Mullan 61 Chairman of the Board, 2000-Present Chairman of the Board, President and Chief Executive President and Officer of Registrant Chief Executive Officer Chairman of the Board of Canopy, LLC President and Chief Executive 1991-2000 Officer of Registrant John H. Goddard, Jr. 53 Executive Vice President 2000-Present Executive Vice President of Registrant President and Chief Executive Officer of Canopy, LLC Executive Vice President 1994-2000 of Registrant William A. DeMarco 55 Vice President and Chief Financial 1994-Present Vice President and Officer of Registrant Chief Financial Officer Barry C. Maulding 55 Vice President, General Counsel 1994-Present Vice President, and Corporate Secretary General Counsel and of Registrant Corporate Secretary
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 8,500 Distribution/Sales Facilities Atlanta, GA (Norcross) 23,200 Birmingham, AL 37,000 Boston, MA (Hingham) 10,700 Chicago, IL (Itasca) 49,600 Cincinnati, OH 35,000 Cleveland, OH 7,800 Dallas, TX 17,500 Denver, CO 10,000 Des Moines, IA (Ankeny) 15,000 Houston, TX (Bellaire) 10,300 Jackson, MS (Richland) 1,500 Kalamazoo, MI 14,700 Kansas City, KS 16,800 Lancaster, PA (Lititz) 14,300 Las Vegas, NV 6,200 Los Angeles, CA 44,900 Miami, FL (Miramar) 14,700 Milwaukee, WI (New Berlin) 23,300 Minneapolis, MN (Roseville) 76,800 Mobile, AL 8,000 Nashville, TN 16,000 New Orleans, LA (Harahan) 8,800 Omaha, NE 15,000 Orlando, FL 14,400 Pennsauken, NJ 19,500 Phoenix, AZ 11,500 Pittsburgh, PA 15,800 Portland, OR 12,500 Sacramento, CA 7,600 St. Louis, MO 22,000 San Diego, CA 10,600 San Jose, CA 35,300 Seattle, WA (Auburn) 9,600 All of the properties are held under operating leases, except for the Birmingham, Des Moines and St. Louis 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 parties, is a defendant in a contribution action to determine the liability for the state ordered clean up of a landfill. 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 2000 and 1999. Stock Price ---------------------------- Cash Dividends High Low Per Share -------------------------------------------------------------------------------- 2000 ----- First Quarter $ 6.84 $ 5.00 $ .0475 Second Quarter 5.62 4.81 .0475 Third Quarter 5.87 4.00 .0475 Fourth Quarter 5.25 4.06 .0475 1999 ----- First Quarter $ 7.06 $ 5.25 $ .045 Second Quarter 8.12 4.84 .045 Third Quarter 8.00 4.50 .045 Fourth Quarter 6.50 4.00 .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 2,800 shareholders of record as of December 31, 2000. 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, 2001. ITEM 6. SELECTED FINANCIAL DATA This information should be read in conjunction with the Company's consolidated financial statements and notes to such statements included herein.
Years Ended December 31, -------------------------------------------------------------- (in thousands, except per share amounts) 2000 1999 1998(1) 1997(2) 1996 -------------------------------------------------------------------------------------------------------- Statement of Income Data Net sales .............................. $ 547,558 $ 547,417 $ 454,635 $ 415,913 $ 367,755 Cost of sales .......................... 459,110 459,609 375,609 347,788 305,517 -------------------------------------------------------------------------------------------------------- Gross profit ........................... 88,448 87,808 79,026 68,125 62,238 Operating expenses ..................... 74,819 73,630 68,643 59,631 54,042 Gain on sale of property and equipment . 384 -- -- -- -- -------------------------------------------------------------------------------------------------------- Income from operations ................. 14,013 14,178 10,383 8,494 8,196 Interest expense ....................... (5,913) (5,484) (3,605) (2,913) (1,915) Gain on sale of capital lease .......... -- -- -- 3,658 -- Loss on business divestiture ........... -- -- -- (401) -- Minority interest ...................... 319 -- -- -- -- Other income-net ....................... 314 78 297 515 421 -------------------------------------------------------------------------------------------------------- Income before provision for income taxes 8,733 8,772 7,075 9,353 6,702 Provision for income taxes ............. 3,655 3,663 2,975 3,862 2,788 -------------------------------------------------------------------------------------------------------- Net income ............................. $ 5,078 $ 5,109 $ 4,100 $ 5,491 $ 3,914 ======================================================================================================== Per Share Data Net income per basic share ............. $ .79 $ .78 $ .63 $ .84 $ .60 Net income per diluted share ........... .79 .78 .62 .83 .60 Cash dividends per share ............... .19 .18 .18 .18 .18 ======================================================================================================== Balance Sheet Data Working capital ........................ $ 93,744 $ 94,236 $ 100,602 $ 69,151 $ 67,040 Total assets ........................... 187,116 196,807 190,697 138,491 134,175 Total long-term debt obligations ....... 55,600 62,500 75,205 32,788 36,250 Shareholders' equity ................... 62,403 59,545 55,611 52,548 48,183 ======================================================================================================== (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.
