SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended June 30, 2002
[ ] 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: 0-14961
PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 EAST COLUMBIA STREET - TUCSON, ARIZONA - 85714
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(520) 512-1100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
Indicate by checkmark 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 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 the 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 ]
The estimated aggregate market value of the voting common stock held by
non-affiliates of the registrant was $2,231,125 as of September 16, 2002.
Because PrimeSource's common stock is not listed or quoted on an exchange, this
computation is based on an estimated market value of $.32 per share of common
stock as of September 16, 2002.
As of August 31, 2002, 22,713,356 shares of common stock, $.01 par value, were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated:
None.
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TABLE OF CONTENTS
Part I
Item 1. Business.................................................................................................. 4
Item 2. Properties................................................................................................ 16
Item 3. Legal Proceedings......................................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 16
Part II
Item 5. Market for Registrant's Common Shares and related Stockholder Matters.................................... 17
Item 6. Selected Financial Data................................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................ 31
Item 8. Financial Statements and Supplementary Data............................................................... 33
Item 9. Changes In and Disagreements with Accountants on Accounting Disclosure................................... 64
Part III Item 10. Directors and Executive Officers of the Registrant........................................................ 64
Item 11. Executive Compensation.................................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 72
Item 13. Certain Relationships and Related Transactions............................................................ 75
Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... 76
Signatures ..................................................................................................................... 83
Index to
Exhibits ...................................................................................................................... 86
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PART I
When we refer to "we," "us", "our," or "PrimeSource," we mean PrimeSource
Healthcare, Inc., a Massachusetts corporation formerly known as Luxtec
Corporation, and its consolidated subsidiaries.
This document includes various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of
the Securities Exchange Act of 1934, as amended, which represent our
expectations or beliefs concerning future events. Statements containing
expressions such as "believes," anticipates" or "expects" used in our press
releases and periodic reports on Forms 10-K and 10-Q filed with the Securities
and Exchange Commission are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Although we believe
our expectations are based upon reasonable assumptions within the bounds of our
knowledge and operations, there can be no assurances that actual results will
not materially differ from expected results. We caution that these and similar
statements included in this report and in previously filed periodic reports,
including reports filed on Forms 10-K and 10-Q are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation those listed under Item 7. "Management Discussion and Analysis,"
under the subheading "Risk Factors."
We caution readers not to place undue reliance on forward-looking statements,
which speak only as of the date thereof. We undertake no obligation to publicly
release any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof.
ITEM 1. BUSINESS
GENERAL
We are a leading specialty medical products sales, marketing, manufacturing and
service company. We sell a broad portfolio of specialty medical products, some
of which we manufacture, to hospitals and surgery centers nationwide through a
dedicated organization of sales and marketing professionals. We have expanded
rapidly through the acquisition and integration of a number of leading regional
specialty sales and marketing organizations and select specialty medical
products manufacturing companies. Since January 1998, we have acquired eleven
regional specialty sales and marketing organizations and one specialty medical
products manufacturer. We have consolidated and integrated each of the twelve
acquired businesses in order to create a uniform operational platform and to
help facilitate further expansion of our business. Today, we have two primary
businesses: Specialty Distribution Services and the Manufactured Products
Division or Manufactured Products. As of August 31, 2002, we had 169 employees
and generated total revenue of $58.9 million for the fiscal year ending June 30,
2002.
On March 2, 2001, we completed a merger with PrimeSource Surgical, Inc., or
PrimeSource Surgical, resulting in PrimeSource Surgical becoming our wholly
owned subsidiary. Subsequent to the merger with PrimeSource Surgical, we changed
our name from "Luxtec Corporation," or Luxtec, to "PrimeSource Healthcare, Inc."
In October 2001, we engaged Corporation Revitalization Partners as a
restructuring agent to evaluate our operations for possible reorganization. In
November 2001, we commenced with a restructuring plan which involved narrowing
the focus of our operations, consolidation of certain under performing sales
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regions, reduction of corporate overhead through workforce reductions and
facility consolidation, restructuring of our balance sheet through refinancing
of our senior bank debt and reduction of debt levels through cost reductions and
improved efficiency of operations.
BUSINESS STRATEGY
Our goal is to be one of the nation's leading suppliers of specialty medical
products to hospitals and surgery centers. We intend to continue to grow by:
* hiring experienced territory sales representatives;
* securing additional specialty product lines to our product offerings;
and
* selectively acquiring specialty medical products manufacturers. We
expect to benefit from the acquisition of select specialty medical
products manufacturers by increasing sales of acquired product lines
through use of our direct specialty medical products sales force.
Our Manufactured Products Division continues to lead the surgical headlamp
illumination industry and plans to focus its research and development budget on
new, innovative products.
We believe we are well positioned to continue our growth within the specialty
medical products industry. We expect to experience sales growth in the specialty
medical products industry as a result of:
* favorable industry demographics;
* increases in our market share;
* the acquisition of select specialty medical products manufacturers;
* further penetration of existing customer accounts due to our
introduction of new products and services; and
* entrance into new specialty markets and expansion into international
markets.
INDUSTRY
The medical products industry has grown in recent years due to the aging of the
population and the development of new medical products and technologies that
create new product opportunities for manufacturers and suppliers. Healthcare
industry analysts estimate that the overall market for specialty medical
products and supplies in the United States is in excess of $30 billion. An
estimated $10.0 to $12.0 billion is distributed by the larger medical and
surgical, or med-surg distributors, such as Owens & Minor, Cardinal Health and
McKesson HBOC. It is estimated that an additional $10.0 to $12.0 billion in
medical product sales is sold directly by medical device manufacturers to end
customers. The remainder of the medical products and supply market in the United
States, estimated to be between $10.0 and $12.0 billion, is comprised of
specialty medical products, supplies and services. The Company competes within
this segment of the market.
