-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WhbSRAynzEpdkRjZS36S+/INPFuvzvzg9BOjDwexPIiEbY1KrQfILFdHK49bWd2C cT7aahrSWo3ldHqpksD3Uw== 0000904816-98-000002.txt : 19980331 0000904816-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000904816-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIMESOURCE CORP CENTRAL INDEX KEY: 0000904816 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 231430030 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21750 FILM NUMBER: 98578267 BUSINESS ADDRESS: STREET 1: 4350 HADDONFIELD RD STREET 2: SUITE 222 CITY: PENNSAUKEN STATE: NJ ZIP: 08109 BUSINESS PHONE: 6094884888 MAIL ADDRESS: STREET 1: FAIRWAY CORPORATE CENTER SUITE 222 STREET 2: 4350 HADDONFIELD ROAD CITY: PENNSAUKEN STATE: NJ ZIP: 08109 FORMER COMPANY: FORMER CONFORMED NAME: PHILLIPS & JACOBS INC DATE OF NAME CHANGE: 19930514 10-K 1 1997 FORM 10-K FOR PRIMESOURCE CORP. 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, 1997 Commission file Number 0-21750 PRIMESOURCE CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-1430030 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4350 Haddonfield Road, Suite 222, Pennsauken, N.J. 08109 (Address of Principal Executive Offices) (Zip Code) (609)488-4888 Registrant's Telephone Number Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock $.01 par value per share Nasdaq Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) As of March 24, 1998 the aggregate market value of the voting stock held by nonaffiliates was approximately $66.4 million. As of March 24, 1998 there were 6,522,711 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 35 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 and systems integrator serving the printing, publishing and graphic arts industries. For approximately 135 years, the Company or its unincorporated predecessor has been servicing these industries. 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 Stock Market's National Market. Subsequent to the spin-off from TBC, the Company has had two 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. With these acquisitions, the Company estimates it currently covers 75% of the United States market. The Company believes there will be a continuing consolidation of distributors in the industry and the Company's business strategy will continue to include pursuing such acquisitions which will either expand the Company's presence in key markets and/or offer new products and services to the printing and imaging industries. The Company is headquartered in Pennsauken, New Jersey and has one business with two areas of focus, one servicing the digital electronic component of the market providing system design, installation, servicing, training and technical support as well as ongoing workflow and cost-support analyses and the other providing supplies and traditional equipment to the market. The Company maintains a decentralized management structure which allows the operating divisions broad discretion in the conduct of their respective businesses, including responsibility for 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 return on net assets and sales growth under its financial goals. In order to provide shareholder value, the Company believes it must strive to maximize its long-term return on the shareholders' investment. By quantifying this objective and applying it at the operating level, the Company believes it can best meet this goal. Management believes that this concept of fostering and perpetuating the entrepreneurial drive of operating management will continue to be a key factor in the Company's future success. The Company presently represents over 500 suppliers, sells and supports more than 50,000 products and has a customer base in excess of 25,000. No customer accounted for more than 3% of the Company's net sales in 1997. Consumable products, which include film, plates, proofing materials, photographic chemicals, printing blankets and pressroom chemistry, presently represent approximately 80% of total sales. The remaining 20% is derived from sales of printing presses, electronic imaging equipment, desktop publishing, electronic color proofing equipment, scanning systems, and other hardware and software products. The industry is moving from an analog to a digital environment. As a result of this transition, management expects sales of certain types of sensitized film and paper products to continue trending down, while sales of certain high-technology products and equipment used in the digital process to increase. In addition, there has been and continues to be a consolidation of the customer base. Many printing and imaging customers want a single source for design, pre-press preparation, and printing. Consolidation eliminates duplicate overhead costs and creates larger entities capable of supporting more sophisticated management techniques, from strategic planning through actual production. Management expects to continue to see this consolidation of customers into larger more sophisticated operations offering more services to their customers. While the Company sells primarily the same products as its competitors, generally at similar prices, the Company attempts to differentiate itself by focusing on providing training, technical support, and a value-added approach with products which will make its customers more efficient and effective. In addition, the Company's broad geographic presence provides an advantage in servicing regional and national customers. Based on the changes which are occurring in the industry, management believes this broad national presence, combined with the emphasis on technical support, will provide significant added-value to its 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 that it is one of the largest dealers 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 employed 657 employees at December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT BUSINESS EXPERIENCE POSITION HELD NAME AGE LAST FIVE YEARS SINCE - --------------------------- ----- ------------------------------------------ ----------------- James F. Mullan 58 President and Chief Executive 1991-Present President and Officer of Registrant Chief Executive Officer John H. Goddard, Jr. 50 Executive Vice President September, 1994- Executive Vice President of Registrant Present President, Chief Executive Officer 1992-1994 of Momentum Corporation William A. DeMarco 52 Vice President and Chief Financial Officer September, 1994- Vice President and of Registrant Present Chief Financial Officer Vice President of Finance, Treasurer, and 1993-1994 Secretary of Registrant Vice President of Finance and Operations 1992-1993 of Phillips & Jacobs, Incorporated Barry C. Maulding 52 Vice President, General Counsel September, 1994- Vice President, and Corporate Secretary Present General Counsel and of Registrant Corporate Secretary Vice President Administration, 1993-1994 General Counsel and Corporate Secretary of Momentum Corporation General Counsel, Director of Administration and 1992-1993 Corporate Secretary of Momentum Corporation
ITEM 2. PROPERTIES The locations and primary use of the physical properties of the Company are as follows:
Approximate Square Location Footage - ----------------------------- ----------- Corporate Headquarters Pennsauken, NJ 7,400 Distribution/Sales Facilities Atlanta, GA (Norcross) 23,200 Birmingham, AL 37,000 Boston, MA (Hingham) 13,500 Chicago, IL (Itasca) 49,600 Cincinnati, OH 35,000 Dallas, TX 17,500 Des Moines, IA (Ankeny) 14,000 Houston, TX 7,000 Jackson, MS 6,000 Kalamazoo, MI 20,000 Kansas City, KS 16,800 Lititz, PA 14,000 Los Angeles, CA (Cerritos) 9,900 Miami, FL (Miramar) 14,700 Milwaukee, WI (New Berlin) 16,300 Minneapolis, MN (Mendota Heights) 53,600 Mobile, AL 5,100 Nashville, TN 16,000 New Orleans, LA (Harahan) 8,800 Omaha, NE 10,000 Orlando, FL 14,400 Pennsauken, NJ 32,000 Pittsburgh, PA 10,500 Portland, OR 7,800 San Francisco, CA (South San Francisco) 10,000 Seattle, WA (Tukwila) 38,600 St. Louis, MO 22,000
All of the properties are held under operating leases, except for the Birmingham, Des Moines, Minneapolis, St. Louis and Seattle facilities which are owned. Management believes that the Company's properties are generally well maintained and adequate for current operations and foreseeable expansion. The inability of the Company to renew any short-term real property lease would not have a material effect on the Company's results of operations. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its business. Management believes that none of the litigation in which the Company is currently involved would, individually or in the aggregate, have a material effect on the Company's consolidated financial position or results of operations when resolved in a future period. The Company, along with many other potentially responsible parties, is a defendant in a declaratory action to determine an allocation of costs for the investigation and remediation of two Superfund cleanup sites. The Company believes its insurance will cover any costs incurred in these two matters. 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 Stock Market's National Market under the symbol PSRC. The following quarterly stock price and dividend information is provided for 1996 and 1997.
Stock Price Cash Dividends High Low Per Share - ------------------------------------------------------------------------------- 1996 First Quarter $ 6.50 $ 5.00 $ .045 Second Quarter 7.50 5.00 .045 Third Quarter 7.50 5.75 .045 Fourth Quarter 8.13 6.00 .045 1997 First Quarter $ 8.75 $ 7.63 $ .045 Second Quarter 8.25 7.00 .045 Third Quarter 10.63 7.63 .045 Fourth Quarter 13.00 9.63 .045
The payment of future cash dividends will depend on the level and growth of the Company's earnings and the Company's needs for cash. There were approximately 3,500 shareholders of record as of December 31, 1997. 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, 1998. ITEM 6. SELECTED FINANCIAL DATA The following selected historical consolidated financial data has been derived from consolidated financial statements. On August 1, 1993, the Company was spun-off from Tasty Baking Company ("TBC"). Accordingly, the historical data for 1993, which include the operations of the Company when it was a subsidiary of TBC, may not necessarily reflect the results of operations or financial position that would have been obtained had the Company been an independent publicly-held company during the entire year. The operations of Momentum Corporation are included from September 1, 1994, the date Momentum merged with the Company. This information should be read in conjunction with the Company's consolidated financial statements included herein.
Years Ended December 31, ------------------------------------------------------------- (in thousands, except per share amounts) 1997(1) 1996 1995(2) 1994 1993(3) - ---------------------------------------------------------------------------------------------------------- Statement of Income Data Net sales ................................ $ 414,867 $ 366,657 $ 357,077 $ 238,154 $ 167,744 Cost of sales ........................... 343,116 301,428 293,790 194,346 135,094 - ---------------------------------------------------------------------------------------------------------- Gross profit ............................. 71,751 65,229 63,287 43,808 32,650 Operating expenses ....................... 63,257 57,033 58,615 37,362 26,572 - ---------------------------------------------------------------------------------------------------------- Income from operations ................... 8,494 8,196 4,672 6,446 6,078 Interest expense ......................... (2,913) (1,915) (2,235) (1,113) (531) Gain on sale of capital lease ............ 3,658 Loss on business divestiture ............. (401) Other income-net ......................... 515 421 441 408 251 - ---------------------------------------------------------------------------------------------------------- Income before provision for income taxes and cumulative effect of changes in accounting principles ............. 9,353 6,702 2,878 5,741 5,798 Provision for income taxes ............... 3,862 2,788 1,232 2,210 2,399 - ---------------------------------------------------------------------------------------------------------- Income before cumulative effect of changes in accounting principles ..... 5,491 3,914 1,646 3,531 3,399 Cumulative effect on prior years of changes in accounting principles ..... (1,306) - ---------------------------------------------------------------------------------------------------------- Net income ............................... $ 5,491 $ 3,914 $ 1,646 $ 3,531 $ 2,093 ========================================================================================================== Per Share Data Income before cumulative effect of changes in accounting principles Basic ................................ $ .84 $ .60 $ .25 $ .72 $ .83 Diluted .............................. .83 .60 .25 .71 .83 ========================================================================================================== Net income Basic ................................ $ .84 $ .60 $ .25 $ .72 $ .51 Diluted .............................. .83 .60 .25 .71 .51 ========================================================================================================== Balance Sheet Data Working capital .......................... $ 69,151 $ 67,040 $ 65,168 $ 60,987 $ 28,631 Total assets ............................. 138,491 134,175 119,804 120,760 52,427 Total long-term obligations .............. 32,788 36,250 32,202 29,094 12,747 Shareholders' equity ..................... 52,548 48,183 45,572 46,169 20,654 ========================================================================================================== (1) Income for 1997, includes a charge to cost of sales for $2,300,000 ($1,381,000 after tax) for the write-down of demonstration and other digital electronic 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. (2) Income for 1995, includes a one-time restructuring expense of $1,315,000 ($794,000 after tax) relating to the consolidation of five distribution centers, the realignment of two others, and the centralization of certain financial and information services. (3) Income for 1993, includes a one-time charge to operating expenses of $609,000 ($519,000 after tax) resulting from costs associated with the spin-off from TBC consisting primarily of legal, accounting and other professional fees and an after tax charge of $1,306,000 for the cumulative effect of changes in methods of accounting for income taxes and postretirement benefits other than pensions. Per share information for 1993 is based on the average number of shares of TBC common shares outstanding for the year converted to Company shares using the spin-off ratio of two Company shares for every three shares of TBC common stock.