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, --------------------------- 2000 1999 1998 --------------------------------------------------------------------------- Net sales .................................. 100.0% 100.0% 100.0% Cost of sales .............................. 83.8 83.9 82.6 -------------------------------------------------------------------------- Gross profit ............................... 16.2 16.1 17.4 Selling, general and administrative expenses 12.8 12.7 14.2 Depreciation and amortization .............. .6 .6 .6 Provision for doubtful accounts ............ .3 .2 .1 Gain on sale of property and equipment ..... .1 -- -- Restructure and other ...................... -- -- .2 -------------------------------------------------------------------------- Income from operations ..................... 2.6 2.6 2.3 Interest expense ........................... (1.1) (1.0) (.8) Gain on sale of capital lease Minority interest .......................... .1 -- -- Other income-net ........................... -- -- .1 -------------------------------------------------------------------------- Income before provision for income taxes ... 1.6 1.6 1.6 Provision for income taxes ................. .7 .7 .7 -------------------------------------------------------------------------- Net income ................................. .9% .9% .9% ==========================================================================
All periods previously reported have a reclassification to comply with revised accounting standards, requiring freight billed to customers to be included in sales and freight out expenses to be included in cost of sales. Previously, freight out expense net of freight billed was included in selling, general and administrative expenses. This accounting change has no effect on the Company's current or historical net income or net income per share. COMPARISON OF 2000 TO 1999 Net income for 2000 was $5,078,000, or $.79 per diluted share, compared to $5,109,000, or $.78 per diluted share, in 1999. Income in 2000 was negatively impacted by additional costs incurred by the Company for the expansion of its digital printing business including the formation of Canopy, LLC ("Canopy"), a joint venture owned 74% by the Company and 26% by Xeikon, in the second half of the year. Sales remained relatively flat between the two years with sales of $547,558,000 in 2000 and $547,417,000 in 1999. During the first nine months of the year, sales increases were positive. However, beginning at the end of the third quarter and continuing through the remainder of the year, sales were negatively impacted by an overall softness in the printing industry. Gross profit as a percent of sales increased from 16.1% in 1999 to 16.2% in 2000. This increase is primarily due to a positive change in product mix between the two years. Selling, general and administrative expenses increased $586,000 in 2000 or as a percent of sales increased from 12.7% in 1999 to 12.8% in 2000. In 2000, the Company incurred approximately $1 million of additional expenses as a result of the formation of Canopy. Excluding this impact, the expenses as a percent of sales would have been less than in the prior year. Depreciation and amortization expense decreased from $3,096,000 in 1999 to $2,998,000 in 2000. This decrease is due to a decline in the Company's investment in property and equipment. The provision for doubtful accounts increased from $1,186,000 in 1999 to $1,887,000 in 2000. In 2000, the Company incurred higher levels of write-offs than had been experienced in earlier years. The Company sold two buildings during the year, one in Minneapolis and the other in Seattle. Total proceeds for the two sales were approximately $4.4 million with a gain of approximately $380,000. Interest expense increased from $5,484,000 in 1999 to $5,913,000 in 2000. This increase is due to higher interest rates during the year that were partially offset by decreased debt levels. The effective income tax rate remained relatively constant between the two years at 41.9% in 2000 and 41.8% in 1999. The difference between the effective tax rates and the federal statutory rate of 34% is primarily attributable to the effect of state income taxes and non-deductible expenses. The Company implemented a dividend increase beginning with the first quarterly dividend paid in 2000. The quarterly dividend per share was increased from $.045 to $.0475 per share. In addition, because the Company believes its stock is undervalued in the marketplace and the repurchase of the stock at the current market levels represents an excellent value for the Company and its shareholders, the Board of Directors, in March 2000, authorized a stock repurchase program to acquire up to 325,000 shares of the Company's common stock. In 2000, the Company acquired and retired 178,406 shares. For the year 2001, the Company expects to continue to improve its market share, and expects improved results from Canopy as the market acceptance for digital printing increases. In addition, the Company expects interest costs to decrease as a result of lower debt levels and lower interest rates. The Company will, however, be affected by potential changes in the strength of the economy. COMPARISON OF 1999 TO 1998 Net income for 1999 was $5,109,000, or $.78 per diluted share, compared to $4,100,000, or $.62 per diluted share, in 1998. Excluding a one-time pre-tax restructure and other charge of $1.05 million in 1998, the net income in 1998 was $4,734,000, or $.71 per diluted share. This increase in net income for 1999 was the result of improved income from operations. During the year, the Company was able to successfully integrate the acquisition of Bell Industries' Graphic Imaging Group ("Bell acquisition") and complete the reorganization of the Company into three regions. Excluding the 1998 one-time charge, income from operations increased 24% in 1999 from $11,433,000 in 1998 to $14,178,000 in 1999. Including the one-time charge, 1998 income from operations was $10,383,000. Sales for 1999 were $547,417,000, a 20% increase over 1998 sales of $454,635,000. This sales increase is primarily the result of the Bell acquisition, increased national account sales and over a 200% increase in digital press sales. Gross profit as a percent of sales was 16.1% in 1999 compared to 17.4% in 1998. This decrease is primarily the result of changes in product and customer mix and lower manufacturer rebates. Selling, general and administrative expenses as a percent of sales decreased from 14.2% in 1998 to 12.7% in 1999. In 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. This percentage decrease in selling, general and administrative expenses reflects the successful implementation of this reorganization and integration program. Depreciation and amortization expense increased from $2,507,000 in 1998 to $3,096,000 in 1999. This increase is due to additional goodwill amortization as a result of the Bell acquisition. The provision for doubtful accounts increased from $440,000 in 1998 to $1,186,000 in 1999. This increase is due to increased sales in 1999, plus, losses that occurred in transitioning accounts acquired in the Bell acquisition. Interest expense increased from $3,605,000 in 1998 to $5,484,000 in 1999. This increase is attributable to the debt associated with the Bell acquisition. The effective income tax rate remained relatively constant between the two years at 41.8% in 1999 and 42% in 1998. The difference between the effective tax rates and the federal statutory rate of 34% is primarily attributable to the effect of state income taxes and non-deductible expenses. Financial Condition and Liquidity Cash flow provided by operating activities was $17,299,000 and $10,196,000 in 2000 and 1999, respectively, and cash used in operating activities was $2,302,000 in 1998. The improvement in 2000 is due to a continual improvement in working capital management. In both 2000 and 1999, the change in assets and liabilities resulted in a positive cash flow from operations. In 2000, the cash flow was $8.8 million compared to $1.4 million in 1999. Excluding the impact of changes in assets and liabilities, the cash flow was $8.5, $8.8 and $7.7 million in 2000, 1999 and 1998, respectively. Cash flow provided by investing activities was $1,490,000 in 2000 and cash used in investing activities was $487,000 and $45,618,000 in 1999 and 1998, respectively. In 2000, the Company had proceeds of $4.4 million on the sale of two facilities, one in Minneapolis and the other in Seattle. In 1998, the Company incurred $43.9 million for business acquisitions which was primarily for the Bell acquisition. Property and equipment expenditures for each of the three years ranged between $1.5 and $1.7 million. The Company had no material capital expenditure commitments at December 31, 2000 and expects capital expenditures for 2001 to be approximately $2 million. Cash flows used in financing activities were $18,789,000 and $9,709,000 in 2000 and 1999, respectively, and $47,920,000 provided in 1998. The cash used in 2000 and 1999 was primarily provided by the operating and investing activities. The cash provided in 1998 was used primarily for the Bell acquisition. Debt decreased by $8 and $16.3 million in 2000 and 1999, respectively. Debt increased by $45.4 million in 1998, primarily due to the Bell acquisition. The book overdraft decreased by $9.1 million in 2000 and increased by $7.7 and $3.6 million in 1999 and 1998, respectively. In 2000, the Company received $500,000 cash as part of the minority interest in Canopy and expended $1 million for the repurchase of Company stock. The Company's primary source of debt financing is a revolving credit agreement with a commitment of $75 million and $55.6 million outstanding at December 31, 2000. In March 2001, the existing revolving agreement was replaced with a new $75 million revolving credit agreement expiring in March 2004. The Company believes this revolver, combined with cash from operations, is sufficient to support the current capital requirements of the Company. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivatives and hedging activities. The new standard requires that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instrument will generally be offset on the income statement by changes in the fair value of the hedged item. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income until it is cleared to earnings during the same period in which the hedged item affects earnings. The ineffective portion of all hedges will be recognized in current earnings each period. Changes in the fair value of derivative instruments that are not designated as a hedge will be recorded each period in current earnings. In July 1999, the FASB issued SFAS No. 137, and SFAS No. 138 that deferred the effective date for implementation of SFAS No. 133 to fiscal years beginning after June 15, 2000 and which addressed certain issues causing implementation difficulties for entities that apply SFAS No. 133, respectively. The Company will adopt SFAS No. 133, including the amendments in SFAS No. 138, on January 1, 2001. Transactions that the Company has entered into that will be accounted for under SFAS No. 133, as amended, are interest rate exchange agreements and foreign currency forward exchange contracts. Adoption of these new standards will not 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, 2000, 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 7.86% at December 31, 2000. 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. Although most purchases for the Company are transacted in US dollars, on occasion, the Company purchases equipment payable in a foreign currency. For payments with extended terms, generally up to six months, the Company will enter into foreign currency forward exchange contracts that minimize the risk of foreign exchange rate fluctuations on such payments. At December 31, 2000, the Company had foreign currency forward exchange contracts with a notional value of approximately $1.1 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRIMESOURCE CORPORATION Consolidated Statements of Income Years Ended December 31, ----------------------------------- (Thousands of dollars, except per share amounts) 2000 1999 1998 ------------------------------------------------------------------------------------------ Net sales .......................................... $ 547,558 $ 547,417 $ 454,635 Cost of sales ...................................... 459,110 459,609 375,609 ------------------------------------------------------------------------------------------ Gross profit ....................................... 88,448 87,808 79,026 Selling, general, and administrative expenses....... 69,934 69,348 64,646 Depreciation and amortization ...................... 2,998 3,096 2,507 Provision for doubtful accounts .................... 1,887 1,186 440 Gain on sale of property and equipment ............. 384 -- -- Restructure and other .............................. -- -- 1,050 ------------------------------------------------------------------------------------------ Income from operations ............................. 14,013 14,178 10,383 Interest expense ................................... (5,913) (5,484) (3,605) Minority interest .................................. 319 -- -- Other income-net ................................... 314 78 297 ------------------------------------------------------------------------------------------ Income before provision for income taxes ........... 8,733 8,772 7,075 Provision for income taxes ......................... 3,655 3,663 2,975 ------------------------------------------------------------------------------------------ Net income ......................................... $ 5,078 $ 5,109 $ 4,100 ========================================================================================== Net income per share Basic .............................................. $ .79 $ .78 $ .63 Diluted ............................................ .79 .78 .62 ========================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Balance Sheets December 31, ------------------- (Thousands of dollars, except share information) 2000 1999 ------------------------------------------------------------------------------------------- Assets Current Assets Trade receivables, less allowances of $3,250 and $3,127, respectively $ 80,529 $ 83,012 Other receivables ................................................... 5,897 10,683 Inventories ......................................................... 66,866 68,379 Deferred income taxes ............................................... 3,443 3,228 Other ............................................................... 709 843 ------------------------------------------------------------------------------------------- Total Current Assets ................................................ 157,444 166,145 Property and equipment, net ......................................... 7,680 12,063 Excess of cost over net assets of businesses acquired, net of accumulated amortization of $4,114 and $3,043, respectively 18,518 16,427 Deferred income taxes ............................................... 955 977 Long-term receivables ............................................... 508 585 Other assets ........................................................ 2,011 610 ------------------------------------------------------------------------------------------- Total Assets ........................................................ $187,116 $196,807 =========================================================================================== Liabilities and Shareholders' Equity Current Liabilities Current portion of long-term debt obligations ....................... $ -- $ 104 Notes payable ....................................................... -- 953 Accounts payable .................................................... 45,010 45,766 Book overdraft ...................................................... 7,825 16,937 Accrued payroll and benefits ........................................ 4,226 4,241 Other accrued liabilities ........................................... 6,639 3,908 ------------------------------------------------------------------------------------------- Total Current Liabilities ........................................... 63,700 71,909 Long-term debt obligations, net of current portion .................. 55,600 62,500 Accrued pension, Postretirement and other liabilities ............... 1,832 2,853 ------------------------------------------------------------------------------------------- Total Liabilities ................................................... 121,132 137,262 ------------------------------------------------------------------------------------------- Commitments and Contingencies Minority Interest in Subsidiary ..................................... 3,581 -- Shareholders' Equity Common stock, $.01 par value, 24,000,000 shares authorized 6,357,806 and 6,536,212 issued and outstanding, respectively ........ 64 65 Additional paid-in capital .......................................... 25,023 25,725 Retained earnings ................................................... 37,316 33,755 ------------------------------------------------------------------------------------------- Total Shareholders' Equity .......................................... 62,403 59,545 ------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity .......................... $187,116 $196,807 =========================================================================================== See accompanying notes to consolidated financial statements
PRIMESOURCE CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, ------------------------------------ (Thousands of dollars) 2000 1999 1998 ----------------------------------------------------------------------------------------------------- Operating Activities Net income .................................................... $ 5,078 $ 5,109 $ 4,100 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ............................................... 1,927 2,003 1,957 Amortization ............................................... 1,071 1,093 550 Provision for doubtful accounts ............................ 1,887 1,186 440 Pension benefit ............................................ (848) (959) (218) Restructure and other expense .............................. -- -- 996 Gain on sale of property and equipment ..................... (384) -- -- Other ...................................................... (186) 406 (112) Changes in assets and liabilities, net of effects from business combinations: Receivables ................................................ 5,382 (11,306) (1,075) Inventories ................................................ 1,513 732 2,388 Other current assets ....................................... 134 119 278 Income taxes ............................................... (227) 843 (668) Accounts payable and other accrued liabilities ............. 2,261 11,303 (10,803) Pension and other postretirement benefits .................. (309) (333) (135) ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities ........... 17,299 10,196 (2,302) Investing Activities Proceeds from sales of property and equipment ................. 4,482 67 163 Purchase of property and equipment ............................ (1,642) (1,452) (1,743) Payments for business acquisitions, net of cash acquired ...... -- (100) (43,946) Decrease in long-term receivables ............................. 77 112 127 Decrease (increase) in other assets .......................... (1,401) 1,017 (185) Other, net .................................................... (26) (131) (34) ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities ........... 1,490 (487) (45,618) Financing Activities Net increase (decrease) in short-term borrowings .............. (953) (2,547) 3,500 Proceeds from long-term obligations ........................... 278,800 92,600 144,300 Repayment of long-term obligations ............................ (285,804) (106,329) (102,429) Increase (decrease) in book overdraft ......................... (9,112) 7,742 3,586 Dividends paid ................................................ (1,224) (1,176) (1,175) Proceeds from minority shareholder investment in subsidiary ... 500 -- -- Purchase of common stock ...................................... (996) -- -- Proceeds from exercise of stock options ....................... -- 1 138 ----------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities ........... (18,789) (9,709) 47,920 ----------------------------------------------------------------------------------------------------- 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 -------------------- Additional (Thousands of dollars, ($.01 Par Value) Paid-in Retained except share information) Shares Amount Capital Earnings Total -------------------------------------------------------------------------------------------- Balance, January 1, 1998 ........... 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 Net income ......................... 5,109 5,109 Cash dividends paid to shareholders ($.18 per share) ... (1,176) (1,176) Stock options exercised ............ 200 1 1 Purchase and retirement of common stock ................. (6) --------------------------------------------------------------------------------------------- Balance, December 31, 1999 ......... 6,536,212 65 25,725 33,755 59,545 Net income ......................... 5,078 5,078 Cash dividends paid to shareholders ($.19 per share) ... (1,224) (1,224) Purchase and retirement of common stock ................. (178,406) (1) (702) (293) (996) --------------------------------------------------------------------------------------------- Balance, December 31, 2000 ......... 6,357,806 $64 $25,023 $37,316 $62,403 ============================================================================================= 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 majority-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 no 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 or assigned values as a result of acquisitions. 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 forty 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 eight 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 generally recognized when products are shipped and title is passed to the customer. Derivative Financial Instruments The Company uses derivative financial instruments to manage its exposure to interest and foreign currency exchange rate fluctuations. To manage its exposure to fluctuations in interest rates, the Company uses interest rate exchange agreements ("SWAPS"). These SWAPS are matched with variable rate debt and periodic cash payments are accrued on a settlement basis as an adjustment to interest expense. Any premiums associated with these instruments are amortized over their term and realized gains or losses as a result of the termination of the instruments are deferred and amortized over the remaining term of the underlying debt. Unrealized gains and losses as a result of these instruments are recognized when the underlying hedged item is extinguished or otherwise terminated. Although most purchases for the Company are transacted in US dollars, on occasion, the Company purchases equipment payable in a foreign currency. For payments with extended terms, generally up to six months, the Company will enter into foreign currency forward exchange contracts that minimize the risk of foreign exchange rate fluctuations on such payments. The Company does not hold or issue any derivative financial instruments for trading purposes and is not a party to leveraged instruments. The credit risks associated with the Company's derivative financial instruments are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although the Company may be exposed to losses in the event of nonperformance by the counterparties, the Company does not expect such losses, if any, to be significant. 