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Historically, the specialty medical products industry has been highly
fragmented. During the past decade, healthcare providers have consolidated into
larger and more sophisticated integrated delivery networks, or IDNs, in an
effort to reduce costs. In addition, in order to gain purchasing power, buyers
of medical products and supplies have consolidated their purchases under large,
national group purchasing organizations, or GPOs. With the scale added by our
completed acquisitions, we have begun to expand our traditional customer base,
composed primarily of hospitals and surgery centers, to IDNs and GPOs. IDNs and
GPOs have expanded in recent years and currently purchase a significant
percentage of medical products and supplies for hospitals. GPO contractors
typically require purchasing volume of at least $10 million when structuring
purchasing contracts with distributors. By aggregating specialty products, we
have created an opportunity for GPOs to capture additional administrative fees
by bringing in non-contracted specialty medical products. Furthermore, because
of our access to IDNs and GPOs, we have established a compelling advantage with
small product manufacturers (which cannot easily access the IDN and GPO customer
base) over smaller competitors who are unable to satisfy IDN and GPO minimum
volume purchasing requirements.
We believe that we are well positioned within our industry because we:
* provide a consultative, specialty-focused sales approach through a
network of highly trained sales professionals;
* reach a national customer base of GPOs and IDNs that is beyond the
scope of local and regional specialty medical products distributors;
* operate in a complementary niche outside the volume-driven model of
large, national med-surg distributors; and
* offer a broader range of products, services, and solutions exceeding
those of any single specialty medical product manufacturer's direct
sales force.
We believe that customers seek to consolidate their purchases of products and
services in the highly fragmented specialty medical products and services market
in order to reduce their procurement costs. We help customers reduce the number
of vendors that they work with, thereby reducing the overall procurement costs
of products and services.
PRODUCTS AND SERVICES
SPECIALTY DISTRIBUTION SERVICES
Within the SDS business, we divide our business into PrimeSource Surgical, or
Surgical, and PrimeSource Critical Care, or Critical Care. The Surgical segment
is a regional sales and marketing organization that markets and sells a large
number of surgical products primarily to hospitals and surgery centers in the
midwestern, mid-atlantic and southeastern United States. The Critical Care
segment is a regional sales and marketing organization that sells a large number
of products primarily to hospitals and surgery centers in the southeastern and
northeastern United States.
Within the Surgical segment, the primary specialties are:
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* Cardio Vascular;
* Endoscopy;
* General Surgery; and
* Gynecology.
Within the Critical Care segment, the primary specialties are:
* Neonatal Intensive Care; and
* Maternal and Child Care.
Our products and services are primarily used in hospital operating rooms and
intensive care units, outpatient surgery centers and to a lesser degree doctors'
offices. Most of our products are technologically innovative medical products,
or specialty products, that require hands-on training of clinicians and medical
personnel. We continue to expand our product base to include additional
instruments and equipment thereby allowing customers to use us as a source for a
greater percentage of their specialty products needs.
The sale of specialty disposable products and capital equipment account for the
majority of our revenues. Our capital equipment products are typically complex
and require significant consultative selling and training of medical staff
personnel. Our specialty disposable products are often sold to support the
growing base of installed capital equipment products and offer a recurring and
stable source of revenue.
THE MANUFACTURED PRODUCTS DIVISION
We operate the Manufactured Products business through our Luxtec division, which
designs, manufactures and markets fiber optic headlight and video camera
systems, light sources, cables, retractors and surgical and other custom-made
equipment for the medical and dental industries. Luxtec has developed a
proprietary, fiber optic drawing system designed to manufacture optical glass to
a specified diameter. The fibers are utilized in fiber optic cables, which are
incorporated with Luxtec's surgical headlight systems and video camera systems,
as well as into an array of fiber optic transilluminators utilized with Luxtec's
surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs,
and light sources for use with other manufacturers' products, including various
endoscopic systems used in minimally invasive surgical procedures.
Fiber optics allow for the transmission of a light or image from one place to
another through a flexible conduit of optical glass rods and tubes. The flexible
conduit provides for an improved ability to bend and transmit light and images
to and from places with limited or difficult access.
The technology used by Luxtec to provide illumination directly to the surgical
site is facilitated by fiber optic cables transmitting light to an adjustable
headlight composed of a series of lenses and mirrors mounted on a headband.
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These lenses then focus the light directly on the surgical site when worn by the
surgeon. This provides a lightweight, low temperature illumination source to
enhance visualization for microsurgical and deep cavity illumination. A summary
of the Luxtec division's specific product offerings is as follows:
HEADLIGHT SYSTEMS: Luxtec designs and manufactures a proprietary line of fiber
optic headlight systems that assist surgeons by brightly illuminating the
surgical site. Designed to provide maximum performance and comfort, Luxtec's
patented headlight systems are lightweight and provide the surgeon with a
virtually unobstructed view of the surgical area.
LIGHT SOURCES: Luxtec manufactures a product line of high quality, solid state
xenon and halogen fiber optic light sources. Luxtec's light sources offer a wide
range of light intensities in order to serve the varying requirements in
illuminating surgical and diagnostic procedures. The lamps illuminate the end
surface of the fiber optic cable through which the light is transmitted, without
transmitting heat. Luxtec's light sources are designed and manufactured to
comply with Underwriters Laboratories 544 medical safety standards and are
listed domestically with ETL Laboratories. Internationally, Luxtec strives to
achieve compliance with all applicable international standards to compete
effectively on a worldwide basis (including the CE mark, which has been attained
on the present product line).