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, ----------------------------- 1997 1996 1995 - --------------------------------------------------------------------------- Net sales .................................. 100.0% 100.0% 100.0% Cost of sales .............................. 82.7 82.2 82.3 - -------------------------------------------------------------------------- Gross profit ............................... 17.3 17.8 17.7 Selling, general and administrative expenses 14.5 14.7 15.0 Depreciation and amortization .............. .6 .7 .7 Provision for doubtful accounts ............ .2 .2 .3 Restructure expense ........................ .4 - -------------------------------------------------------------------------- Income from operations ..................... 2.0 2.2 1.3 Interest expense ........................... (.7) (.5) (.6) Gain on sale of capital lease .............. .9 Loss on business divestiture ............... (.1) Other income-net ........................... .1 .1 .1 - -------------------------------------------------------------------------- Income before provision for income taxes ... 2.2 1.8 .8 Provision for income taxes ................. .9 .7 .3 - -------------------------------------------------------------------------- Net income ................................. 1.3% 1.1% .5% ==========================================================================
COMPARISON OF 1997 TO 1996 Net income for 1997 was $5,491,000, or $.83 per diluted share compared to $3,914,000, or $.60 per share in 1996. There were three significant items which affected the results for 1997, a $2.3 million charge for demonstration and other digital electronic inventory, a $3.7 million gain on the sale of a capital lease, and a $.4 million loss on a business divestiture. Excluding these items, which will be discussed later in further detail, the net income for 1997 would have been $4,930,000 ($.74 per share), a 26% increase over 1996 net income. Net sales in 1997 were $414,867,000 compared to $366,657,000 in 1996, an increase of 13.1%. This sales increase is primarily the result of the acquisition of five VGC Corporation locations in 1996, one in August 1996 and four in November 1996. Excluding the impact of the VGC acquisition, sales increased modestly, although there were fluctuations between geographic locations. In 1997, the Company established a systems group to service the digital electronic component of the market. Although this group will work closely with the local distribution centers, the group is structured based on distinct products with a separate staff with technical expertise to provide workflow analysis, and installation, training and service, to more effectively meet customer requirements. Included in this reorganization is the centralization of the electronics inventory in two primary locations, eliminating the duplication of demonstration and other electronics inventory at each of the Company's branches. In conjunction with this centralization and new distribution approach, the Company expensed $2.3 million to cost of sales for the write-down of the existing branch inventory to current market value. This charge to cost of sales resulted in the gross profit percent decreasing from 17.8% in 1996 to 17.3% in 1997. Excluding this charge, the 1997 gross profit percent would have been 17.8%, the same as in 1996. Selling, general and administrative expenses as a percent of sales decreased from 14.7% in 1996 to 14.5% in 1997. The Company benefited by the economies of merging the VGC business into the existing business, plus the continued efforts to reduce costs within the Company. These gains were partially offset by additional staffing required for the new Systems Division. The Company expects increased sales and gross margins in 1998 to justify these additional expenses. In 1997, the provision for doubtful accounts decreased to $694,000 from $865,000 in 1996. The Company has continued to benefit from more stringent credit requirements which were initially implemented in 1995. Interest expense increased from $1,915,000 in 1996 to $2,913,000 in 1997. This increase is primarily due to the debt associated with the acquisition of VGC. In 1997, the Company sold its interest in a capital lease in the Los Angeles, California area for a gain of approximately $3.7 million. The lease rents were significantly lower than the existing market, which resulted in the market value for the lease. From a Company operating standpoint, the facility was substantially larger than what was required for the Company's operations. Subsequent to the sale, the Company moved its Los Angeles operations to a facility of appropriate size for the areas operations. In addition, in 1997, the Company sold its pressroom material converting operation, which consisted primarily of inventory and machinery, to a national converting company and simultaneously entered into a supplier agreement with the buyer. The transaction allows the Company to focus its efforts on marketing and selling the products and in developing an alliance with the largest converter in the industry. The Company recorded a loss on the divestiture of $401,000. The effective income tax rate decreased from 41.6% in 1996 to 41.3% in 1997. The lower rate in 1997 is primarily due to non-deductible expenses being a lesser percent of income in 1997 compared to 1996. The difference between the effective tax rates and the federal statutory rate of 34% for both years is primarily attributable to the effect of state income taxes and non-deductible expenses. COMPARISON OF 1996 TO 1995 Net income for 1996 was $3,914,000, or $.60 per share compared to $1,646,000, or $.25 per share for 1995. The results for 1995 include a one-time charge of $1,315,000 ($794,000 after related tax benefit) for restructuring expenses. Excluding this restructure expense, net income for 1995 would have been $2,440,000 ($.37 per share). Net sales in 1996 were $366,657,000 compared to $357,077,000 in 1995, an increase of 3%. This sales increase is primarily the result of the VGC acquisition. Excluding the impact of the VGC acquisition, sales were flat during the year, with modest decreases in the first half of the year and modest increases in the second half. Gross profit as a percent of sales remained stable between the two years, at 17.8% in 1996 and 17.7% in 1995. Selling, general, and administrative expenses as a percent of sales decreased from 15.0% in 1995 to 14.7% in 1996. As previously indicated, in 1995, the Company incurred a restructuring charge of $1,315,000. This expense was incurred in the consolidation of five distribution centers, the realignment of two others, and the centralization of certain financial and information services. The efficiencies in aligning operations by geographical area and consolidating duplicate facilities and functions, combined with other cost reduction programs resulted in a containment of expenses in 1996. Interest expense decreased from $2,235,000 in 1995 to $1,915,000 in 1996. Prior to the acquisition of VGC in November, interest expense was lower during the year due to decreased working capital levels. With the acquisition of VGC, the debt levels increased with a corresponding increase in interest expense. The effective income tax rate decreased from 42.8% in 1995 to 41.6% in 1996. The lower rate in 1996 is primarily due to non-deductible expenses being a lesser percent of income in 1996 compared to 1995. Financial Condition and Liquidity Cash used in operating activities was $1,795,000 in 1997. Cash provided by operations was $7,701,000 and $3,024,000 in 1996 and 1995, respectively. The substantial decrease in cash flow in 1997 compared to 1996 is primarily due to increased working capital levels in 1997. This increase reflects the adjustment of working capital levels for the VGC acquisition to ongoing operating levels and temporary increases in inventory levels to ensure inventory availability through the conversion of the Company to a single business system. The effect of changes in asset levels decreased cash flow by $6.7 million in 1997, compared to an increase in cash flows in 1996 of $.5 million. In addition, although the 1997 cash flow from operations excludes the pretax gain on the sale of the capital lease, the related tax expense of approximately $1.5 million is reflected in the outflow of cash. Cash flow provided by investing activities was $3,650,000 in 1997, compared to cash flows used by investing activities of $14,471,000 and $1,062,000 in 1996 and 1995, respectively. The cash generated in 1997 was primarily from the sale of the capital lease and the pressroom material converting operation. The primary expenditure in 1996, was for the VGC acquisition. In the three years, property and equipment expenditures ranged between $1.5 and $2 million. The Company had no material capital expenditure commitments at December 31, 1997. Capital expenditures for 1998 are anticipated to be approximately $2 million. In addition, the Company's business strategy is to continue to acquire regional distributors within the Company's current markets or companies that offer new products and services to the printing and imaging industries. Cash flows from financing activities were $1,855,000 used in 1997, $6,770,000 provided in 1996, and $2,580,000 used in 1995. The cash used in 1997 was primarily for the paydown of debt of $2,448,000 and was primarily provided from the proceeds from the sale of the capital lease and the business divestiture. In 1996, the cash provided was from an increase in debt and an increase in the book overdraft, and was used along with cash generated from operations for the VGC acquisition. The other primary component of financing activities was dividend payments of $1.2 million in 1997 and 1996 and $2.5 million in 1995. The Company's primary source of debt financing is a revolving credit agreement with a commitment of $50 million of which $18.5 million was available at December 31, 1997. The Company believes this source of borrowing, combined with cash from operations, is sufficient to support the current capital requirements of the Company. For potential acquisitions which would exceed the current financing levels, the Company believes based on the current capacity of the balance sheet for additional debt, with a current debt to equity ratio of .65 to 1, and the Company's prior success in integrating new acquisitions, additional debt capital would be available to the Company at favorable rates. PROCEDURES FOR THE YEAR 2000 ISSUE The Company's business system will require program modifications prior to the year 2000, for what is commonly referred to as the "Year 2000 Issue". Similar to other systems, the system currently abbreviates the year to a two-digit number. As currently programmed, this abbreviation will cause many of the functions within the system which are date sensitive to operate improperly or malfunction in the year 2000. The Company has contracted with the software manufacture to work with the Company's management information system department to make the necessary programming changes to correct this problem. This work is scheduled for the summer of 1998. The Company does not anticipate the cost of the modifications will have a material impact on the Company's results of operations or financial position. In addition, the Company is in the process of initiating formal communications with its significant suppliers and customers to determine the extent to which the Company might be impacted by those third parties' failure to correct any year 2000 issues. DERIVATIVE FINANCIAL INSTRUMENTS In 1997, the Company began utilizing derivative financial instruments to reduce interest rate risks. The Company does not hold or issue financial instruments for trading or speculative purposes. The counterparty is a major commercial bank. Management believes losses related to credit risk are remote. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. In addition, SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. These statements are effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of evaluating these disclosure requirements. The adoption of these statements is not expected to have any impact on the Company's consolidated results of operations, financial position or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PRIMESOURCE CORPORATION Consolidated Statements of Income
Years Ended December 31, ----------------------------------- (Thousands of dollars, except per share amounts) 1997 1996 1995 - ----------------------------------------------------------------------------------- Net sales ................................... $ 414,867 $ 366,657 $ 357,077 Cost of sales ............................... 343,116 301,428 293,790 - ----------------------------------------------------------------------------------- Gross profit ................................ 71,751 65,229 63,287 Selling, general, and administrative expenses 60,151 53,748 53,547 Depreciation and amortization ............... 2,412 2,420 2,663 Provision for doubtful accounts ............. 694 865 1,090 Restructure expense ......................... 1,315 - ----------------------------------------------------------------------------------- Income from operations ...................... 8,494 8,196 4,672 Interest expense ............................ (2,913) (1,915) (2,235) Gain on sale of capital lease ............... 3,658 Loss on business divestiture ................ (401) Other income-net ............................ 515 421 441 - ----------------------------------------------------------------------------------- Income before provision for income taxes .... 9,353 6,702 2,878 Provision for income taxes .................. 3,862 2,788 1,232 - ----------------------------------------------------------------------------------- Net income .................................. $ 5,491 $ 3,914 $ 1,646 =================================================================================== Net income per share Basic ....................................... $ .84 $ .60 $ .25 Diluted ..................................... .83 .60 .25 =================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Balance Sheets