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. 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. Freight In accordance with Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Costs, freight billed to customers is included in sales and freight out expenses are included in cost of sales. 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 Sheets 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 $554.3 million and $4.8 million ($.73 per basic share and $.72 per diluted share), respectively. In April 1998, the Company acquired the assets of Joseph Genstein, Inc., a graphics distributor in the Pittsburgh area, for approximately $1.5 million. In 1999, an additional $100,000 was paid in accordance with a contingent incentive provision under the purchase agreement for obtaining a specified sales level after the acquisition. The excess of the acquisition costs over the net tangible assets acquired for this acquisition is included in the Consolidated Balance Sheets and is being amortized on a straight-line basis over 15 years. The pro-forma results of this acquisition 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. Joint Venture Effective July 1, 2000, the Company entered into a joint venture with Xeikon to form Canopy, LLC ("Canopy"). The Company's ownership share is 74% with Xeikon owning 26%. The Company's contribution to the venture was a net asset investment consisting primarily of inventory and equipment of $11.1 million. Xeikon's investment consisted of a combination of cash and intangibles assets totaling $3.9 million. Intangibles are being amortized over an expected useful life of eight years. Canopy's business focuses on the sales, installation, and ongoing service and support of digital color and monochrome printing systems in the U.S. and Canada. These systems are utilized primarily by commercial, database, packaging, and transactional printers. Canopy is a separate and distinct legal entity from the Company. For financial reporting purposes, Canopy's assets, liabilities and earnings are consolidated with those of the Company. Xeikon's interest in Canopy is reported in the financial statements as a minority interest. 4. Restructure and Other In 1998, the Company incurred a restructure and other expense charge of $1,050,000. At December 31, 1999, the remaining balance was a $430,000 write-down of a building to net realizable value. In February 2000, this building was sold. 5. Cash Flow Information Cash payments for interest and income taxes (net of refunds) for the years ended December 31, consisted of: (Thousands of dollars) 2000 1999 1998 --------------------------------------------------- Interest.............. $4,947 $5,687 $3,368 Income taxes .............3,928 2,750 3,760 =================================================== Excluded from the accompanying Consolidated Statements of Cash Flows for the year ended December 31, 2000 are the fair value of the non-cash assets contributed by the minority shareholder in the Canopy joint venture of $3,400,000 and for the year ended December 31, 1998, the assets acquired in the Bell acquisition of $55,314,000 and the liabilities assumed or created in the same acquisition of $11,368,000. 6. Inventories Inventories, which are primarily finished goods, at December 31, consisted of: (Thousands of dollars) 2000 1999 -------------------------------------------------- Last-in, first-out (LIFO) $27,763 $32,400 First-in, first-out (FIFO) 39,103 35,979 ------------------------------------------------ Total inventories ....... $66,866 $68,379 ================================================== The current replacement costs of inventories exceeds LIFO values by approximately $6,095,000 and $5,785,000 at December 31, 2000 and 1999, respectively. 7. Property and Equipment Property and equipment, net, at December 31, consisted of: (Thousands of dollars) 2000 1999 ---------------------------------------------------------------------- Land ....................................... $ 573 $ 1,354 Buildings and improvements ................. 3,871 7,300 Leased property ............................ 399 399 Machinery, equipment and other ............. 14,033 13,707 --------------------------------------------------------------------- 18,876 22,760 Less accumulated depreciation and amortization (11,196) (10,697) --------------------------------------------------------------------- Property and equipment, net ................ $ 7,680 $ 12,063 ===================================================================== 8. Notes Payable and Long-Term Debt Obligations The long-term debt obligations of the Company at December 31, consisted of: (Thousands of dollars) 2000 1999 ------------------------------------------------------- Revolving credit agreement .... $ 55,600 $ 62,500 Other miscellaneous obligations -- 104 ------------------------------------------------------- 55,600 62,604 Less current portion .......... -- (104) ------------------------------------------------------- Net long-term obligations ..... $ 55,600 $ 62,500 ======================================================= At December 31, 2000, the Company had a $75 million revolving credit agreement that would have expired in May 2001. In March 2001, the Company replaced this revolver with a new revolver that expires in March 2004, at which time the entire outstanding balance under the revolver will come due. Under the terms of this new agreement, which includes five banks, the Company can borrow at the prime rate or the London Interbank Offered Rate ("LIBOR") plus between 1.25% to 2.25% depending on certain specified performance levels. The debt is collateralized by the accounts receivable and inventory of the Company. If the new agreement had been in place at December 31, 2000, the applicable LIBOR rate would have been LIBOR plus 2%. As a result of the new financing, the debt outstanding at December 31, 2000 has been classified as long term. The Company had two short-term bank lines with a total availability of $7.5 million that expired during the year ended December 31, 2000. Based on anticipated debt levels, the Company believes the amount available under the revolving credit agreement will be adequate to meet its ongoing debt requirements and does not plan to replace these lines or establish any additional lines of credit. The revolving loan agreement in place on December 31, 2000 and the new replacement revolving loan agreement provide, among other terms, various requirements for net worth and leverage and fixed charge coverage ratios. The Company was in compliance with these requirements under the revolving credit agreement in place on December 31, 2000 and would have also been in compliance if the new revolver had been in place. In 1997, the Company entered into 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 7.86% at December 31, 2000. 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, 2000, is a liability of $35,000. 