10-Q 1 sec10q0601.txt PRIMESOURCE CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2001 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File Number 000-21750 PrimeSource Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-1430030 ------------ ---------- (State of incorporation) (I.R.S. Employer Identification No.) 4350 Haddonfield Road, Suite 222, Pennsauken, NJ 08109 -------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (856) 488-4888 (Registrant's telephone number, including area code) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock: Class Outstanding at August 10, 2001 ----- ------------------------------ Common stock, par value $.01 6,357,806 shares PRIMESOURCE CORPORATION INDEX PART I - FINANCIAL STATEMENTS Item 1 - Financial Information Page No. -------- Condensed Balance Sheets June 30, 2001 and December 31, 2000 3 Condensed Statements of Income Three and Six Months Ended June 30, 2001 and 2000 4 Condensed Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 5 Notes to Condensed Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 11 Item 6 - Exhibits and Reports on Form 8-k 11 SIGNATURES 12 Certain statements contained in this report are forward-looking. Such forward-looking statements are subject to a number of factors, including material risks, uncertainties and contingencies, which could cause actual results to differ materially from those set forth in the forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to successfully implement its business strategies including successfully integrating business acquisitions, the effect of general economic conditions and technological, competitive and other changes in the industry, as well as other risks and uncertainties as set forth in the Company's periodic reports and other filings with the Securities and Exchange Commission. PART I. FINANCIAL INFORMATION Item 1. Financial Statements

PRIMESOURCE CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission and instructions to Form 10-Q. While these statements reflect all adjustments (which consist of normal recurring accruals) which are, in the opinion of management, necessary to a fair presentation of the results for the interim periods presented, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's 2000 Annual Report on Form 10-K for further information. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. 2. Inventory Pricing Inventories consist primarily of purchased goods for sale. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) and first-in, first-out methods of accounting. Because the inventory determination under the LIFO method can only be made at the end of each fiscal year, interim financial results are based on estimated LIFO amounts and are subject to final year-end LIFO inventory adjustments. 3. Income Per Common Share The following is a reconciliation of the average shares of common stock used to compute basic income per share to the shares used to compute diluted income per share as shown on the consolidated condensed statements of income for the three and six months ended June 30:

4. Restructure Expense In 2001, the Company incurred a restructure expense of $780,000. The costs consist of $719,000 for employee severance compensation for 50 employees and $61,000 for lease costs on vacated facilities. At June 30, 2001, $183,000 of severance compensation and $33,000 of lease costs had been paid. It is expected the restructuring activities will be substantially completed by the end of the current year. 5. New Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivatives and hedging activities. The new standard requires that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instrument will generally be offset on the income statement by changes in the fair value of the hedged item. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income until it is cleared to earnings during the same period in which the hedged item affects earnings. The ineffective portion of all hedges will be recognized in current earnings each period. Changes in the fair value of derivative instruments that are not designated as a hedge will be recorded each period in current earnings. The Company utilizes derivative financial instruments in the form of interest rate swaps to effectively fix the interest rate on a portion of its floating rate debt. At January 1, 2001 and June 30, 2001, the Company had one outstanding swap with a notional value of $17 million and an expiration date of November 6, 2001. The swap is designated as a cash flow hedge. In addition, although most purchases for the Company are transacted in US dollars, on occasion, the Company purchases equipment payable in a foreign currency. For payments with extended terms, generally up to six months, the Company will enter into foreign currency forward exchange contracts that minimize the risk of foreign exchange rate fluctuations on such payments. At January 1, 2001 and June 30, 2001, the Company had foreign currency forward exchange contracts with a notional value of approximately $1.1 million and none, respectively. These forward exchange contracts are designated as fair value hedges. Recognizing the fair value of the cash flow hedge at the January 1, 2001 adoption date of SFAS No. 133 resulted in a charge to other comprehensive income of $35,000. Changes in the fair value of the cash flow hedge through June 30, 2001 resulted in an additional charge of $99,000 to other comprehensive income. The adoption of SFAS 133 had no impact on the net income of the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations --------------------- Net income for the quarter ended June 30, 2001, excluding a restructure expense and the Company's share of the net loss from Canopy, LLC which was formed in the second half of 2000, was $1.12 million ($.18 per diluted share), compared to $1.4 million ($.22 per diluted share) for the same period last year. In the quarter ended June 30, 2001, the Company incurred an after-tax restructure charge of $459,000 ($.07 per diluted share), related to a workforce reduction in every area of its operations, as well as for the consolidation of several facilities. The Company's loss from Canopy, LLC was $636,000 ($.10 per diluted share) for the second quarter. Including the restructure charge and the net loss from Canopy, net income was $28,000. Excluding the restructure expense and Canopy loss, the net income for the six-months ended June 30, 2001 was $2.54 million ($.40 per diluted share) compared to $2.76 million ($.43 per diluted share) for the first half of last year. Including the restructure expense of $459,000 and the six-month loss from Canopy of $1.3 million, the net income for 2001 was $804,000 ($.13 per share). Net sales decreased from $135.7 to $121.1 million for the quarter and from $277.2 to $250.4 million for the six-months ended June 30, 2001 compared to the same periods last year. These results reflect weak industry conditions, particularly in capital equipment, and film sales that continue to be adversely affected by the ongoing transition to digital technology, as well as by reduced print demand. In addition, Canopy's results continue to be well below expectations. Selling, administrative and other expenses as a percent of sales were 15% and 14.8% for the quarter and six-months ended June 30, 2001, respectively, compared to 13.6% and 13.3%, respectively, for the same periods last year. The company implemented a restructure program in the current quarter that will result in annual savings of approximately $4 million. The savings will come primarily from personnel reductions and the combining of several locations. The Company incurred a related restructuring expense of $780,000 during the quarter for the associated employee severance and lease termination costs. Interest expense was $1,054,000 and $2,365,000 for the quarter and six-month period ended June 30, 2001 compared to $1,443,000 and $2,879,000, respectively, for the same periods last year. This decrease is due primarily to decreased debt levels. The effective income tax rate between the six-month periods ended June 30, 2000 and 2001, increased from 41.7% in 2000 to 45% in 2001. This increase is due to non-deductible expenses being a higher percent to income in 2001 compared to 2000. The difference between the effective tax rates and the federal statutory rate of 34% for both periods is attributable to state income taxes and non-deductible expenses. Financial Condition and Liquidity --------------------------------- Net cash provided by operating activities for the six months ended June 30, 2001 was $12,655,000 compared to $3,209,000 for the same period last year. The increase in 2001 is the result of cash generated from a decrease in working capital levels. This decrease is a result of the lower sales level and continual improvement in asset management. Excluding the effect of changes in assets and liabilities, the cash flow was $2,277,000 in 2001 and $4,132,000 in 2000. This reflects the decrease in income. Net cash provided by investing activities was $290,000 for the six months ended June 30, 2001 compared to $1,829,000 for the same period last year. The primary difference between the two years, was $2.5 million received on the sale of property and equipment in 2000, consisting primarily of proceeds from the sale of a facility in Minneapolis. Capital expenditures were $402,000 and $935,000 for the six months ended June 30, 2001 and 2000, respectively. Additional capital expenditures for the year, for which there are no material commitments, are anticipated to be approximately $1.5 million. Net cash used in financing activities was $12,945,000 and $5,038,000 for the six months ended June 30, 2001 and 2000, respectively. The cash used was provided by the net cash generated from the operating and investing activities. For 2001, debt decreased by $10.3 million compared to a $.5 million decrease for 2000. The book overdraft decreased by $2.0 million and $3.2 million in 2001 and 2000, respectively. For both years, dividend payments were $.6 million. In 2000, the Company expended $733,000 for the repurchase of Company stock. The Company's primary source of debt financing is a revolving credit agreement with a commitment of $75 million of which $45.3 million was outstanding at June 30, 2001. The Company believes this facility combined with future cash flows from operations will be adequate to meet the ongoing capital requirements of the Company. New Accounting Standards ------------------------ Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivatives and hedging activities. The new standard requires that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instrument will generally be offset on the income statement by changes in the fair value of the hedged item. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income until it is cleared to earnings during the same period in which the hedged item affects earnings. The ineffective portion of all hedges will be recognized in current earnings each period. Changes in the fair value of derivative instruments that are not designated as a hedge will be recorded each period in current earnings. The Company utilizes derivative financial instruments in the form of interest rate swaps to effectively fix the interest rate on a portion of its floating rate debt. At January 1, 2001 and June 30, 2001, the Company had one outstanding swap with a notional value of $17 million and an expiration date of November 6, 2001. The swap is designated as a cash flow hedge. In addition, although most purchases for the Company are transacted in US dollars, on occasion, the Company purchases equipment payable in a foreign currency. For payments with extended terms, generally up to six months, the Company will enter into foreign currency forward exchange contracts that minimize the risk of foreign exchange rate fluctuations on such payments. At January 1, 2001 and June 30, 2001, the Company had foreign currency forward exchange contracts with a notional value of approximately $1.1 million and none, respectively. These forward exchange contracts are designated as fair value hedges. Recognizing the fair value of the cash flow hedge at the January 1, 2001 adoption date of SFAS No. 133 resulted in a charge to other comprehensive income of $35,000. Changes in the fair value of the cash flow hedge through June 30, 2001 resulted in an additional charge of $99,000 to other comprehensive income. The adoption of SFAS 133 had no impact on the net income of the Company. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a. The Company's annual meeting of shareholders was held on May 8, 2001. b. Matters voted upon at the meeting and the results of those votes were as follows:

Other directors whose terms of office continued after the meeting are as follows: Fred C. Aldridge, Jr., Phillip J. Baur, Jr., Richard E. Engebrecht, John H. Goddard, Jr., Edward N. Patrone, John M. Pettine.

The foregoing matters are described in detail in the Company's proxy statement dated April 6, 2001. Item 6. Exhibits and Reports on Form 8-K a. Exhibits none b. Reports on Form 8-K The Registrant did not file a report on Form 8-K during the quarter ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIMESOURCE CORPORATION (REGISTRANT) BY /s/ WILLIAM A. DEMARCO ---------------------- William A. DeMarco Vice President of Finance and Chief Financial Officer (principal financial and accounting officer) DATE August 14, 2001

PRIMESOURCE CORP 10-Q