FIBER OPTIC CABLES: Luxtec designs and manufactures a complete range of fiber
optic cables and holds patents on certain fiber optic cable assemblies. See
"Patents and Trademarks." Luxtec offers surgeons a range of fiber bundle
diameters in order to optimize the use of surgical instruments. Luxtec employs a
proprietary technology that enables the fiber optic interface to withstand
significantly higher temperatures and permits the use of higher output light
sources. In addition, all of Luxtec's fiber optic cables are adaptable to light
sources made by other manufacturers.
FIBER OPTIC HEADLIGHT AND VIDEO CAMERA SYSTEMS: Luxtec manufactures and markets
a series of video products that are currently being used in the United States
and in over 25 countries around the world. Luxtec's Microlux headlight camera
systems are designed to televise surgical procedures. The system is a very
small, lightweight, solid state television camera mounted at the front of a
headband, manufactured by Luxtec, and integrated with fiber optic illumination.
SALES AND MARKETING
We sell our products and services to acute care hospitals, clinics and surgery
centers. In fiscal year ended June 30, 2002, within the Surgical Distribution
Service business, we sold specialty medical products to over 3,000 customers,
primarily in the United States and Canada. We are not dependent on any single
customer or geographic group of customers, with no single customer accounting
for more than 2% of our sales during our fiscal year ended June 30, 2002.
We maintain an extensive sales organization that is highly experienced and
skilled in representing clinical products and services. Our sales
representatives serve as a service and educational resource to the marketplace.
They assist clinicians in selecting and purchasing products, help customers
better manage inventories of specialty medical products and direct the
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appropriate utilization of our clinically focused products. Each sales
representative works within an assigned sales territory under the supervision of
a dedicated regional sales manager. All of our sales representatives are
primarily compensated on a commission basis.
Within the surgical illumination business, Luxtec is the market leader in
surgical headlights with an estimated 60,000 surgeons using their products on a
worldwide basis. Within the United States, the Luxtec fiber optic and
illumination products are primarily distributed through PrimeSource Surgical's
sales force, supported by Luxtec field specialists and a customer support team
located in our West Boylston facility. Luxtec also distributes domestically
through a number of other regional specialty medical distributors.
Internationally, Luxtec distributes through a network of local distributors.
DISTRIBUTION
We believe that responsive delivery of quality specialty medical products and
supplies is a key element to providing complete customer satisfaction. Our
customers place orders for medical products and supplies by telephone, facsimile
or via the internet. Our customer service call centers answer approximately 95%
of all calls by the third ring and have a call abandonment rate of less than 2%.
All orders are routed through our centralized computer ordering, shipping and
inventory management system, which is linked to our distribution centers. Rapid
and accurate order fulfillment is a principal component of our value-added
approach. We estimate that 92% of our disposable, consumable product orders are
shipped complete within 24 hours.
In order to assure the availability of our broad product lines for prompt
delivery to customers, we must maintain sufficient inventories at our
distribution centers. Our inventory levels are centralized with and managed by a
purchasing department using an integrated inventory control system. Our
inventory consists primarily of medical products and supplies.
MANUFACTURING AND SUPPLIERS
Manufacturer relationships are an integral part of our businesses. Our Specialty
Distribution Service business represents more than 100 manufacturers with over
95% of sales concentrated among approximately 25 of these manufacturers. A
majority of the business is comprised of stocking relationships whereby we stock
the vendors products and provide substantially all fulfillment services (i.e.,
customer service, shipping, returns, etc.). The remainder of the revenue is
received on an "agency" basis whereby we do not stock the vendor's products and
do not provide fulfillment services. In the case of an agency sale, the
manufacturer provides substantially all fulfillment services for customers and
we provide sales and marketing support in helping facilitate the sale of the
vendor's product. For providing the sales and marketing support, we are paid a
sales commission on each sale of the vendor's products.
Within the Manufactured Products business, Luxtec purchases components and
materials from more than 300 vendors and believes it can purchase substantially
all of its product requirements from other competing vendors under similar
terms. Luxtec has no long-term contract with any supplier but does maintain
long-standing relationships with certain vendors.
Our Specialty Distribution Service business aggressively pursues the opportunity
to market and sell medical equipment and supplies on an exclusive basis.
Manufacturers of specialty medical products and supplies typically offer
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distribution rights only to a selected group of distributors and are
increasingly seeking to reduce the number of distributors selling their products
to end users in an effort to reduce the overall costs associated with selling
and marketing their products. We have been successful in assisting manufacturers
in their development and marketing plans and in obtaining the exclusive rights
to sell certain products. We believe that our ability to capture and retain such
distribution rights represents a barrier to the entry of competitors.
Within the Specialty Distribution Service business, our network of manufacturers
is continually seeking representation or market introduction for their products,
resulting in a growth pipeline of attractive, innovative products accretive to
our portfolio of distributed products. Moreover, we have been able to enter into
contractual relationships with certain manufacturers that are typically
exclusive in nature, extend for several years in duration, and include a right
of first refusal on new product introductions.