9. Provision for Income Taxes The income tax provision for the years ended December 31, consisted of: (Thousands of dollars) 2000 1999 1998 ----------------------------------------------------------- Current: Federal .................. $ 2,899 $ 2,762 $ 2,450 State .................... 785 754 644 ----------------------------------------------------------- 3,684 3,516 3,094 Deferred: Federal .................. (23) 115 (93) State .................... (6) 32 (26) ----------------------------------------------------------- (29) 147 (119) ----------------------------------------------------------- Provision for income taxes $ 3,655 $ 3,663 $ 2,975 =========================================================== 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) 2000 1999 1998 -------------------------------------------------------------------------------------- Statutory tax provision ............................. $ 2,969 $ 2,982 $ 2,406 State income taxes, net of federal income tax benefit 518 519 408 Expenses for which there are no tax benefits ........ 191 179 190 Other, net .......................................... (23) (17) (29) -------------------------------------------------------------------------------------- Provision for income taxes .......................... $ 3,655 $ 3,663 $ 2,975 ======================================================================================
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) 2000 1999 ----------------------------------------------------------------- Provision for doubtful accounts ........... $ 1,278 $ 1,238 Inventory reserves ........................ 937 857 Postretirement benefits other than pensions 675 707 Vacation accrual .......................... 501 424 Goodwill .................................. 255 277 Pension and employee benefit costs ........ 30 385 Depreciation .............................. (72) (495) Other, net ................................ 794 812 ----------------------------------------------------------------- Total deferred tax assets ................. $ 4,398 $ 4,205 ================================================================= 10. 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:
2000 1999 1998 --------------------------------------------------------------------------------- Average shares of common stock outstanding used to compute basic net income per share . 6,422,015 6,536,098 6,526,805 Dilutive effect of stock options ........... 231 12,842 122,611 --------------------------------------------------------------------------------- Average shares of common stock outstanding used to compute diluted net income per share 6,422,246 6,548,940 6,649,416 --------------------------------------------------------------------------------- Net income per share: Basic.............................................. $ .79 $ .78 $ .63 Diluted............................................ .79 .78 .62 ----------------------------------------------------------------------------------
At December 31, 2000, there were outstanding options to purchase 569,621 shares of common stock at a range of prices between $5.75 and $11.18. The dilutive effect of stock options is based on the treasury method that computes the equivalent dilutive shares as the difference between the option shares and the amount of assumed common shares that could be purchased from the proceeds from the exercise of the stock options at the then current market price. To the extent the option price exceeds the current common stock price, the options are excluded, as the effect of including these options would be anti-dilutive, reducing the number of shares. The calculation for a year is based on the weighted-average dilutive shares during the year reflecting both changes in outstanding options during the year and changes in the common stock's market price. At December 31, 2000, the option prices were above the common stock's market price, thus none of the option shares were included in the calculation. 11. Defined Benefit Pension Plans The Company has a defined benefit pension 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 total 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. In addition, the Company has a supplemental executive retirement plan for certain Company executives that provides certain additional benefits. The components of the net periodic pension benefit for the years ended December 31, were: (Thousands of dollars) 2000 1999 1998 --------------------------------------------------------------------- Service cost ..................... $ 1,172 $ 995 $ 982 Interest cost .................... 2,137 1,874 1,872 Expected return on plan assets ... (3,771) (3,538) (2,980) Amortization of prior service cost 15 (9) (9) Transition cost amortization ..... 5 5 5 Recognized net actuarial gain .... (406) (286) (88) --------------------------------------------------------------------- Net periodic pension benefit ..... $ (848) $ (959) $ (218) ===================================================================== Assumptions: Discount rate .................... 7.25% 7.50% 6.50% 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 plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, were: (Thousands of dollars) 2000 1999 ---------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year ...... $ 27,284 $ 30,805 Service cost ................................. 1,172 995 Interest cost ................................ 2,137 1,874 Actuarial loss (gain) ........................ 2,847 (4,811) Benefits paid ................................ (1,624) (1,579) ---------------------------------------------------------------------- Benefit obligation at end of year ............ $ 31,816 $ 27,284 ---------------------------------------------------------------------- Change in Plan assets: Fair value of plan assets at beginning of year $ 38,526 $ 36,111 Actual return (loss) on plan assets .......... (35) 3,937 Employer contributions ....................... 64 57 Benefits paid ................................ (1,624) (1,579) ---------------------------------------------------------------------- Fair value of plan assets at end of year ..... $ 36,931 $ 38,526 ---------------------------------------------------------------------- Reconciliation of funded status: Funded status ................................ $ 5,115 $ 11,242 Unrecognized net actuarial gain .............. (4,462) (11,279) Unrecognized prior service cost .............. 26 (200) Unrecognized transition obligation ........... 5 9 ---------------------------------------------------------------------- Accrued pension liability .................... $ 684 $ (228) ====================================================================== The plans' assets are invested in undivided interests in several funds structured to duplicate the performance of various stock and bond indexes. The accrued pension liability is included in accrued pension, postretirement and other liabilities on the Consolidated Balance Sheets. 12. Defined Contribution Pension Plans The Company has a defined contribution pension plan in the form of qualified IRC 401(k) plan. Participation in this plan is available to substantially all employees. Company contributions to the plan are based on a percentage of the employee contributions not to exceed certain maximum levels. The cost of this plan was $262,000, $275,000 and $290,000 for the years 2000, 1999, and 1998, respectively. 13. 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 the Tasty 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 periodic postretirement benefit expense for the years ended December 31, included the following components: (Thousands of dollars) 2000 1999 1998 ---------------------------------------------------------------------- Service cost .............................. $ 15 $ 20 $ 20 Interest cost ............................. 