December 31, ---------------------- (Thousands of dollars, except share information) 1997 1996 - -------------------------------------------------------------------------------------------- Assets Current Assets Trade receivables, less allowances of $1,913 and $1,787, respectively $ 53,861 $ 54,044 Other receivables ................................................... 6,675 6,612 Inventories ......................................................... 53,919 48,741 Deferred income taxes ............................................... 2,361 1,982 Other ............................................................... 1,155 671 - -------------------------------------------------------------------------------------------- Total Current Assets ............................................... 117,971 112,050 Property and equipment, net ......................................... 12,315 13,719 Excess of cost over net assets of businesses acquired, net of accumulated amortization of $1,435 and $1,102, respectively 4,217 4,487 Deferred income taxes ............................................... 1,705 1,763 Long-term receivables ............................................... 824 895 Other assets ........................................................ 1,459 1,261 - -------------------------------------------------------------------------------------------- Total Assets ........................................................ $ 138,491 $ 134,175 ============================================================================================ Liabilities and Shareholders' Equity Current Liabilities Current portion of long-term obligations ............................ $ 1,362 $ 1,550 Accounts payable .................................................... 34,045 29,781 Book overdraft ...................................................... 5,609 3,847 Accrued payroll and benefits ........................................ 3,434 2,587 Other accrued liabilities ........................................... 4,370 7,245 - -------------------------------------------------------------------------------------------- Total Current Liabilities ........................................... 48,820 45,010 Long-term obligations, net of current portion ....................... 32,788 36,250 Accrued pension and other liabilities ............................... 2,387 2,577 Postretirement benefits other than pension .......................... 1,948 2,155 - -------------------------------------------------------------------------------------------- Total Liabilities ................................................... 85,943 85,992 Commitments and Contingencies Shareholders' Equity Common stock, $.01 par value, 24,000,000 shares authorized 6,516,620 and 6,514,795 issued and outstanding, respectively ........ 65 65 Additional paid-in capital .......................................... 25,586 25,533 Retained earnings ................................................... 26,897 22,628 Unamortized restricted stock awards ................................. (43) - -------------------------------------------------------------------------------------------- Total Shareholders' Equity ......................................... 52,548 48,183 - -------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity .......................... $ 138,491 $ 134,175 ============================================================================================ See accompanying notes to consolidated financial statements
PRIMESOURCE CORPORATION Consolidated Statements of Cash Flows
Years Ended December 31, ----------------------------------- (Thousands of dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Operating Activities Net income ............................................. $ 5,491 $ 3,914 $ 1,646 Adjustments to reconcile net income to net cash provided by (used in)operating activities: Depreciation ........................................ 1,980 1,900 2,006 Amortization ........................................ 432 520 657 Provision for doubtful accounts ..................... 694 865 1,090 Gain on sale of capital lease ....................... (3,658) Loss on business divestiture ........................ 401 Other ............................................... (391) 28 756 Changes in assets and liabilities, net of effects from business combinations/divestitures: Receivables ......................................... (574) (4,751) (6,658) Inventories ......................................... (7,754) 1,485 2,499 Other current assets ................................ (484) 258 (173) Income taxes ........................................ 100 1,768 2,064 Accounts payable and other accrued liabilities ...... 2,255 2,917 288 Pension and other postretirement benefits ........... (287) (1,203) (1,151) - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities ... (1,795) 7,701 3,024 Investing Activities Proceeds from sales of property and equipment .......... 565 218 473 Proceeds from sale of capital lease .................... 3,151 Purchase of property and equipment ..................... (1,918) (1,530) (1,713) Proceeds from business divestitures .................... 2,388 2,235 Payments for business combinations, net of cash acquired (14,394) (954) (Increase) decrease in long-term receivables ........... 71 (33) 777 (Increase) decrease in other assets .................... (254) (732) 479 Other, net ............................................. (353) (235) (124) - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities ... 3,650 (14,471) (1,062) Financing Activities Net decrease in short-term borrowings .................. (3,000) Proceeds from long-term obligations .................... 74,600 142,924 102,925 Repayment of long-term obligations ..................... (77,048) (138,532) (100,050) Increase in book overdraft ............................. 1,762 3,847 Dividends paid ......................................... (1,172) (1,211) (2,497) Purchase of common stock ............................... (106) (258) Proceeds from exercise of stock options ................ 109 42 - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities .... (1,855) 6,770 (2,580) - ---------------------------------------------------------------------------------------------- Net decrease in cash ................................... --- --- (618) Cash at beginning of year .............................. --- --- 618 - ---------------------------------------------------------------------------------------------- Cash at end of year .................................... $ --- $ --- $ --- ============================================================================================== Net cash paid (received) during the year for: Interest .......................................... $ 2,742 $ 1,826 $ 2,223 Income taxes ...................................... 3,878 2,314 (644) ============================================================================================== See accompanying notes to consolidated financial statements.
PRIMESOURCE CORPORATION Consolidated Statements of Shareholders' Equity
Unamortized Common Stock Additional Restricted (Thousands of dollars, ($.01 Par Value) Paid-in Retained Stock except share information) Shares Amount Capital Earnings Awards Total - --------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1995 ......... 6,508,630 $ 65 $ 25,359 $ 20,887 $ (142) $ 46,169 Net income ....................... 1,646 1,646 Cash dividends paid to shareholders ($.3825 per share) (2,497) (2,497) Shares issued under noncompete agreement .......... 15,000 142 142 Restricted stock awards and related amortization .......... 470 70 70 Stock options exercised and related tax benefit ........... 3,195 42 42 - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 ....... 6,527,295 65 25,543 20,036 (72) 45,572 Net income ....................... 3,914 3,914 Cash dividends paid to shareholders ($.18 per share) . (1,211) (1,211) Shares issued under acquisition agreement ......... 25,000 137 137 Amortization of restricted stock awards .................. 29 29 Purchase of common stock ......... (37,500) (147) (111) (258) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 ....... 6,514,795 65 25,533 22,628 (43) 48,183 Net income ....................... 5,491 5,491 Cash dividends paid to shareholders ($.18 per share) . (1,172) (1,172) Stock options exercised and related tax benefit ........... 15,837 109 109 Amortization of restricted stock awards .................. 43 43 Purchase of common stock ......... (14,012) (56) (50) (106) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 ....... 6,516,620 65 25,586 26,897 --- 52,548 ===================================================================================================================== 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 and systems integrator serving the printing, publishing and graphics arts industries. The Company was spun-off from Tasty Baking Company ("TBC") on August 1, 1993. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid temporary cash investments purchased with a maturity of three months or less to be cash equivalents. The Company's cash management program utilizes zero balance accounts. Accordingly, in general, the Company has none or minimal cash balances. Book overdraft balances have been reclassified to a current liability in the accompanying Consolidated Balance Sheets. Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) and first-in, first-out (FIFO) methods. Property and Equipment Property and equipment are carried at cost. Costs of major additions, replacements and betterments are capitalized and maintenance and repairs which do not extend the life of the respective assets are expensed as incurred. When property is retired or otherwise disposed, the cost of the property and the related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in current operations. Depreciation is computed by the straight-line method over the estimated useful lives of the assets which range from three to ten years for machinery and equipment and ten to thirty years for buildings and improvements. Capital leases are included under property and equipment with the corresponding amortization included in depreciation. The related financial obligations under the capital leases are included in long-term obligations. Capital leases are amortized over the useful lives of the respective assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Excess of Cost Over Net Assets of Businesses Acquired The excess of the total acquisition cost over the fair value of net tangible assets acquired (the "goodwill acquired") is being amortized by the straight-line method over periods ranging from fifteen to forty years. The Company's policy is to record an impairment loss against the goodwill acquired in the period when it is determined the carrying amount of the net assets may not be recoverable. The Company performs this evaluation on a quarterly basis. This determination includes evaluation of factors such as current market value, future asset utilization, business climate and future net cash flows (undiscounted and without interest) expected to result from the use of the net assets. Revenue Recognition Revenue is recognized when products are shipped and title is passed to the customer. Derivative Financial Instruments In 1997, the Company began utilizing derivative financial instruments to reduce interest rate risks. The Company does not hold or issue financial instruments for trading or speculative purposes. The counterparty is a major commercial bank. Management believes losses related to credit risk are remote. The instruments are accounted for on an accrual basis. The net cash amounts paid or received under such agreements are accrued and recognized as an adjustment to interest expense. Fair Value of Financial Instruments The carrying value of the Company's short-term financial instruments such as receivables and payables approximates their fair values, based on the short-term maturities of these instruments. The carrying value of long-term investments, consisting primarily of long-term notes receivable, and long-term debt obligations, consisting primarily of revolving credit debt with interest rates based on current short-term market rates, approximates the market value based on the estimated discounted value of future cash flows at December 31, 1997 and 1996. The fair value of derivative financial instruments is based on the quoted settlement cost on the balance sheet date. Concentrations of Credit Risk Concentrations of credit risk with respect to trade receivables are limited due to a large customer base and its geographic dispersion. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses have not exceeded management's expectations. Incentive Stock Awards The Company applies the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25 to account for options granted to employees and directors to purchase common shares. Statement of Financial Accounting Standards 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 earnings per share as if the fair-value-based method of accounting had been applied. No compensation expense is recognized on the grant date since, at that date, the option price equals the market price of the underlying common shares. Income Taxes Income tax expense is based on pre-tax 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. Income Per Common Share In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share(EPS)" (SFAS No. 128). The Company adopted SFAS 128 in the fourth quarter of 1997. All prior-period EPS data presented has been restated. Adoption did not have a material effect on the Company's EPS. 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 have been made to the 1996 consolidated financial statements and related footnotes to conform to the 1997 presentations. 2. Business Combinations In 1996, the Company acquired the operating assets of KPM and VGC Corporation's branch operations in St. Louis, Missouri; Minneapolis, Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha, Nebraska for an aggregate purchase price of $14,394,000. In 1995, the Company acquired substantially all of the operating assets of Turner Products, Inc. and Litho Supply and Service Company's supply distribution business for an aggregate purchase price of $1,010,000. These business combinations have been accounted for as purchases and, accordingly, are included in operations from their respective acquisition dates. The excess of the acquisition costs over the net tangible assets acquired is included in the Consolidated Balance Sheet and is being amortized on a straight-line basis over 15 years. The pro-forma results of these acquisitions would not have had a significant impact on the Company's consolidated results of operations. 3. Sale of Capital Lease In October 1997, the Company sold its rights to a building lease in the Los Angeles California area, for $3,151,000. The lease had been accounted for as a capital lease. The pretax gain on the sale after eliminating the associated net financial basis of the lease assets of $695,000 and the liability for future lease payments of $1,202,000, was $3,658,000. Subsequent to the sale, the Company's operations previously located in the facility were moved to a new leased facility in the area. 4. Business Divestitures Pressroom Material Converting Operation In October 1997, the Company completed the sale of a pressroom material converting operation. The pretax loss on the sale was $401,000. In conjunction with the sale, the Company entered into a supplier agreement with the buyer. Onandaga Litho Supply In October 1996, the Company sold substantially all of the assets of its Rochester, New York subsidiary, Onandaga Litho Supply, Co., Inc. There was no gain or loss on the sale. 5. Inventory Write-down to Market In 1997, the Company established a systems group to better utilize the Company's technical resources in providing solutions and on-going support, including installation service and training, in the digital electronics component of the market. Included in this reorganization is the centralization of the electronics inventory, eliminating the duplication of inventory at the Company's various branches. In conjunction with this reorganization and new distribution approach, the Company expensed $2.3 million in 1997 to write-down the existing branch inventory to current market value based on its expected disposal value. This amount has been recorded in cost of sales in the Consolidated Income Statements. 6. Inventories Inventories, which are primarily finished goods, at December 31 consisted of:
(Thousands of dollars) 1997 1996 ----------------------------------------------------------------------- Last-in, first-out (LIFO) .................... $30,168 $25,838 First-in, first-out (FIFO) ................... 23,751 22,903 ----------------------------------------------------------------------- Total inventories ............................ $53,919 $48,741 =======================================================================
The current replacement costs of inventories exceeds LIFO values by approximately $5,432,000 and $5,591,000 at December 31, 1997 and 1996, respectively. 7. Property and Equipment Property and equipment, net, at December 31 consisted of:
(Thousands of dollars) 1997 1996 -------------------------------------------------------------------- Land ......................................... $ 1,354 $ 1,549 Buildings and improvements ................... 7,605 9,017 Leased property .............................. 399 1,418 Machinery, equipment and other ............... 12,460 10,883 -------------------------------------------------------------------- 21,818 22,867 Less accumulated depreciation and amortization (9,503) (9,148) -------------------------------------------------------------------- Property and equipment, net .................. $ 12,315 $ 13,719 ====================================================================
8. Long-term Obligations The long-term obligations of the Company at December 31 consisted of:
(Thousands of dollars) 1997 1996 ------------------------------------------------------------------------------------- Revolving credit agreement ................................... $ 31,500 $ 32,450 Term loan (interest rate of 6.03%), principal payments of $167 plus interest due quarterly through December, 1999 .... 1,333 2,000 Term loan (interest rate of 6.03%), principal payments of $134 plus interest due quarterly through December, 1999 .... 1,070 1,604 Capitalized lease obligation (imputed interest rate of 8.38%) 1,352 Capitalized lease obligation (imputed interest rate of 8.97%, payable in monthly installments of $12 through July, 1999) 223 348 Other miscellaneous notes .................................... 24 46 ------------------------------------------------------------------------------------- 34,150 37,800 Less current portion ......................................... (1,362) (1,550) ------------------------------------------------------------------------------------- Net long-term obligations .................................... $ 32,788 $ 36,250 =====================================================================================
Maturities of long-term obligations are $1,362,000 in 1998, $1,288,000 in 1999, $31,500,000 in 2000 and none thereafter. The Company has an uncollateralized $50 million revolving credit agreement which expires in January, 2000. Under the terms of the agreement, which includes three banks, the Company can borrow at the prime rate or the London Interbank Offered Rate (LIBOR) plus between .75% to 1.05% depending on certain specified performance levels. The loan agreements provide, among other terms, various requirements for tangible net worth and leverage and fixed charge coverage ratios. The Company was in compliance with these requirements at December 31, 1997. In November 1997, the Company entered into an interest rate swap agreement with a notional amount of $17 million. This swap agreement effectively fixed the interest rate on a like amount of the Company's floating rate debt at 6.16% plus the Company's LIBOR spread in effect at the time. The effective rate was 7.06% at December 31, 1997. 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, 1997, is a liability of $145,000. The fair value of the swap agreement is not recognized in the consolidated financial statements since it is accounted for as a hedge. Under terms of certain insurance policies and claims handling agreements, the Company is required to maintain certain standby letters of credit. At December 31, 1997 and 1996, these totaled $200,000 and $300,000, respectively. 9. Provision for Income Taxes The income tax provision for the years ended December 31 consisted of:
(Thousands of dollars) 1997 1996 1995 ---------------------------------------------------------- Current: Federal .................. $ 3,349 $ 2,571 $ 1,015 State .................... 791 586 143 ---------------------------------------------------------- 4,140 3,157 1,158 Deferred: Federal .................. (229) (264) 58 State .................... (49) (105) 16 ---------------------------------------------------------- (278) (369) 74 ---------------------------------------------------------- Provision for income taxes $ 3,862 $ 2,788 $ 1,232 ==========================================================
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) 1997 1996 1995 ------------------------------------------------------------------------------------ Statutory tax provision .............................. $ 3,180 $ 2,279 $ 979 State income taxes, net of federal income tax benefit 490 334 95 Expenses for which there are no tax benefits ......... 172 154 178 Other, net ........................................... 20 21 (20) ------------------------------------------------------------------------------------ Provision for income taxes ........................... $ 3,862 $ 2,788 $ 1,232 ====================================================================================
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) 1997 1996 ---------------------------------------------------------------- Pension and employee benefit costs ........ $ 772 $ 979 Inventory reserves ........................ 890 165 Postretirement benefits other than pensions 867 853 Vacation accrual .......................... 276 408 Provision for doubtful accounts ........... 677 634 Depreciation .............................. (408) (424) Other, net ................................ 992 1,130 ---------------------------------------------------------------- Total deferred tax assets ................. $ 4,066 $ 3,745 ================================================================
10. Earnings Per Share The following is a reconciliation of the average shares of common stock used to compute basic earnings per share to the shares used to compute diluted earnings per share as shown on the Consolidated Statements of Income for the years ended December 31:
1997 1996 1995 ------------------------------------------------------------------------------ Average shares of common stock outstanding used to compute basic earnings per share . 6,509,083 6,538,279 6,525,042 Dilutive effect of stock options ......... 126,751 19,710 42,024 ------------------------------------------------------------------------------ Average shares of common stock outstanding used to compute diluted earnings per share 6,635,834 6,557,989 6,567,066 Net income per share: Basic .................................... $ .84 $ .60 $ .25 Diluted .................................. .83 .60 .25 ==============================================================================
11. Defined Benefit Pension Plans Prior to January 1, 1997, the Company had two defined benefit pension plans, the Momentum Retirement Plan (the "Momentum Plan") and the PrimeSource Pension Plan (the "PrimeSource Plan"). The Momentum Retirement Plan covered substantially all of the employees who were employed by Momentum Corporation on September 1, 1994, the date Momentum Corporation merged with the Company. Effective January 1, 1997, this plan was merged into the PrimeSource Plan. The PrimeSource Plan, which previously covered substantially all of the employees not covered by the Momentum Plan, effective with the merger of the Momentum Plan, covers substantially all of the employees of the Company. Benefits under the plans are generally based on the employees' years of service and compensation during the years preceding retirement. Contributions to the plans are based on funding standards established by the Employee Retirement Income Security Act of 1974. The components of the net pension expense for both plans combined for the years ended December 31, 1996 and 1995 and for the merged plan for the year ended December 31, 1997 were:
(Thousands of dollars) 1997 1996 1995 ------------------------------------------------------------------------------- Service cost of benefits earned during the year $ 728 $ 1,000 $ 732 Interest cost on projected benefit obligation . 1,734 1,718 1,572 Actual return on plan assets ................. (5,272) (3,082) (5,118) Net amortization and deferral ................. 2,620 821 3,297 ------------------------------------------------------------------------------- Net pension expense(benefit) .................. $ (190) $ 457 $ 483 ===============================================================================
The plans' funded status and the amounts recognized in the Company's Consolidated Balance Sheets at December 31 were:
PrimeSource Momentum Plan Plan --------------------- --------- (Thousands of dollars) 1997 1996 1996 --------------------------------------------------------------------------------------- Actuarial present value of plan benefit obligations: Vested ............................................. $ 22,811 $ 5,931 $ 15,424 Non-vested ......................................... 663 74 361 --------------------------------------------------------------------------------------- Accumulated benefit obligation ..................... 23,474 6,005 15,785 Effect of future salary increases .................. 3,215 1,565 753 --------------------------------------------------------------------------------------- Projected benefit obligation ....................... 26,689 7,570 16,538 Plan assets at fair value .......................... 30,507 6,295 19,591 --------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation ....................... 3,818 (1,275) 3,053 Unrecognized prior service cost .................... (200) (205) Unrecognized gain .................................. (5,096) (356) (2,903) --------------------------------------------------------------------------------------- Net pension asset (liability) ...................... $ (1,478) $ (1,836) $ 150 =======================================================================================
The actuarial present value of benefits and projected benefit obligations were determined using a discount rate of 7%, 7.75% and 7.25% for the years ending December 31, 1997, 1996 and 1995, respectively. The expected long-term rate of return on assets was 10% and the rate of compensation increase used to measure the projected benefit obligation was 4%. The plan's assets are invested in undivided interests in several funds structured to duplicate the performance of various stock and bond indexes. 12. Defined Contribution Pension Plans The Company sponsors a number of defined contribution pension plans in the form of IRC 401(k) plans. Participation in one of these plans is available to substantially all employees. Company contributions to these plans are based on a percentage of the employee contributions not to exceed certain maximum levels. The cost of these plans was $296,000, $220,000 and $222,000 for the years 1997, 1996, and 1995, 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") which primarily covers retirees and employees who previously participated in the TBC Retiree Medical Plan, and the Momentum Retiree Medical Plan (the "Momentum Retiree Plan), which primarily covers retirees and employees who were previously employed by Momentum Corporation prior to the merger with the Company in 1994. Both plans provide health care benefits through a health care administrator and contracts with health service providers. In addition, the P/J Retiree Plan provides life insurance benefits through an insurance company. The Company life insurance premium contribution is limited to $20,000 of coverage per retiree, with the retiree paying the premium for any coverage beyond the $20,000. The Company's policy is to fund the plans as benefits are paid. The plans are contributory with ceilings on the Company's contribution. In addition, under the Momentum Retiree Plan, employees who were under the age of 55 on December 31, 1992 receive no contribution from the Company under the plan. Net postretirement benefit expense (benefit) for the years ended December 31 included the following components:
(Thousands of dollars) 1997 1996 1995 ------------------------------------------------------------------------- Service cost of benefits earned during the year $ 16 $ 17 $ 19 Interest cost on projected benefit obligation . 89 86 106 Amortization of net gain ...................... (103) (107) (100) ------------------------------------------------------------------------- Net expense (benefit) ......................... $ 2 $ (4) $ 25 =========================================================================
The plans' funded status and the amounts recognized in the Company's Consolidated Balance Sheets at December 31 were:
(Thousands of dollars) 1997 1996 ------------------------------------------------------------------ Actuarial present value of benefit obligations: Fully eligible plan participants ............ $ (169) $ (146) Other active plan participants .............. (89) (76) Retirees and vested terminated employees .... (902) (830) ------------------------------------------------------------------ Accumulated postretirement benefit obligation (1,160) (1,052) Unrecognized net gain ....................... (788) (1,103) ------------------------------------------------------------------ Postretirement benefit liability ............ $(1,948) $(2,155) ==================================================================
The accumulated postretirement benefit obligation was determined using a discount rate of 7.00%, 7.75% and 7.25% for the years ending December 31, 1997, 1996 and 1995, respectively. The health care cost trend rates used were 7.67% (7.18% for health maintenance organizations(HMO's)), 8.12% (7.45% for HMO's), and 8.56% (7.73% for HMO's) for the years 1997, 1996, and 1995, respectively, gradually declining to 5% in 2003 (2005 for HMO's) and remaining at that level thereafter. 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. Incentive Stock Awards 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 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 or its subsidiaries terminates. Changes in options outstanding for the three years ended December 31, 1997 are:
Option Prices ------------------------- Weighted Options Average Range ----------------------------------------------------------------------- Outstanding at January 1, 1995 . 380,297 $ 10.35 $ 5.92-13.03 ----------------------------------------------------------------------- Granted ........................ 65,350 6.11 6.11 Exercised ...................... (3,195) 6.34 6.34 Canceled ....................... (19,009) 10.07 6.34-12.32 ----------------------------------------------------------------------- Outstanding at December 31, 1995 423,443 9.74 5.92-13.03 ----------------------------------------------------------------------- Granted ........................ 344,756 6.30 6.11- 6.97 Canceled ....................... (303,350) 11.04 5.92-13.03 ----------------------------------------------------------------------- Outstanding at December 31, 1996 464,849 6.34 6.11- 8.06 ----------------------------------------------------------------------- Granted ........................ 56,500 11.18 11.18 Exercised ...................... (15,853) 6.15 6.11- 6.97 Canceled ....................... (7,115) 6.15 6.11- 6.97 ----------------------------------------------------------------------- Outstanding at December 31, 1997 498,381 $ 6.89 $ 6.11-11.18 =======================================================================
At December 31, 1997, there were 248,513 options exercisable with a weighted-average option price of $6.40 and a range from $6.11 to $8.06, and 93,000 options available for grant. The weighted-average remaining contractual life of outstanding options at December 31, 1997 and 1996 was 7.7 and 8.3 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 earnings 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) 1997 1996 1995 ---------------------------------------------------------- Net Income: As reported ............. $ 5,491 $ 3,914 $ 1,646 Pro forma ............... 5,360 3,813 1,631 ========================================================== Earnings Per Share: As reported Basic ................. $ .84 $ .60 $ .25 Diluted ............... .83 .60 .25 Pro forma Basic ................. .82 .58 .25 Diluted ............... .81 .58 .25 ==========================================================
The weighted-average fair value per share for options granted was $5.23, $2.51 and $1.92 for 1997, 1996 and 1995, respectively. The fair value was estimated using the Black-Scholes option-pricing model. For options granted in 1997, a dividend yield rate of 1.6%, expected stock volatility of 45%, expected option life of seven years and risk-free interest rate of 5.8% were used in estimating the value. For options granted in 1996, a dividend yield rate of 2.6%, expected stock volatility of 37%, expected option life of seven years and risk-free interest rate of 6.75% were used in estimating the value. For options granted in 1995, a dividend yield rate of 2.9%, expected stock volatility of 34%, expected option life of seven years and risk-free interest rate of 5.5% 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 which is amortized to operations over the restriction period. At December 31, 1997, all awards were fully amortized and an additional 61,880 shares were available for future awards. 15. Leases The Company leases certain distribution and office facilities, machinery and equipment, and automotive equipment under various noncancelable lease agreements. The Company expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. Minimum annual rentals payable under noncancelable operating leases with a remaining term of more than one year from December 31, 1997 are as follows:
Years Ending December 31, (Thousands of dollars) ---------------------------------------------- 1998 ......................... $1,959 1999 ......................... 1,445 2000 ......................... 725 2001 ......................... 229 2002 ......................... 233 Thereafter ................... 33 ----------------------------------------------- Total minimum lease payments $4,694 ===============================================
Rent expense, net of noncancelable sublease income of none, $5,000 and $98,000 in 1997, 1996, and 1995, respectively, was $2,219,000, $2,182,000 and $2,382,000 for 1997, 1996, and 1995, respectively. The Company leases a distribution facility from two employees. Rent expense incurred in connection with this lease was $65,000, $63,000 and $60,000 in 1997, 1996, and 1995, respectively. 16. Restructure Expense The Company recognized a restructuring expense of $1,315,000 in 1995 relating to the consolidation of five distribution centers, the realignment of two others, and the centralization of certain financial and information services. The expense consisted of $875,000 for employee severance compensation and $440,000 for costs associated with the closure of facilities. Except for continuing lease commitments for closed facilities, which fully terminated in 1997, substantially all of the costs were paid in 1995. 17. New Accounting Standards In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This Statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 is not expected to have any impact on the Company's consolidated results of operations, financial position or cash flows. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Standard establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 is not expected to have any impact on the Company's consolidated results of operations, financial position or cash flows. 18. Commitments and Contingencies The Company is subject to various legal proceedings and claims which have arisen in the ordinary course of its business. The Company does not believe that the ultimate resolution of such matters will have a material effect on the Company's consolidated financial position or results of operations. The Company has a commitment to purchase certain inventory from a supplier through December 1999. This commitment is not expected to surpass usage requirements through this period. The Company, along with many other potentially responsible parties, is a defendant in declaratory actions to determine the allocation of costs for the investigation and remediation of two Superfund cleanup sites. The Company believes its insurance will cover any costs incurred in these two matters. The Company is also, in general, subject to possible loss contingencies pursuant to federal or state environmental laws and regulations. Although these contingencies could result in future expenses or judgments, such expenses or judgments are not expected to have a material effect on the Company's consolidated financial position or results of operations. 19. Quarterly Financial Information (unaudited) Summarized unaudited quarterly financial data for the years ended December 31, 1997 and 1996 are:
(Thousands of dollars except per share data) First Second Third Fourth Total ----------------------------------------------------------------------------------------- Year Ended December 31, 1997 (1) Net sales ...................... $103,388 $103,170 $102,462 $ 105,847 $ 414,867 Gross profit ................... 18,303 18,407 18,279 16,762 71,751 Net income ..................... 1,105 1,176 1,233 1,977 5,491 Net income per share Basic ........................ $ .17 $ .18 $ .19 $ .30 $ .84 Diluted ...................... .17 .18 .19 .29 .83 Year Ended December 31, 1996 (2) Net sales ...................... $ 86,959 $ 87,898 $ 89,344 $ 102,456 $ 366,657 Gross profit ................... 15,182 15,576 16,062 18,409 65,229 Net income ..................... 829 916 924 1,245 3,914 Net income per share Basic ........................ $ .13 $ .14 $ .14 $ .19 $ .60 Diluted ...................... $ .13 $ .14 $ .14 $ .19 $ .60 (1) Income for the quarter and year ended December 31, 1997, includes $2,300,000 ($1,381,000 after tax) write-down of electronics inventory to market, $3,658,000 ($2,183,000 after tax) gain on the sale of a capital lease and $401,000 ($241,000 after tax) loss on a business divestiture. (2) The operations of the VGC acquisition are included from the August 1996 acquisition date for the St. Louis branch and the November 1996 acquisition date for the Minneapolis, Milwaukee, Des Moines and Omaha branches.
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of PrimeSource Corporation We have audited the accompanying consolidated balance sheets of PrimeSource Corporation and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. These financial statements and this financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and this financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PrimeSource Corporation and its subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 20, 1998 PART III. 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, 1998, 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, 1998. 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, 1998. 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, 1998. 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, 1997. 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, 1997 Allowance for doubtful accounts $ 1,787 $ 694 $ $ (568)(E) $ 1,913 Amortization of goodwill 1,102 333 1,435 Inventory reserves 3,172 2,602 (137)(A) (973)(F) 4,664 - -------------------------------------------------------------------------------------------------------------- 6,061 3,629 (137) (1,541) 8,012 - -------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1996 Allowance for doubtful accounts $ 1,372 $ 865 $ (450)(E) $ 1,787 Amortization of goodwill 825 316 (39)(B) 1,102 Inventory reserves 1,752 364 $ 1,754 (C) (698)(F) 3,172 - -------------------------------------------------------------------------------------------------------------- 3,949 1,545 1,715 (1,148) 6,061 - -------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1995 Allowance for doubtful accounts $ 1,457 $ 1,090 $ (1,175)(E) $ 1,372 Amortization of goodwill 519 306 825 Inventory reserves 1,563 561 624 (D) (996)(F) 1,752 - -------------------------------------------------------------------------------------------------------------- 3,539 1,957 624 (2,171) 3,949 - -------------------------------------------------------------------------------------------------------------- (A) Reserve disposed of with the sale of the pressroom material converting operation. (B) Reserve disposed of with the sale of the assets of Onandaga Litho Supply, Inc. (C) Related to the acquisition of VGC Corporation's branch operations in St. Louis, Missouri; Minneapolis, Minnesota; Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha, Nebraska. (D) Related to the merger with Momentum Corporation. (E) Doubtful accounts written off, net of any recoveries. (F) The disposal of obsolete inventory, net of any recoveries.
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 25, 1998 /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 25, 1998 /s/ William A. DeMarco William A. DeMarco Vice President, Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date - ------------------------------- ----------------------------- --------------- /s/ Richard E. Engebrecht Chairman of the Board and March 3, 1998 Richard E. Engebrecht Director of PrimeSource Corporation /s/ Fred C. Aldridge, Jr. Director of PrimeSource March 3, 1998 Fred C. Aldridge, Jr. Corporation /s/ Philip J. Baur, Jr. Director of PrimeSource March 3, 1998 Philip J. Baur, Jr. Corporation /s/ John H. Goddard, Jr. Executive Vice President and March 3, 1998 John H. Goddard, Jr. Director of PrimeSource Corporation /s/ Gary MacLeod Director of PrimeSource March 3, 1998 Gary MacLeod Corporation /s/ James F. Mullan President, Chief Executive March 3, 1998 James F. Mullan Officer and Director of PrimeSource Corporation /s/ Klaus D. Oebel Director of PrimeSource March 3, 1998 Klaus D. Oebel Corporation /s/ Edward N. Patrone Director of PrimeSource March 3, 1998 Edward N. Patrone Corporation /s/ John M. Pettine Director of PrimeSource March 3, 1998 John M. Pettine Corporation
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) (3.1) Amended and Restated Articles of Incorporation of the Registrant (filed as Annex C to the Proxy/Prospectus included within registration statement No. 33-54913 on Form S-4 filed by the Registrant on August 4, 1994) (3.2) Amended and Restated By-laws of the Registrant (filed as Annex D to the Proxy/Prospectus included within registration statement No. 33-54913 on Form S-4 filed by the Registrant on August 4, 1994) (3.3) Amendment to Amended and Restated By-laws of the Registrant effective May 7, 1997. (filed as Exhibit 10.18 to Form 10-K, File No. 0-21750, dated March 28, 1997) (4.1) Form of Common Stock Certificate (filed with Form 10 filed by Registrant on May 12, 1993, (File No. 0-21750 and as subsequently amended on Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993) (4.2) Form of Common Stock Certificate, effective September 1, 1994 (filed as Exhibit 4.2 to Form 10-K, File No. 0-21750, dated March 30, 1995) (10.1) Form of Phillips & Jacobs, Inc. 1993 Long Term Incentive Plan (filed as Exhibit 10.1 to Form 10-K, File No. 0-21750, dated March 30, 1995) (10.2) Form of Phillips & Jacobs, Incorporated Indemnification Agreement (filed with Form 10 filed by Registrant on May 12, 1993, (File No. 0-21750) and as subsequently amended on Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993)* (10.3) Form of Supplemental Executive Retirement Plan Agreement (filed with Form 10 filed by Registrant on May 12, 1993, (File No. 0-21750) and as subsequently amended on Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993)* (10.4) Employment Agreement between Phillips & Jacobs, Incorporated and D.M. Zewiske dated July 1, 1988 (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)* (10.5) 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)* (10.6) 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)* (10.7) 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) (10.8) 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)* (10.9) 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)* (10.10) Phillips & Jacobs, Incorporated 401(k) Savings Plan and Trust Agreement (filed as Exhibit 10.14 to Form 10-K, File No. 0-21750, dated March 28, 1994)* (10.11) 1989 Long-Term Incentive Stock Plan (filed with Registration Statement on Form S-8 on December 8, 1994, File No. 33-87360)* (10.12) 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)* (10.13) Momentum Retirement Plan (filed as Exhibit 10.18 to Form 10-K, File No. 0-21750, dated March 30, 1995)* (10.14) Employment Agreement between the Registrant and John H. Goddard, Jr. dated December 24, 1996.* (10.15) 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)* (10.16) PrimeSource Corporation Pension Plan (filed as Exhibit 10.23 to Form 10-K, File No. 0-21750, dated March 26, 1996)* (10.17) Orlando, FL facility lease dated March 31, 1986 and August 14, 1995 Lease Extension between the Registrant and Dennis M. Zewiske as co-lessor (filed as Exhibit 10.25 to Form 10-K, File No. 0-21750, dated March 26, 1996)* (10.18) 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) 10.19 Employment Agreement between the Registrant and Edward Padley dated December 31, 1997.* 10.20 Employment Agreement between the Registrant and D. James Purcell dated December 31, 1997.