INFORMATION SYSTEMS
Our Specialty Distribution Service business employs a single, centralized,
enterprise management information system utilized across all business units via
a wide-area data network. We have converted all of the acquired specialty
medical products distribution organizations into a single, centralized wide-area
data network. We aggressively pursue standardization of our management
information systems in order to obtain the greatest value from acquired
businesses. This approach yields significant benefits including:
* increased inventory utilization;
* greater visibility as to sales performance; and
* the coordination necessary to address the needs and requirements of an
increasing number of IDNs and GPOs whose members are geographically
dispersed.
In addition to employing traditional e-business technologies such as electronic
data interchange, to achieve greater efficiencies, we also use the inherent
strengths of the internet to enhance relationships with both customers and
manufacturers. Since early 2000, we have offered our web-based Surg-E-Track (TM)
system to our direct sales force as well as select manufacturer partners.
Surg-E-Track provides sales personnel and manufacturer partners with
comprehensive customer purchasing data in a variety of formats. Through the
Surg-E-Track system we have increased our sales representative productivity and
customer service levels and have helped our manufacturer partners more
effectively manage their businesses.
COMPETITION
We compete with a variety of companies including manufacturers that utilize
direct sales forces, national specialty distributors and a number of
significantly smaller local and regional specialty distributors. We compete to a
lesser degree with national med-surg distribution companies such as Cardinal
Health, Inc., McKesson HBOC, Inc. and Owens & Minor, Inc. A brief discussion of
each of the Company's competitors is as follows:
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* PRODUCT MANUFACTURERS' DIRECT SALES FORCES. Product manufacturers'
direct, internal sales forces offer manufacturers direct access to
healthcare providers. Manufacturers, however, periodically outsource
the sales and marketing of some of their products to specialty sales
and marketing organizations such as PrimeSource.
* NATIONAL SPECIALTY DISTRIBUTORS. Several companies serve the national
specialty medical products market. These national specialty
distributors tend to focus and specialize within a particular segment
of the specialty medical products market. Management believes that we
are the only national specialty surgical distributor focusing on the
hospital operating room.
* REGIONAL SPECIALTY DISTRIBUTORS. Regional specialty distributors
represent our primary competition in the specialty medical products
market, but they are unable to match the national scope or breadth of
products that we offer.
* NATIONAL MED-SURG DISTRIBUTORS. In most respects, we complement,
rather than compete, with national med-surg distributors. These larger
supply companies, such as McKesson HBOC, Inc., Owens & Minor, Inc.,
and Cardinal Health, Inc., have historically focused on distributing a
broad array of lower-margin, later-stage products, aiming to give
healthcare providers aggressive pricing and the convenience of
one-stop shopping. As a result, their core expertise does not reside
in creating a market for complex specialty products, which often
require important services such as on-site training and product
support. In addition, these suppliers are generally not viewed by
their customers as experts within specific specialty areas. As a
result, specialty product manufacturers tend to outsource sales and
marketing services to specialists rather than national med/surg
distributors.
Within the Manufactured Products business, Luxtec competes with a number of
manufacturers of proprietary light source systems. Competitors within the United
States include the Cogent division of Welch Allyn, Cuda FiberOptics and Isolux.
Some of Luxtec's competitors have historically relied on metal halide technology
rather than the state-of-the-art xenon technology offered by Luxtec. The xenon
technology is more widely accepted and provides a broader color spectrum than
metal halide technology. Foreign competitors include Richard Wolfe, Scholly GMBH
and those companies previously mentioned above.
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PATENTS AND TRADEMARKS
We maintain a policy of seeking patent and trademark protection in connection
with certain elements of its technology and brandnames. We own the following
U.S. Patents and Trademarks:
Patents
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* Patent No. 4516190 for Surgical Headlight issued May 7, 1985.
* Patent No. 4534617 for Fiber Optic Cable issued August 13, 1985.
* Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
* Patent No. 4653848 for 45 degree and 90 degree Fiber Optic Cables
issued March 31, 1987.
* Patent No. 4797736 for Videolux Television Fiber Optic Headlight
Camera System issued January 10, 1989.
* Patent No. 5003605 for an electronically augmented stethoscope with
timing sound issued March 26, 1991.
* Patent No. 5220453 for telescopic spectacles with coaxial illumination
issued June 15, 1993.
* Patent No. 5295052 for a light source assembly issued March 15 1994.
* Patent No. D345368 for surgical telescopes issued March 22, 1994.
* Patent No. 5331357 for an illumination assembly issued July 19, 1994.
* Patent No. D349123 for spectacles having integral illumination issued
July 26, 1994.
* Patent No. D350760 for an eyeglass frame temple issued September 20,
1994.
* Patent No. 5392781 for blood pressure monitoring in noisy environments
issued February 28, 1995.
* Patent No. D415285 for Pinhole Headlamp Video Camera for Medical and
Surgical Applications issued October 12, 1999.
* Patent No. D398403 for Headband for Surgeons with Removable Headboard
Hanger issued September 15, 1998.
* Patent No. 6258037 for blood pressure monitoring in noisy environments
issued July 10, 2001.
Trademarks
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* LUXTEC, U.S. federal trademark registration number 1,453,098,
registered August 18, 1987.
* LUXTEC (and design), U.S. federal trademark registration number
1,476,726, registered February 16, 1988.
* LUXTEC (stylized), U.S. federal trademark registration number
1,758,176, registered March 16, 1993.
* LUXTEC, U.S. federal trademark registration number 1,956,027,
registered February 13, 1996.
* Luxtec is also the owner of the following foreign trademark
registrations for its LUXTEC trademark: (i) Chile, registration number
452.314, registered October 31, 1995; and (ii) Peru, registration
number 016214, registered June 14, 1995.