109 98 80 Recognized net actuarial gain ............. (19) (31) (76) ---------------------------------------------------------------------- Net periodic postretirement benefit expense $ 105 $ 87 $ 24 ====================================================================== The change in the financial status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, were: (Thousands of dollars) 2000 1999 ---------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year .. $ 1,419 $ 1,526 Service cost ............................. 15 20 Interest cost ............................ 109 98 Actuarial loss (gain) .................... 125 (9) Benefits paid ............................ (185) (216) ---------------------------------------------------------------- Benefit obligation at end of year ........ $ 1,483 $ 1,419 ---------------------------------------------------------------- Fair value of plan assets ................ -- -- ---------------------------------------------------------------- Reconciliation of funded status: Funded status ............................ $(1,483) $(1,419) Unrecognized net actuarial gain .......... (221) (366) --------------------------------------------------------------- Postretirement benefits other than pension $(1,704) $(1,785) =============================================================== Assumptions: Discount rate 2000 7.25% 1999 7.50% 1998 6.50% Medical Trend 6.74% in 2000 grading to 5% in 7 years 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. 14. 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, 2000 are: Option Prices ----------------------- Weighted Options Average Range --------------------------------------------------------------------- Outstanding at January 1, 1998 . 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 --------------------------------------------------------------------- Granted ........................ 75,000 5.75 5.75 Exercised ...................... (200) 6.11 6.11 Canceled ....................... (48,910) 6.46 6.11-11.18 --------------------------------------------------------------------- Outstanding at December 31, 1999 589,492 6.88 5.75-11.18 --------------------------------------------------------------------- Canceled ....................... (19,871) 6.50 6.11-11.18 --------------------------------------------------------------------- Outstanding at December 31, 2000 569,621 $ 6.89 $5.75-11.18 ===================================================================== At December 31, 2000, there were 451,371 options exercisable with a weighted-average option price of $6.86 and a range from $5.75 to $11.18 and 200,976 options available for grant. The weighted-average remaining contractual life of outstanding options at December 31, 2000 and 1999 was 6 and 6.8 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) 2000 1999 1998 ----------------------------------------------------- Net Income: As reported............ $5,078 $5,109 $4,100 Pro forma ............. 4,943 4,906 3,917 ===================================================== Net Income Per Share: As reported Basic ................ $ .79 $ .78 $ .63 Diluted .............. .79 .78 .62 Pro forma Basic ................ .77 .75 .60 Diluted .............. .77 .75 .59 ===================================================== There were no options granted in 2000. The weighted-average fair value per share for options granted was $1.62 in 1999 and $2.67 in 1998. The fair value was estimated using the Black-Scholes option-pricing model. For options granted in 1999, a dividend yield rate of 3.1%, expected stock volatility of 27% and risk-free interest rate of 6.7% were used in estimating the value. For options granted in 1998, a dividend yield rate of 2.8%, expected stock volatility of 45% and risk-free interest rate of 4.6% were 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, 2000, all awards were fully amortized and an additional 61,280 shares were available for future awards. 15. Leases The Company leases certain distribution and office facilities, machinery and equipment, and vehicles 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, 2000 are as follows: Years Ending December 31, (Thousands of dollars) 2001......................... $ 2,710 2002......................... 2,589 2003......................... 1,839 2004......................... 1,284 2005......................... 831 Thereafter................... 5,102 -------------------------------------- Total minimum lease payments $14,355 ====================================== Rent expense, net of noncancelable sublease income of $24,000 in 2000 and 1999 and $10,000 in 1998, was $3,458,000, $3,203,000 and $2,851,000 for 2000, 1999, and 1998, respectively. 16. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivatives and hedging activities. The new standard requires that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instrument will generally be offset on the income statement by changes in the fair value of the hedged item. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income until it is cleared to earnings during the same period in which the hedged item affects earnings. The ineffective portion of all hedges will be recognized in current earnings each period. Changes in the fair value of derivative instruments that are not designated as a hedge will be recorded each period in current earnings. In July 1999, the FASB issued SFAS No. 137, and SFAS No. 138 that deferred the effective date for implementation of SFAS No. 133 to fiscal years beginning after June 15, 2000 and which addressed certain issues causing implementation difficulties for entities that apply SFAS No. 133, respectively. The Company will adopt SFAS No. 133, including the amendments in SFAS No. 138, on January 1, 2001. Transactions that the Company has entered into that will be accounted for under SFAS No. 133, as amended, are interest rate exchange agreements and foreign currency forward exchange contracts. Adoption of these new standards will not have a material effect on the Company's consolidated results of operations, financial position or cash flows. 17. 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, along with many other parties, is a defendant in a contribution action to determine the liability for the state ordered clean up of a landfill. 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. 18. Quarterly Financial Information (unaudited) Summarized unaudited quarterly financial data for the years ended December 31, 2000 and 1999 are:
(Thousands of dollars except per share data) First Second Third Fourth Total ------------------------------------------------------------------------------------- Year Ended December 31, 2000 Net sales .................. $141,519 $135,683 $134,034 $136,322 $547,558 Gross profit ............... 22,197 22,223 21,982 22,046 88,448 Net income ................. 1,361 1,397 1,139 1,181 5,078 Net income per share (1) Basic .................... $ .21 $ .22 $ .18 $ .19 $ .79 Diluted .................. .21 .22 .18 .19 .79 Year Ended December 31, 1999 Net sales .................. $139,988 $133,895 $133,054 $140,480 $547,417 Gross profit ............... 22,212 22,028 21,254 22,314 87,808 Net income ................. 1,235 1,295 1,170 1,409 5,109 Net income per share (1) Basic .................... $ .19 $ .20 $ .18 $ .22 $ .78 Diluted .................. .19 .20 .18 .22 .78 (1) Due to changes in the weighted average number of basic and diluted shares during the periods and rounding, the sum of the quarterly net incomes per share will not necessarily be equal to the full years' income per share.