* 21.1 Subsidiaries of the Registrant 23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants 27 Financial Data Schedule for the year ended December 31, 1997 27.1 Restated Financial Data Schedule for the quarter ended March 31, 1997 27.2 Restated Financial Data Schedule for the quarter ended June 30, 1997 27.3 Restated Financial Data Schedule for the quarter ended September 31, 1997 27.4 Restated Financial Data Schedule for the year ended December 31, 1996 27.5 Restated Financial Data Schedule for the quarter ended March 31, 1996 27.6 Restated Financial Data Schedule for the quarter ended June 30, 1996 27.7 Restated Financial Data Schedule for the quarter ended September 30, 1996 99.1 Undertakings *Management contracts and/or compensatory plans, contracts or arrangements in which a director and/or a named executive officer participates. EX-10.14 2 EMPLOYMENT AGREEMENT - JOHN H. GODDARD, JR. AGREEMENT AGREEMENT made December 24, 1996, between PrimeSource Corporation, a Pennsylvania corporation (the "Company") and John H. Goddard ("Executive"). WHEREAS, Executive is the duly elected Executive Vice President of the Company and has made and is currently making a significant contribution to the Company's business; WHEREAS, the Board of Directors (the "Board") of the Company believe that the continued services of Executive will be of great value and importance to the Company and are desirous of ensuring the continuation of Executive's services for a period of time; and WHEREAS, Executive is willing to enter into an agreement with the Company upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants herein contained and of the mutual benefits herein provided, and intending to be legally bound hereby, the Company and Executive hereby agree as follows: 1. Term of Employment. The Company hereby employs Executive as Executive Vice President and Executive accepts such employment by the Company on the terms and conditions herein contained for a period commencing as of the date hereof and subject to termination only as hereinafter provided (the period from the date hereof through termination as hereinafter provided is referred to as the "Employment Period"). 2. Duties. During the Employment Period, Executive shall have such duties, responsibility and authority and perform such services for the Company as are consistent with Executive's background, training and experience as may from time to time be assigned to Executive by the Board or the Chief Executive Officer of the Company. 3. Compensation. (a) Commencing as of the date hereof and thereafter during the Employment Period, the Company shall pay Executive a base salary at the annual rate of no less than $200,000, which amount may be increased from time to time in accordance with the Company's policies regarding general increases and at the discretion of the Board. Payment shall be made in accordance with the Company's regular practice for senior executive employees as in effect from time to time. (b) In addition to the Executive's base salary, Executive shall be entitled to participate in the normal course of business in the annual executive bonus program(s) of the Company and to receive such bonus payments as are customarily granted for the purposes of providing additional compensation to senior executives. (c) A change-of-control of the Company is defined to be any of the following: (a) the effective date of a Major Transaction which is subject to and satisfies the special voting requirement set forth in Article VIII of the Company's Amended and Restated Articles of Incorporation ("Articles"), (b) the completion of a tender or exchange offer for Voting Stock (other than a tender offer by the Company) which is accepted by the holders of 51% of the Voting Power of the outstanding Voting Stock, (c) the effective date of a merger, consolidation, or dissolution in which the Company is not the surviving entity, or (d) the date on which there is a "Significant Change" in the membership of the Company's Board occurring by the third annual meeting after the effective date of a merger, consolidation, reorganization or a Major Transaction or the date on which any Person becomes a 15% shareholder (each of which is referred to as a "Significant Event"). A Significant Change in the Board shall be deemed to have occurred if one-third or more of the directors are individuals who (i) are or were Affiliates or Associates of the 15% shareholder or any party to the Significant Event and (ii) were not Affiliates or Associates of the Company prior to the Significant Event. A sale or series of sales or other disposition of a subsidiary, division or other operating units, or the assets thereof, not constituting a sale of substantially all of the assets of the Company, shall not constitute a change-of-control. The definitions for Affiliates, Associates, Major Transaction, Person, Voting Stock, and Voting Power are set out in Article VII of the Articles. In the event of a change-of-control, as defined in the prior paragraph, and the termination of the Executive's employment, the Executive shall be entitled to the continuation of his compensation and benefits for a total of two (2) years from the date of such termination of employment at the rates set out in 3(a) and (b) above, payable in equal payments at least monthly. A termination of employment entitling the Executive to a continuation of compensation as set out in this Section 3 shall be deemed to have occurred upon any resignation or termination of the Executive's employment for any reason other than Cause as defined in Section 5 (a) below during the two year period commencing with the effective time of the first change-of-control event. For example, if the change-of-control event occurred on March 1, 1997 and the Executive voluntarily left the Company's employ on September 15, 1997, then he would continue to receive payments from the Company each month through September 15, 1999 equal to one twelfth (1/12) of the greater of (a) the Executive's total compensation (salary plus bonus) for the prior calendar year or (b) the average annual compensation (salary plus bonus) of the Executive for the prior two calendar years. For calculation purposes, the bonus shall apply to the year for which it was earned, which may not be the year in which it was actually paid. Notwithstanding the foregoing, Executive shall not be entitled to such continuation of compensation for any period after he (a) reaches age 66, (b) dies, (c) is disabled and eligible to receive disability payments under the Company's long term disability plan, or in the case of a termination not preceeded by a change-of-control within the prior two years, (d) voluntarily retires from the Company. In addition to continuation of salary and bonus referenced above, for the said two year period the Company shall also continue the Executive's normal fringe benefits to the extent reasonably possible and shall fairly compensate the Executive for the value of any fringe benefits it can not reasonably continue. In the event of a change-of-control and termination of employment, all stock options held by the Executive shall be fully vested and immediately exercisable during the normal post-employment option exercise period as set out in the applicable stock option plan (but in no event for less than 90 days after the employment relationship terminates). 4. Additional Terms. (a) The Company will reimburse Executive for all reasonable expenses properly incurred by Executive in the performance of Executive's duties hereunder in accordance with established practices for senior executives of the Company. (b) During the Employment Period, Executive shall be entitled to participate, in accord with the terms thereof, in any present of future bonus, insurance, pension, SERP, Thrift, ESOP, stock option, or other employee benefit, compensation or incentive plan adopted by the Company and applicable to senior executives generally. 5. Termination of Employment. (a) The Employment Period shall cease and terminate upon the earliest to occur of the events specified below: (i) The first anniversary of receipt of written notice by Executive from the Company of the Company's intent to terminate this Agreement. (ii) The death of Executive. If Executive dies during the term of this Agreement, Executive's salary for 30 days after the date on which death occurs shall be paid to Executive's estate. (iii) The normal retirement date of Executive or upon Executive's election of early retirement. (iv) Termination of Executive's employment for Cause. For these purposes "Cause" for termination of Executive shall be limited to actions by Executive involving willful malfeasance or gross negligence or failure to act by Executive involving willful and material nonfeasance which, at the time of such willful malfeasance or gross negligence or willful and material nonfeasance, would tend to have a materially adverse effect on the Company. Bad judgment or negligence shall not constitute Cause nor shall any act or omission reasonably believed by the Executive to have been in, or not opposed to, the interests of the Company. (b) In the event that Executive becomes "totally disabled" within the meaning of the Company's Long Term Disability Plan, the Employment Period shall be suspended (to resume following suspension unless otherwise terminated under 5(a) above) during any period in which Executive is entitled to receive long term disability payments under the Plan and, during such period of suspension, Executive shall be entitled to the same benefits that any other employee of the Company would enjoy under the Long Term Disability Plan. (c) Except as to rights which have accrued hereunder, this Agreement and all of the liabilities and obligations of the parties hereunder shall cease and terminate effective upon the termination of the Employment Period. (d) If (i) Executive's employment hereunder is terminated by the Company other than pursuant to Section 5(a) hereof, (ii) Executive terminates his employment hereunder because his authority, duties or responsibilities are altered so as to be inconsistent with Executive's background, training and experience, or (iii) the Executive terminates his employment hereunder because of the Company's continued failure to perform its obligations hereunder, then the Executive shall be entitled to receive, in addition to any other damages which Executive may suffer as a direct or indirect result of the termination of Executive's employment by the Company, the compensation and benefits which would otherwise have been payable to Executive under Section 3 hereof through the remaining balance of the Employment Period which would have pertained had the Company given Executive notice of intent to terminate this Agreement on the date Executive's employment ceases, as provided in Section 5(a) (i) above. 6. Non-Competition and Confidentiality. The Executive agrees that: (a) The Company shall cease providing payments hereunder (other than payments already earned or accrued) if, during the compensation period, the Executive shall be employed by or otherwise engage in any business which is competitive with any business of the Company, and (b) during and after the compensation period, the Executive will not divulge or appropriate to the Executive's own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company. Executive agrees that the above covenant not to compete is fair and reasonably necessary for the protection of the Company's confidential information and business. In the event a court should decline to enforce any part of this covenant, such covenant shall be deemed to be modified to restrict Executive's competition with the Company to the maximum extent which the court shall find enforceable. The Board has determined, in its best judgment, that the payments to the Executive hereunder are reasonable consideration for not competing as defined in (a) and for maintaining the confidentiality of information as provided for in (b) above. 7. Assignment. This Agreement shall not be assignable by the Company except to a majority-owned subsidiary or parent entity of the Company or to a successor to the Company and its business by way of merger, acquisition, purchase of assets or otherwise and this Agreement is and shall be binding upon and inure to the benefit of any such parent, subsidiary or successor. This Agreement shall not be assignable by Executive but it shall be binding upon and inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 8. Notices. All notices, requests, demands and other communications hereunder must be in writing and shall be deemed to have been given if delivered by hand or mailed by first class, certified or registered mail, return receipt requested, postage and registry fees prepaid, and addressed as follows: To the Company: President PrimeSource Corporation 4350 Haddonfield Road, Suite 222 Pennsauken, NJ 08109-3377 To the Executive: John H. Goddard 2600 Fairview East Floating Home #722 Seattle, WA 98102 Addresses may be changed by notice in writing to the other party. 9. Arbitration. Any dispute or disagreement arising between the parties hereto with respect to this Agreement or its validity, construction or performance shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association as amended from time to time. The cost of arbitration shall be borne by the Company. Each party shall, however, bear the cost of preparing and presenting its own case, including counsel fees and expenses. Judgment upon the award of arbitrators may be entered by either party in any court having jurisdiction. 10. Miscellaneous. This Agreement is the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings, oral or written, relating to the subject matter hereof, and no change, alteration or modification hereof may be made except in writing signed by both parities hereto. The headings in this Agreement are for convenience of reference only and shall not be considered as part of this Agreement nor limit or otherwise affect the meaning hereof. This Agreement shall in all respects be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. ATTEST: PRIMESOURCE CORPORATION - ----------------------------- ------------------------------ Corporate Secretary President and Chief Executive Officer ------------------------------ John H. Goddard EX-10.19 3 EMPLOYMENT AGREEMENT - EDWARD PADLEY AGREEMENT AGREEMENT made December 31, 1997, between PrimeSource Corporation, a Pennsylvania corporation (the "Company") and Edward Padley ("Executive"). WHEREAS, Executive is the duly elected Vice President and General Manager of Prime Distribution West and has made and is currently making a significant contribution to the Company's business; WHEREAS, the Board of Directors (the "Board") of the Company believe that the continued services of Executive will be of great value and importance to the Company and are desirous of ensuring the continuation of Executive's services for a period of time; and WHEREAS, Executive is willing to enter into an agreement with the Company upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants herein contained and of the mutual benefits herein provided, and intending to be legally bound hereby, the Company and Executive hereby agree as follows: 1. Term of Employment. The Company hereby employs Executive as Vice President and General Manager and Executive accepts such employment by the Company on the terms and conditions herein contained for a period commencing as of the date hereof and subject to termination only as hereinafter provided (the period from the date hereof through termination as hereinafter provided is referred to as the "Employment Period"). 2. Duties. During the Employment Period, Executive shall have such duties, responsibility and authority and perform such services for the Company as are consistent with Executive's background, training and experience as may from time to time be assigned to Executive by the Board or the Chief Executive Officer of the Company. 