* BIMECO, U.S. federal trademark registration number 1,190,584,
registered February, 23 1981
* MegaTech Medical, U.S. federal trademark registration number
1,930,021, registered October 24, 1995
* TMC
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* Clearfield
* ValueFlex
* PrimeSource Healthcare
* PrimeSource Surgical
We terminated our agreement with InterMed, Inc. in May 2002, pursuant to which
we were previously granted an exclusive license agreement for the rights to
Patent No. 5222949 ("In-Vivo Hardenable Catheter") and No. 5334171 ("Flexible,
Noncollapsible Catheter Tube with Hard and Soft Regions"). The agreement allowed
Luxtec to develop a product line of catheters incorporating fiber optics to
facilitate several potential specialized applications.
In general, we rely on our development and manufacturing efforts, rather than
patent protection, to establish and maintain our industry position. We treat our
design and technical data as confidential and rely on nondisclosure agreements,
trade secrets laws and non-competition agreements to protect our proprietary
position. We cannot assure that these measures will adequately protect our
proprietary technologies.
GOVERNMENT REGULATION
The manufacturing, marketing, distribution and sale of specialty medical
products sold by us are subject to government regulation in the United States
and other countries. Among the federal laws which impact us are the Federal
Food, Drug and Cosmetic Act, which regulates the advertising, record keeping,
labeling, handling, storage and distribution of drugs and medical devices, and
which requires us to be registered with the Federal Food and Drug
Administration, and the Safe Medical Devices Act of 1990, which imposes certain
reporting requirements on distributors in the event of an incident involving
serious illness, injury or death caused by a medical device. In addition, in
order to clinically test, produce and market products for human diagnostic or
therapeutic use, we must comply with mandatory procedures and safety standards
established by the United States Food and Drug Administration ("FDA") and
comparable state and foreign regulatory agencies. Typically, products must meet
regulatory standards as safe and effective for their intended use prior to being
marketed for human applications. The clearance process is expensive and time
consuming, and no assurance can be given that any agency will grant clearance
for the sale of our products or that the length of time the process will require
will not be extensive. We believe that we are in substantial compliance with all
of the foregoing laws and that we possess all licenses required in the conduct
of our business.
EMPLOYEES
As of August 31, 2002, we had approximately 169 employees, of which
approximately 45 are engaged in the Surgical segment, approximately 43 in the
Critical Care segment, approximately 54 in the Manufactured Products business
and approximately 27 in corporate and shared services. We believe that our
continued success depends on our ability to attract and retain highly qualified
personnel. None of our employees are covered by a collective bargaining
agreement.
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EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNEL
Following are the names and ages, as of August 31, 2002, of our executive
officers and key management personnel, their positions and summaries of their
backgrounds and business experience.
Name Age Position
- ---- --- --------
Bradford C. Walker 44 President, Chief Executive Officer and Director
Joseph H. Potenza 55 Senior Vice President of Sales & Marketing
Shaun D. McMeans 40 Chief Financial Officer and Senior Vice President
Corporate Development
Samuel M. Stein 62 General Manager, Luxtec Illumination Division
Bruce R. Hoadley 43 Regional Vice President, Surgical Southeast Region
Scott F. Billman 46 Regional Vice President, Surgical Central Region
Mark A. Jungers 50 Regional Vice President, Critical Care
Peter A. Miller 57 Regional Manager, Critical Care
BRADFORD WALKER, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Walker
has over twenty years of experience managing and advising companies in a variety
of industries. Mr. Walker has served as our President and Chief Restructuring
Officer since October 2001, a Director since May 16, 2002, and our Chief
Executive Officer since August 6, 2002. Prior to his work at PrimeSource, Mr.
Walker was a Managing Director with Corporate Revitalization Partners, where he
consulted for companies undertaking a restructuring. From 1988 to 2001, Mr.
Walker lead or participated in over 30 corporate turnarounds. In addition to
turnaround work, Mr. Walker has a strong background with mergers and
acquisitions. From 1983 to1988, Mr. Walker was a partner with Beane, Walker & Co
where he was responsible for its "high-tech" venture capital investments. During
that time, Mr. Walker also served as president of InCare, the nations first PC
based intranet-billing network for physicians. Mr. Walker began his career in
1980 at Arthur Andersen & Co. Mr. Walker graduated cum laude from Baylor
University with majors in Business Administration and Computer Sciences.
JOSEPH H. POTENZA, SENIOR VICE PRESIDENT OF SALES & MARKETING - Mr. Potenza has
over twenty-five years of experience in the medical supply industry. Mr. Potenza
has served as our Senior Vice President of Sales & Marketing since December 21,
2001. Prior to that, Mr. Potenza had served as our Vice President of Corporate
Accounts since February 2001. Prior to joining PrimeSource in February 2001, Mr.
Potenza worked for McKessonHBOC as Vice President of their Corporate Program and
Medibuy where he was responsible for their National Accounts and Corporate
Program. Mr. Potenza spent 20 years with American Hospital Supply Corporation /
Baxter Healthcare Corporation from 1977 to 1997 beginning as a Sales
Representative and culminating as the Eastern Region President, running a $750
million distribution business with 650 employees and seven distribution
facilities. He received his bachelor's degree from Norwich University and an MBA
from Central Michigan University.