19. Subsequent Event On February 2, 2001, the Board of Directors of the Company adopted a Shareholder Rights Plan declaring a dividend of one right for each share of the Company's common stock outstanding. In the event a person or group acquires or seeks to acquire 15% or more of the outstanding common stock of the Company, the rights may be exercised (except by the acquiring person whose rights are canceled) for $20. Upon exercise, each right entitles the holder to purchase from the Company common stock of the Company or the acquiring company having a market value equivalent to two times the $20 exercise price. Subject to certain conditions, the rights are redeemable by the Board of Directors for $.005 per right and are exchangeable for shares of common stock. The rights have no voting power and expire on February 1, 2011. 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) present fairly, in all material respects, the financial position of PrimeSource Corporation and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 February 23, 2001, except for the second paragraph of Note 8 for which the date is March 8, 2001 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, 2001, 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, 2001. 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, 2001. 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, 2001. 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 ............. 29 (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. (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 The Registrant did not file a report on Form 8-K during the quarter ended December 31, 2000. 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, 2000 Allowance for doubtful accounts..... $ 3,127 $1,887 $(1,764) (A) $ 3,250 Amortization of goodwill............ 3,043 1,071 4,114 Inventory reserves.................. 3,289 647 (306) (B) 3,630 -------------------------------------------------------------------------------------------------------------- $ 9,459 $3,605 $(2,070) $10,994 -------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 Allowance for doubtful accounts..... $ 3,419 $1,186 $(1,478) (A) $ 3,127 Amortization of goodwill............ 1,958 1,085 3,043 Inventory reserves.................. 5,414 352 (2,477) (B) 3,289 -------------------------------------------------------------------------------------------------------------- $10,791 $2,623 $(3,955) $ 9,459 -------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1998 Allowance for doubtful accounts..... $ 1,913 $ 440 $1,295 (C) $ (229) (A) $ 3,419 Amortization of goodwill............ 1,435 523 1,958 Inventory reserves.................. 4,664 233 2,000 (C) (1,483) (B) 5,414 -------------------------------------------------------------------------------------------------------------- $ 8,012 $1,196 $3,295 $(1,712) $10,791 -------------------------------------------------------------------------------------------------------------- (A) Doubtful accounts written off, net of any recoveries. (B) The disposal of obsolete inventory, net of any recoveries. (C) Related to the acquisition of Bell Industries' Graphic Imaging Group.
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 27, 2001 /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 27, 2001 /s/ William A. DeMarco ------------------------ William A. DeMarco Vice President, Chief Financial Officer (principal financial and accounting officer) DIRECTORS /s/ William A. DeMarco ---------------------- Fred C. Aldridge, Jr.} William A. DeMarco Philip J. Baur, Jr.} Attorney in fact Richard E. Engebrecht} Power of Attorney John H. Goddard, Jr.} dated March 13, 2001 Gary MacLeod} James F. Mullan} Klaus D. Oebel} Date March 27, 2001 Edward N. Patrone} 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. (Exhibits identified in parentheses are on file with the Securities and Exchange Commission and are incorporated herein by reference as exhibits hereto.) (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) Restated By-laws of the Registrant effective March 2, 1999 (filed as Exhibit 3.2 to Form 10-K, File No. 000-21750, dated March 29, 2000) (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) (4.3) RIGHTS AGREEMENT by and between PrimeSource Corporation and American Stock Transfer & Trust Company dated as of February 1, 2001 (filed as Exhibit 4.1 to Form 8-K filed on February 9, 2001, File No. 000-21750) (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 as amended and effective March 1, 2000 (filed as Exhibit 10.3 to Form 10-K, File No. 000-21750, dated March 29, 2000)* (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 the Proxy/ 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) PrimeSource Corporation 401(k) Savings Plan (Amended and Restated Effective January 1, 1997) (filed as Exhibit 10.9 to Form 10-K, File No. 000-21750, dated March 29, 2000)* (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)* 10.17 Credit Agreement dated March 8, 2001 by and among PrimeSource Corporation and the Banks Party Hereto and PNC, National Association, as Agent and PNC Capital Markets, Inc. as Lead Arranger. 21 Subsidiaries of the Registrant 23 Consent of PricewaterhouseCoopers LLP, Independent Accountants 27.1 Financial Data Schedule for the year ended December 31, 2000 27.2 Restated Financial Data Schedule for the year ended December 31, 1999** 27.3 Restated Financial Data Schedule for the year ended December 31, 1998 ** 27.4 Restated Financial Data Schedule for the nine-months ended September 30, 2000 ** 27.5 Restated Financial Data Schedule for the six-months ended June 30, 2000 ** 27.6 Restated Financial Data Schedule for the three-months ended March 31, 2000 ** 27.7 Restated Financial Data Schedule for the nine-months ended September 30, 1999 ** 27.8 Restated Financial Data Schedule for the six-months ended June 30, 1999 ** 27.9 Restated Financial Data Schedule for the three-months ended March 31, 1999 ** 99 Undertakings * Management contracts and/or compensatory plans, contracts or arrangements in which a director and/or a named executive officer participates. ** Financial Data Schedules were restated to to comply with a revised accounting standard requiring freight billed to customers to be included in sales and freight out expenses to be included in cost of sales. Previously, freight out expense net of freight billed was included in selling, general and administrative expenses. This accounting change has no effect on the Registrant's current or historical net income or net income per share.