3. Compensation. (a) Commencing as of the date hereof and thereafter during the Employment Period, the Company shall pay Executive a base salary at the annual rate of no less than $135,000, which amount may be increased from time to time in accordance with the Company's policies regarding general increases and at the discretion of the Board. Payment shall be made in accordance with the Company's regular practice for senior executive employees as in effect from time to time. (b) In addition to the Executive's base salary, Executive shall be entitled to participate in the normal course of business in the annual executive bonus program(s) of the Company and to receive such bonus payments as are customarily granted for the purposes of providing additional compensation to senior executives. (c) A change-of-control of the Company is defined to be any of the following: (a) the effective date of a Major Transaction which is subject to and satisfies the special voting requirement set forth in Article VIII of the Company's Amended and Restated Articles of Incorporation ("Articles"), (b) the completion of a tender or exchange offer for Voting Stock (other than a tender offer by the Company) which is accepted by the holders of 51% of the Voting Power of the outstanding Voting Stock, (c) the effective date of a merger, consolidation, or dissolution in which the Company is not the surviving entity, or (d) the date on which there is a "Significant Change" in the membership of the Company's Board occurring by the third annual meeting after the effective date of a merger, consolidation, reorganization or a Major Transaction or the date on which any Person becomes a 15% shareholder (each of which is referred to as a "Significant Event"). A Significant Change in the Board shall be deemed to have occurred if one-third or more of the directors are individuals who (i) are or were Affiliates or Associates of the 15% shareholder or any party to the Significant Event and (ii) were not Affiliates or Associates of the Company prior to the Significant Event. A sale or series of sales or other disposition of a subsidiary, division or other operating units, or the assets thereof, not constituting a sale of substantially all of the assets of the Company, shall not constitute a change-of-control. The definitions for Affiliates, Associates, Major Transaction, Person, Voting Stock, and Voting Power are set out in Article VII of the Articles. In the event of a change-of-control, as defined in the prior paragraph, and the termination of the Executive's employment, the Executive shall be entitled to the continuation of his compensation and benefits for a total of two (2) years from the date of such termination of employment at the rates set out in 3(a) and (b) above, payable in equal payments at least monthly. A termination of employment entitling the Executive to a continuation of compensation as set out in this Section 3 shall be deemed to have occurred upon any resignation or termination of the Executive's employment for any reason other than Cause as defined in Section 5 (a) below during the two year period commencing with the effective time of the first change-of-control event. For example, if the change-of-control event occurred on March 1, 1998 and the Executive voluntarily left the Company's employ on September 15, 1998, then he would continue to receive payments from the Company each month through September 15, 2000 equal to one twelfth (1/12) of the greater of (a) the Executive's total compensation (salary plus bonus) for the prior calendar year or (b) the average annual compensation (salary plus bonus) of the Executive for the prior two calendar years. For calculation purposes, the bonus shall apply to the year for which it was earned, which may not be the year in which it was actually paid. Notwithstanding the foregoing, Executive shall not be entitled to such continuation of compensation for any period after he (a) reaches age 66, (b) dies, (c) is disabled and eligible to receive disability payments under the Company's long term disability plan, or in the case of a termination not preceeded by a change-of-control within the prior two years, (d) voluntarily retires from the Company. In addition to continuation of salary and bonus referenced above, for the said two year period the Company shall also continue the Executive's normal fringe benefits to the extent reasonably possible and shall fairly compensate the Executive for the value of any fringe benefits it can not reasonably continue. In the event of a change-of-control and termination of employment, all stock options held by the Executive shall be fully vested and immediately exercisable during the normal post-employment option exercise period as set out in the applicable stock option plan (but in no event for less than 90 days after the employment relationship terminates). 4. Additional Terms. (a) The Company will reimburse Executive for all reasonable expenses properly incurred by Executive in the performance of Executive's duties hereunder in accordance with established practices for senior executives of the Company. (b) During the Employment Period, Executive shall be entitled to participate, in accord with the terms thereof, in any present or future bonus, insurance, pension, Thrift, ESOP, stock option, or other employee benefit, compensation or incentive plan adopted by the Company and applicable to senior executives generally. 5. Termination of Employment. (a) The Employment Period shall cease and terminate upon the earliest to occur of the events specified below: (i) The first anniversary of receipt of written notice by Executive from the Company of the Company's intent to terminate this Agreement. (ii) The death of Executive. If Executive dies during the term of this Agreement, Executive's salary for 30 days after the date on which death occurs shall be paid to Executive's estate. (iii) The normal retirement date of Executive or upon Executive's election of early retirement. (iv) Termination of Executive's employment for Cause. For these purposes "Cause" for termination of Executive shall be limited to actions by Executive involving willful malfeasance or gross negligence or failure to act by Executive involving willful and material nonfeasance which, at the time of such willful malfeasance or gross negligence or willful and material nonfeasance, would tend to have a materially adverse effect on the Company. Bad judgment or negligence shall not constitute Cause nor shall any act or omission reasonably believed by the Executive to have been in, or not opposed to, the interests of the Company. (b) In the event that Executive becomes "totally disabled" within the meaning of the Company's Long Term Disability Plan, the Employment Period shall be suspended (to resume following suspension unless otherwise terminated under 5(a) above) during any period in which Executive is entitled to receive long term disability payments under the Plan and, during such period of suspension, Executive shall be entitled to the same benefits that any other employee of the Company would enjoy under the Long Term Disability Plan. (c) Except as to rights which have accrued hereunder, this Agreement and all of the liabilities and obligations of the parties hereunder shall cease and terminate effective upon the termination of the Employment Period. (d) If (i) Executive's employment hereunder is terminated by the Company other than pursuant to Section 5(a) hereof, (ii) Executive terminates his employment hereunder because his authority, duties or responsibilities are altered so as to be inconsistent with Executive's background, training and experience, or (iii) the Executive terminates his employment hereunder because of the Company's continued failure to perform its obligations hereunder, then the Executive shall be entitled to receive, in addition to any other damages which Executive may suffer as a direct or indirect result of the termination of Executive's employment by the Company, the compensation and benefits which would otherwise have been payable to Executive under Section 3 hereof through the remaining balance of the Employment Period which would have pertained had the Company given Executive notice of intent to terminate this Agreement on the date Executive's employment ceases, as provided in Section 5(a) (i) above. 6. Non-Competition and Confidentiality. The Executive agrees that: (a) The Company shall cease providing payments hereunder (other than payments already earned or accrued) if, during the compensation period, the Executive shall be employed by or otherwise engage in any business which is competitive with any business of the Company, and (b) during and after the compensation period, the Executive will not divulge or appropriate to the Executive's own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company. Executive agrees that the above covenant not to compete is fair and reasonably necessary for the protection of the Company's confidential information and business. In the event a court should decline to enforce any part of this covenant, such covenant shall be deemed to be modified to restrict Executive's competition with the Company to the maximum extent which the court shall find enforceable. The Board has determined, in its best judgment, that the payments to the Executive hereunder are reasonable consideration for not competing as defined in (a) and for maintaining the confidentiality of information as provided for in (b) above. 7. Assignment. This Agreement shall not be assignable by the Company except to a majority-owned subsidiary or parent entity of the Company or to a successor to the Company and its business by way of merger, acquisition, purchase of assets or otherwise and this Agreement is and shall be binding upon and inure to the benefit of any such parent, subsidiary or successor. This Agreement shall not be assignable by Executive but it shall be binding upon and inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 8. Notices. All notices, requests, demands and other communications hereunder must be in writing and shall be deemed to have been given if delivered by hand or mailed by first class, certified or registered mail, return receipt requested, postage and registry fees prepaid, and addressed as follows: To the Company: President PrimeSource Corporation 4350 Haddonfield Road, Suite 222 Pennsauken, NJ 08109-3377 To the Executive: Edward Padley 1314 Marguette Ave. #2502 Minneapolis, MN 55403 Addresses may be changed by notice in writing to the other party. 9. Arbitration. Any dispute or disagreement arising between the parties hereto with respect to this Agreement or its validity, construction or performance shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association as amended from time to time. The cost of arbitration shall be borne by the Company. Each party shall, however, bear the cost of preparing and presenting its own case, including counsel fees and expenses. Judgment upon the award of arbitrators may be entered by either party in any court having jurisdiction. 10. Miscellaneous. This Agreement is the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings, oral or written, relating to the subject matter hereof, and no change, alteration or modification hereof may be made except in writing signed by both parities hereto. The headings in this Agreement are for convenience of reference only and shall not be considered as part of this Agreement nor limit or otherwise affect the meaning hereof. This Agreement shall in all respects be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. ATTEST: PRIMESOURCE CORPORATION - ----------------------------- ------------------------------ Corporate Secretary President and Chief Executive Officer ------------------------------ Edward Padley EX-10.20 4 EMPLOYMENT AGREEMENT - D. JAMES PURCELL AGREEMENT AGREEMENT made December 31, 1997, between PrimeSource Corporation, a Pennsylvania corporation (the "Company") and Donald James Purcell ("Executive"). WHEREAS, Executive is the duly elected Vice President and General Manager of Prime Distribution East and has made and is currently making a significant contribution to the Company's business; WHEREAS, the Board of Directors (the "Board") of the Company believe that the continued services of Executive will be of great value and importance to the Company and are desirous of ensuring the continuation of Executive's services for a period of time; and WHEREAS, Executive is willing to enter into an agreement with the Company upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the mutual covenants herein contained and of the mutual benefits herein provided, and intending to be legally bound hereby, the Company and Executive hereby agree as follows: 1. Term of Employment. The Company hereby employs Executive as Vice President and General Manager and Executive accepts such employment by the Company on the terms and conditions herein contained for a period commencing as of the date hereof and subject to termination only as hereinafter provided (the period from the date hereof through termination as hereinafter provided is referred to as the "Employment Period"). 2. Duties. During the Employment Period, Executive shall have such duties, responsibility and authority and perform such services for the Company as are consistent with Executive's background, training and experience as may from time to time be assigned to Executive by the Board or the Chief Executive Officer of the Company. 