SHAUN D. MCMEANS, CHIEF FINANCIAL OFFICER, CHIEF OPERATING OFFICER AND CLERK -
Mr. McMeans has over 18 years experience in manufacturing and distribution
businesses, specializing in financial management, accounting and corporate
development. Prior to being named our Chief Financial Officer and Chief
14
Operating Officer in January 2002, Mr. McMeans had also served as our Vice
President of Operations and Corporate Controller. Prior to joining PrimeSource
in April 2000, Mr. McMeans held a number of financial and operational positions
with Burnham Corporation, a leading domestic manufacturer and distributor of
residential and commercial boilers for residential heating and commercial
process applications. He holds a bachelor's degree in accounting from The
Pennsylvania State University and is a certified public accountant. He began his
career in public accounting with the former Peat, Marwick, Mitchell and Company.
SAMUEL M. STEIN, GENERAL MANAGER, LUXTEC ILLUMINATION DIVISION - Mr. Stein has
an extensive background in the development of young, high growth, technically
oriented companies. Prior to becoming the General Manager of the Luxtec Division
in March 2001, Mr. Stein served as Luxtec's Chief Financial Officer. Prior to
joining Luxtec in 1993, Mr. Stein served as Chief Operating and Chief Financial
Officer of Mitrol, Inc. of which he was also co-founder. He has held the
position of Chief Financial Officer with companies ranging from young start-ups
to subsidiaries of Fortune 500 corporations. He holds a bachelor's degree in
Business Administration from the University of Toledo.
BRUCE R. HOADLEY, REGIONAL VICE PRESIDENT - PRIMESOURCE SURGICAL, SOUTHEAST
REGION -- Mr. Hoadley has an extensive background in med-surg and critical care
product sales and management. Prior to becoming the Regional Vice President and
Manager of our Surgical business in the Southeastern United States in June 1999,
Mr. Hoadley served as the Sales Manager for Futuretech, a leading distributor of
specialty medical products to the surgical market in the Southeastern United
States. PrimeSource Surgical acquired Futuretech in June 1999. Mr. Hoadley
joined Futuretech in 1991. Prior to joining Futuretech, Mr. Hoadley held sales
management positions with Kendall Healthcare and Devon. He holds a bachelor's
degree in marketing from the University of Alabama.
SCOTT F. BILLMAN, REGIONAL VICE PRESIDENT - PrimeSource Surgical, Central
Region-- Mr. Billman has extensive experience in sales, marketing and operations
management. Prior to joining PrimeSource in March 2002, Mr. Billman held several
management positions in the healthcare industry. He most recently served as
Senior Vice President, Product Marketing for Medi-buy, Inc. Mr. Billman holds a
bachelor's degree and an MBA from Bowling Green State University.
MARK A. JUNGERS, REGIONAL VICE PRESIDENT - PRIMESOURCE CRITICAL CARE -- Mr.
Jungers has an extensive background in medical-surgical and critical care
product sales and management. Prior to becoming the Regional Vice President and
Manager of our Critical Care business in the Southeastern United States in June
1999, Mr. Jungers served as the Sales Manager for Bimeco, a leading distributor
of specialty medical products to the critical care market in the Southeastern
United States. PrimeSource Surgical acquired Bimeco in June 1999. Mr. Jungers
joined Bimeco in 1979. Prior to joining Bimeco, Mr. Jungers held sales and
marketing positions with Extracorporeal Medical Division of Johnson & Johnson.
He holds a bachelor's degree in Business Administration from Marquette
University.
PETER A. MILLER, REGIONAL MANAGER, PRIMESOURCE CRITICAL CARE -- Mr. Miller has
an extensive background and over 30 years experience in the medical distribution
industry. Prior to becoming the Regional Manager of our Critical Care business
in the Northeastern United States in December 2000, Mr. Miller served as
President of New England Medical Specialties, a company he founded in 1985.
PrimeSource Surgical acquired New England Medical Specialties in December 2000.
Prior to founding New England Medical Specialties, Mr. Miller held positions in
sales and upper management with Foster Medical.
15
ITEM 2. PROPERTIES
PrimeSource's corporate headquarters is located at 3700 East Columbia Street,
Tucson, Arizona. All of our facilities are leased and all of the facilities and
offices are located in the United States. A summary of the Company's facilities,
as of August 31, 2002, and offices is as follows:
Lease
Square Expiration
City, State Feet Date
----------- ---- ----
Tucson, Arizona.............................. 25,544 02/28/05
Birmingham, Alabama.......................... 18,356 11/30/06
Atlanta, Georgia............................. 4,800 07/31/04
Guilford, Connecticut........................ 7,300 07/31/03
West Boylston, Massachusetts................. 31,689 10/31/05
------
87,689
======
We believe that the all of our facilities are in satisfactory condition and
suitable for the particular purposes for which they were acquired or constructed
and are sufficient for the Company's current operations. Our West Boylston,
Massachusetts facility will undergo repairs of its air conditioning systems in
fiscal 2003; however, the estimated cost of these repairs is planned for and
considered immaterial to the Company. The Company is in the process of
sub-leasing a portion of its Tucson facility (approximately 16,500 square feet
of idle warehouse and office space). This space became vacant subsequent to the
2001 restructuring.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and suits arising in the ordinary course of our
business. We believe that ordinary course legal proceedings will not have a
material adverse effect on our financial position, results of operations or
liquidity.
On September 5, 2002, John F. Rooney and Michael K. Bayley, each former
executive officers and directors of PrimeSource, filed a complaint against us in
Arizona Superior Court, County of Pima. The complaint alleges a breach by us of
the severance agreements with each of Messrs. Rooney and Bayley and seeks an
aggregate of at least $1.2 million in compensatory damages. We believe that we
have meritorious defenses and we intend to defend our position with respect to
this complaint. The outcome of this action cannot be determined at the present
time and no assurance can be give as to the occurrence of any particular
outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock was listed on the American Stock Exchange (the "AMEX") under
the AMEX symbol "LXU.EC") from April 20, 1994 through November 17, 2000, at
which time it was delisted by the AMEX because it no longer continued to satisfy
the AMEX's listing requirements. On November 16, 2000, the trading day
immediately before our common stock was delisted by the AMEX, the closing price
was $1.00.
The following table sets forth the high and low closing sale prices of our
common stock on the AMEX during the periods indicated below:
Common Stock
------------
High Low
---- ---
Fiscal Year Ended 10/31/99
First Quarter 2.88 2.00
Second Quarter 2.94 2.13
Third Quarter 2.75 1.88
Fourth Quarter 3.00 1.75
Fiscal Year Ended 10/31/00
First Quarter 4.0 1.56
Second Quarter 2.75 1.50
Third Quarter 2.25 1.44
Fourth Quarter 1.75 0.63
Our common stock is not currently listed on any public exchange or market. There
is no established public trading market for our common stock and we cannot
assure that we will ever be able to establish trading of our common stock on a
public market or exchange.
As of August 31, 2002, there were approximately 547 holders of record of our
common stock. We estimate that there are approximately 1,400 beneficial holders
of our common stock.
We have not paid any cash dividends on our common stock since our inception and
the Board of Directors does not contemplate doing so in the near future. The
Board of Directors currently intends to retain any future earnings for use in
expanding our business. We are limited in our ability to pay dividends. In
addition, we may not declare or pay any dividend without the consent of lenders
and our preferred stockholders.
On January 23, 2002, we created a new class of stock, Series F Convertible
Redeemable Preferred Stock, no par value (the "Series F Stock"), with 5,221,248
authorized shares. The Series F Stock was issued in exchange for our previously
outstanding shares of Series D Exchangeable Preferred Stock, par value $1.00 per
17
share (the "Series D Stock"). We did not receive any cash proceeds in connection
with the issuance of the Series F Stock in exchange for the Series D Stock.
Pursuant to the provisions of the Certificate of Vote establishing the Series D
Stock, as of January 23, 2002, the Series D Stock ceased to remain outstanding.
Series F Stock was convertible into 5,221,248 shares of common stock at the
option of the holder at any time. Each share of Series F Stock had one vote for
each share of common into which it was convertible. In addition, Series F Stock
ranked senior to all other of our outstanding stock at June 30, 2002. Series F
Stock accrued dividends at the rate of 8 percent per year of the original
issuance price and had a liquidation preference equal to $1.00 per share plus an
amount equal to all accrued but unpaid dividends. The Series F Stock had a
mandatory redemption date of June 3, 2005, and was redeemable at the original
issue price plus accrued but unpaid dividends. The Series F Stock also had
special consent rights to certain of our activities, including, but not limited
to, amendment of our articles or bylaws and merger or consolidation of
PrimeSource. On August 6, 2002, Series F Stock was converted to common stock, as
discussed further below.
On August 6, 2002, we created a new series of preferred stock, Series G
Convertible Redeemable Preferred Stock, no par value (the "Series G Stock"). On
August 6, 2002, we issued and sold 70,452 shares of Series G Stock and warrants
to purchase an aggregate of 3,300,000 shares of our common stock at $.01 per
share. These warrants vested immediately and expire August 6, 2012. We received
aggregate cash proceeds of $2,254,464 from the issuance and sale of the Series G
Stock and warrants on August 6, 2002. In addition, on September 15, 2002, we
issued and sold an additional 10,891 shares of Series G Stock for aggregate
consideration of $348,512. Each share of Series G Stock is convertible into 100
shares of common stock, subject to adjustment, at the option of the holder at
any time after the sooner of December 31, 2002 or the approval by the Board of
Directors of an increase in the authorized shares of common stock to at least
68,000,000 shares. Each share of Series G Stock has one vote for each share of
common stock into which it would be convertible. In addition, the Series G Stock
ranks senior to all other outstanding stock of PrimeSource. Each share Series G
Stock accrues dividends at the rate of 8 percent per year of the original
issuance price of $32.00 per share and has a liquidation preference equal to
$64.00 per share plus an amount equal to all accrued but unpaid dividends. Each
share of Series G Stock has a mandatory redemption date of June 3, 2005, and is
redeemable at the original issue price of $32.00 per share plus accrued but
unpaid dividends. The Series G Stock also has special consent rights to certain
of our activities, including, but not limited to, amendment of our articles or
bylaws and the merger or consolidation of PrimeSource. Our sale of the Series G
Stock and the related warrants was exempt from registration with the Securites
Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder because the purchasers acquired the
securities for their own respective accounts and not with a view to
distribution.
On August 6, 2002 and prior to the issuance and sale of the Series G Stock and
warrants, we restructured our equity structure. Each outstanding share of our
Series C Convertible Preferred Stock, $1.00 par value per share (the "Series C
Stock"), was converted into 27.58 shares of our common stock. In connection with
the conversion of the Series C Stock, we issued the former holders of the Series
C Stock warrants to purchase an aggregate of 7,390,614 shares of our common
stock with an exercise price of .01 per share. These warrants vested immediately
and expire on August 6, 2012. Additionally, exercise prices on warrants to
purchase an aggregate of 140,330 shares of our common stock previously issued to
certain holders of Series C Stock were repriced from $1.68 per share to $.01 per
share.