3. Compensation. (a) Commencing as of the date hereof and thereafter during the Employment Period, the Company shall pay Executive a base salary at the annual rate of no less than $135,000, which amount may be increased from time to time in accordance with the Company's policies regarding general increases and at the discretion of the Board. Payment shall be made in accordance with the Company's regular practice for senior executive employees as in effect from time to time. (b) In addition to the Executive's base salary, Executive shall be entitled to participate in the normal course of business in the annual executive bonus program(s) of the Company and to receive such bonus payments as are customarily granted for the purposes of providing additional compensation to senior executives. (c) A change-of-control of the Company is defined to be any of the following: (a) the effective date of a Major Transaction which is subject to and satisfies the special voting requirement set forth in Article VIII of the Company's Amended and Restated Articles of Incorporation ("Articles"), (b) the completion of a tender or exchange offer for Voting Stock (other than a tender offer by the Company) which is accepted by the holders of 51% of the Voting Power of the outstanding Voting Stock, (c) the effective date of a merger, consolidation, or dissolution in which the Company is not the surviving entity, or (d) the date on which there is a "Significant Change" in the membership of the Company's Board occurring by the third annual meeting after the effective date of a merger, consolidation, reorganization or a Major Transaction or the date on which any Person becomes a 15% shareholder (each of which is referred to as a "Significant Event"). A Significant Change in the Board shall be deemed to have occurred if one-third or more of the directors are individuals who (i) are or were Affiliates or Associates of the 15% shareholder or any party to the Significant Event and (ii) were not Affiliates or Associates of the Company prior to the Significant Event. A sale or series of sales or other disposition of a subsidiary, division or other operating units, or the assets thereof, not constituting a sale of substantially all of the assets of the Company, shall not constitute a change-of-control. The definitions for Affiliates, Associates, Major Transaction, Person, Voting Stock, and Voting Power are set out in Article VII of the Articles. In the event of a change-of-control, as defined in the prior paragraph, and the termination of the Executive's employment, the Executive shall be entitled to the continuation of his compensation and benefits for a total of two (2) years from the date of such termination of employment at the rates set out in 3(a) and (b) above, payable in equal payments at least monthly. A termination of employment entitling the Executive to a continuation of compensation as set out in this Section 3 shall be deemed to have occurred upon any resignation or termination of the Executive's employment for any reason other than Cause as defined in Section 5 (a) below during the two year period commencing with the effective time of the first change-of-control event. For example, if the change-of-control event occurred on March 1, 1998 and the Executive voluntarily left the Company's employ on September 15, 1998, then he would continue to receive payments from the Company each month through September 15, 2000 equal to one twelfth (1/12) of the greater of (a) the Executive's total compensation (salary plus bonus) for the prior calendar year or (b) the average annual compensation (salary plus bonus) of the Executive for the prior two calendar years. For calculation purposes, the bonus shall apply to the year for which it was earned, which may not be the year in which it was actually paid. Notwithstanding the foregoing, Executive shall not be entitled to such continuation of compensation for any period after he (a) reaches age 66, (b) dies, (c) is disabled and eligible to receive disability payments under the Company's long term disability plan, or in the case of a termination not preceeded by a change-of-control within the prior two years, (d) voluntarily retires from the Company. In addition to continuation of salary and bonus referenced above, for the said two year period the Company shall also continue the Executive's normal fringe benefits to the extent reasonably possible and shall fairly compensate the Executive for the value of any fringe benefits it can not reasonably continue. In the event of a change-of-control and termination of employment, all stock options held by the Executive shall be fully vested and immediately exercisable during the normal post-employment option exercise period as set out in the applicable stock option plan (but in no event for less than 90 days after the employment relationship terminates). 4. Additional Terms. (a) The Company will reimburse Executive for all reasonable expenses properly incurred by Executive in the performance of Executive's duties hereunder in accordance with established practices for senior executives of the Company. (b) During the Employment Period, Executive shall be entitled to participate, in accord with the terms thereof, in any present or future bonus, insurance, pension, Thrift, ESOP, stock option, or other employee benefit, compensation or incentive plan adopted by the Company and applicable to senior executives generally. 5. Termination of Employment. (a) The Employment Period shall cease and terminate upon the earliest to occur of the events specified below: (i) The first anniversary of receipt of written notice by Executive from the Company of the Company's intent to terminate this Agreement. (ii) The death of Executive. If Executive dies during the term of this Agreement, Executive's salary for 30 days after the date on which death occurs shall be paid to Executive's estate. (iii) The normal retirement date of Executive or upon Executive's election of early retirement. (iv) Termination of Executive's employment for Cause. For these purposes "Cause" for termination of Executive shall be limited to actions by Executive involving willful malfeasance or gross negligence or failure to act by Executive involving willful and material nonfeasance which, at the time of such willful malfeasance or gross negligence or willful and material nonfeasance, would tend to have a materially adverse effect on the Company. Bad judgment or negligence shall not constitute Cause nor shall any act or omission reasonably believed by the Executive to have been in, or not opposed to, the interests of the Company. (b) In the event that Executive becomes "totally disabled" within the meaning of the Company's Long Term Disability Plan, the Employment Period shall be suspended (to resume following suspension unless otherwise terminated under 5(a) above) during any period in which Executive is entitled to receive long term disability payments under the Plan and, during such period of suspension, Executive shall be entitled to the same benefits that any other employee of the Company would enjoy under the Long Term Disability Plan. (c) Except as to rights which have accrued hereunder, this Agreement and all of the liabilities and obligations of the parties hereunder shall cease and terminate effective upon the termination of the Employment Period. (d) If (i) Executive's employment hereunder is terminated by the Company other than pursuant to Section 5(a) hereof, (ii) Executive terminates his employment hereunder because his authority, duties or responsibilities are altered so as to be inconsistent with Executive's background, training and experience, or (iii) the Executive terminates his employment hereunder because of the Company's continued failure to perform its obligations hereunder, then the Executive shall be entitled to receive, in addition to any other damages which Executive may suffer as a direct or indirect result of the termination of Executive's employment by the Company, the compensation and benefits which would otherwise have been payable to Executive under Section 3 hereof through the remaining balance of the Employment Period which would have pertained had the Company given Executive notice of intent to terminate this Agreement on the date Executive's employment ceases, as provided in Section 5(a) (i) above. 6. Non-Competition and Confidentiality. The Executive agrees that: (a) The Company shall cease providing payments hereunder (other than payments already earned or accrued) if, during the compensation period, the Executive shall be employed by or otherwise engage in any business which is competitive with any business of the Company, and (b) during and after the compensation period, the Executive will not divulge or appropriate to the Executive's own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company. Executive agrees that the above covenant not to compete is fair and reasonably necessary for the protection of the Company's confidential information and business. In the event a court should decline to enforce any part of this covenant, such covenant shall be deemed to be modified to restrict Executive's competition with the Company to the maximum extent which the court shall find enforceable. The Board has determined, in its best judgment, that the payments to the Executive hereunder are reasonable consideration for not competing as defined in (a) and for maintaining the confidentiality of information as provided for in (b) above. 7. Assignment. This Agreement shall not be assignable by the Company except to a majority-owned subsidiary or parent entity of the Company or to a successor to the Company and its business by way of merger, acquisition, purchase of assets or otherwise and this Agreement is and shall be binding upon and inure to the benefit of any such parent, subsidiary or successor. This Agreement shall not be assignable by Executive but it shall be binding upon and inure to the benefit of Executive's heirs, executors, administrators and legal representatives. 8. Notices. All notices, requests, demands and other communications hereunder must be in writing and shall be deemed to have been given if delivered by hand or mailed by first class, certified or registered mail, return receipt requested, postage and registry fees prepaid, and addressed as follows: To the Company: President PrimeSource Corporation 4350 Haddonfield Road, Suite 222 Pennsauken, NJ 08109-3377 To the Executive: Donald James Purcell 1900 Conway Hills Drive Hebron, Kentucky 41048 Addresses may be changed by notice in writing to the other party. 9. Arbitration. Any dispute or disagreement arising between the parties hereto with respect to this Agreement or its validity, construction or performance shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association as amended from time to time. The cost of arbitration shall be borne by the Company. Each party shall, however, bear the cost of preparing and presenting its own case, including counsel fees and expenses. Judgment upon the award of arbitrators may be entered by either party in any court having jurisdiction. 10. Miscellaneous. This Agreement is the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings, oral or written, relating to the subject matter hereof, and no change, alteration or modification hereof may be made except in writing signed by both parities hereto. The headings in this Agreement are for convenience of reference only and shall not be considered as part of this Agreement nor limit or otherwise affect the meaning hereof. This Agreement shall in all respects be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. ATTEST: PRIMESOURCE CORPORATION - ----------------------------- ------------------------------ Corporate Secretary President and Chief Executive Officer ------------------------------ Donald J. Purcell EX-21 5 PARENTS & SUBSIDIARIES OF REGISTRANT There is no parent of the registrant. The Registrant owns 100% of the outstanding capital stock of the following subsidiaries: Business Name of Corporation Jurisdiction of Incorporation Dixie Type & Supply Company, Inc. Alabama The aforementioned is included in the Consolidated Financial Statements of the Registrant filed herewith. EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of PrimeSource Corporation and its subsidiaries on Forms S-8 (File Nos. 33-71638 and 33-87360) of our report dated February 20, 1998, on our audits of the consolidated financial statements and financial statement schedule of PrimeSource Corporation and its subsidiaries as of December 31, 1997 and 1996, and for the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 25, 1998 EX-27 7 FDS 12/31/97
5 1,000 YEAR DEC-31-1997 JAN-31-1997 DEC-31-1997 0 0 55,774 1,913 53,919 117,971 21,818 9,503 138,491 48,820 32,788 0 0 65 52,483 138,491 414,867 414,867 343,116 343,116 0 694 2,913 9,353 3,862 5,491 0 0 0 5,491 .84 .83
EX-27.1 8 RESTATED FDS 3/31/97
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 0 0 54,662 1,702 50,238 113,142 23,249 9,548 134,940 41,126 40,078 0 0 65 48,946 134,940 103,388 103,388 85,085 85,085 0 113 750 1,867 762 1,105 0 0 0 1,105 .17 .17
EX-27.2 9 RESTATED FDS 6/30/97
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 0 0 54,951 1,717 52,147 115,599 23,600 9,989 137,431 43,665 38,838 0 0 65 49,741 137,431 206,558 206,558 169,848 169,848 0 168 1,556 3,889 1,608 2,281 0 0 0 2,281 .35 .35
EX-27.3 10 RESTATED FDS 9/30/97
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 0 0 57,536 1,770 50,828 116,081 23,342 10,026 137,969 43,551 38,470 0 0 65 50,709 137,969 309,020 309,020 254,031 254,031 0 385 2,335 5,987 2,473 3,514 0 0 0 3,514 .53 .53
EX-27.4 11 RESTATED FDS 12/31/96
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 55,831 1,787 48,741 112,050 22,867 9,148 134,175 45,010 36,250 0 0 65 48,118 134,175 366,657 366,657 301,428 301,428 0 865 1,915 6,702 2,788 3,914 0 0 0 3,914 .60 .60
EX-27.5 12 RESTATED FDS 3/31/96
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 0 0 50,520 1,503 39,052 95,501 18,466 8,478 113,663 33,808 28,378 0 0 66 46,196 113,663 86,959 86,959 71,777 71,777 0 200 520 1,405 576 829 0 0 0 829 .13 .13
EX-27.6 13 RESTATED FDS 6/30/96
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 0 0 46,239 1,600 33,619 91,367 17,934 8,325 108,729 31,769 28,378 0 0 65 46,785 108,729 174,857 174,857 144,099 144,099 0 373 943 2,921 1,176 1,745 0 0 0 1,745 .27 .27
EX-27.7 14 RESTATED FDS 9/30/96
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 0 0 49,185 1,607 37,717 92,859 18,294 8,753 110,193 33,389 24,780 0 0 65 47,333 110,193 264,201 264,201 217,381 217,381 0 545 1,291 4,475 1,806 2,669 0 0 0 2,669 .41 .41
EX-99.1UNDERTAKINGS 15 UNDERTAKINGS TO BE INCORPORATED BY REFERENCE INTO FORM S-8 REGISTRATION STATEMENTS NO. 33-71638 AND 33-87360 UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Filings incorporating subsequent Exchange Act documents by reference The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) Employee plans on Form S-8. (1) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus to each employee to whom the prospectus is sent or given a copy of the registrant's annual report to stockholders for its last fiscal year, unless such employee otherwise has received a copy of such report, in which case the registrant shall state in the prospectus that it will promptly furnish, without charge, a copy of such report on written request of the employee. If the last fiscal year of the registrant has ended within 120 days prior to the use of the prospectus, the annual report of the registrant for the preceding fiscal year may be so delivered, but within such 120 days period the annual report for the last fiscal year will be furnished to each such employee. (2) The undersigned registrant hereby undertakes to transmit or cause to be transmitted to all employees participating in the plan who do not otherwise receive such material as stockholders of the registrant, at the time and in the manner such material is sent to its stockholders, copies of all reports, proxy statements and other communications distributed to its stockholders generally. (3) Where interests in a plan are registered herewith, the undersigned registrant and plan hereby undertake to transmit or cause to be transmitted promptly, without charge, to any participant in the plan who makes a written request, a copy of the then latest annual report of the plan filed pursuant to section 15(d) of the Securities Exchange Act of 1934 (Form 11-K). If such report is filed as part of the registrant's annual report on Form 10-K, that entire report (excluding exhibits) shall be delivered upon written request. If such report is filed as part of the registrant's annual report to stockholders delivered pursuant to paragraph (1) or (2) of this undertaking, additional delivery shall not be required. (i) Acceleration of effectiveness. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other that the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----