18
Simultaneous with the conversion of the Series C Stock, each outstanding share
of our Series F Convertible Redeemable Preferred Stock, no par value (the
"Series F Stock"), was converted into one share of common stock. In connection
with the conversion of the Series F Stock, we issued the former holders of the
Series F Stock warrants to purchase an aggregate of 1,614,560 shares of our
common stock with an exercise price of $.01 per share. These warrants vested
immediately and expire on August 6, 2012.
On August 6, 2002 and subsequent to the conversion of the Series C Stock and the
Series F Stock (but prior to the issuance and sale of the Series G Stock), each
outstanding share of our Series E Convertible Preferred Stock, no par value (the
"Series E Stock"), was exchanged for .3125 shares of Series G Stock. In
connection with the exchange of the Series E Stock, we issued the former holders
of the Series E Stock warrants to purchase an aggregate of 817,000 shares of our
common stock with an exercise price of $.01. These warrants vested immediately
and expire on August 6, 2012.
Equity Compensation Plan Information
------------------------------------
June 30, 2002
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
Equity compensation
plans approved by
security holders...... 5,713,342 $1.27 2,986,658
Equity compensation
plans not approved
by security holders 0 0 0
--------- ----- ---------
Total....... 5,713,342 $1.27 2,986,658
========= ===== =========
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived from
our historical audited consolidated financial statements of PrimeSource for each
of the five years in the period ended June 30, 2002. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes thereto. Data is in thousands except per share data.
FISCAL YEAR
OPERATING DATA: ENDED JUNE 30
------------ ------------ -------------- ------------ -------------
2002(1) 2001(2) 2000(3)(4) 1999(5) 1998(6)
-------- ------- ---------- ------- -------
NET SALES . . . . . . . . . . $58,945 $51,032 $54,411 $15,114 $6,362
NET LOSS. . . . . . . . . . . $(6,191) $(4,382) $(1,384) $(744) $(116)
NET LOSS PER SHARE. . . . . . $(1.11) $(1.37) $(.69) $(0.17) $(0.04)
BALANCE SHEET DATA:
TOTAL ASSETS. . . . . . . . . . . . $37,587 $45,450 $31,297 $30,380 $7,261
LONG-TERM OBLIGATIONS. . . $23,285 $20,335 $15,968 $1,516 $776
STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY). . . . . $(5,349) $(562) $(567) $2,622 $3,646
(1) In the fiscal year ended June 30, 2002, PrimeSource approved plans for
further restructuring of operations involving narrowing the focus of its
operations, consolidation of certain under performing sales regions, reduction
of corporate overhead through workforce reductions, restructuring of its balance
sheet through the refinancing of PrimeSource Healthcare's and PrimeSource
Surgical's senior bank debt and the reduction of debt levels through cost
reductions and improved efficiency of operations. The aggregate cost of the
restructuring included total charges of $2,915,673.
(2) Effective March 2, 2001, PrimeSource Surgical completed a merger with Luxtec
Corporation for aggregate consideration of approximately $4,791,000, where
PrimeSource Surgical assumed liabilities, net of assets acquired and costs of
approximately $3,931,000. The acquisition was accounted for using the purchase
method of accounting and the results of operations of Luxtec have been included
in the financial statements of PrimeSource Surgical as of the date of
acquisition. In December 2000, the Company acquired two entities for aggregate
consideration of $1,310,000. The acquisition was accounted for using the
purchase method of accounting and the results of operations of the acquired
entities have been included in the consolidated financial statements from the
date of acquisition.
(3) In June 2000, PrimeSource Surgical sold an entity for approximately
$398,000, which resulted in a recorded loss of approximately $732,000. In
20
addition, in April 2000, PrimeSource Surgical acquired an entity for $405,000.
The acquisition was accounted for using the purchase method of accounting and
the results of operations are included in the audited financial statements from
the date of acquisition.
4) In the fiscal year ended June 30, 2000, PrimeSource Surgical approved plans
for a major restructuring of its operations with the goal of centralizing
distribution facilities, eliminating unprofitable divisions and reducing costs.
The aggregate costs of the restructuring included total charges of 1,031,000.
(5) In June 1999, PrimeSource Surgical acquired four entities for $17,000,000.
In March 1999, PrimeSource Surgical acquired an entity for approximately
$196,000. Each of the acquisitions were accounted for using the purchase method
of accounting and the results of operations of the acquired entities have been
included in the consolidated financial statements from the date of acquisition.
(6) In January 1998, PrimeSource Surgical acquired two companies for
consideration of approximately $3,556,000. In June 1998, PrimeSource Surgical
acquired an entity for approximately $358,000. Each of the acquisitions were
accounted for using the purchase method of accounting, the results of operations
of the acquired entities are included in the consolidated financial statements
from the dates of acquisition.
21
OPERATING DATA:
The following table sets forth unaudited quarterly consolidated operating results for each of our last eight quarters. We have
prepared this information on a basis consistent with our audited consolidated financial statements and included all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the data. These quarterly
results are not necessarily indicative of future results of operations. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements
and the notes thereto. Data is in thousands, except per share data.
Sep-30, Dec-31, Mar-31, Jun-30, Sep-30, Dec-31, Mar-31, Jun-30,
2000 2000 (1) 2001 2001 2001 2001(2)(3) 2002(3) 2002(2)(3)
--------- ---------- --------- --------- --------- ---------- --------- ---------
Net revenues $12,504.9 $ 11,436.0 $12,691.6 $14,399.1 $16,025.7 $ 15,007.7 $14,585.1 $13,326.8
Cost of sales 8,413.7 8,524.9 8,362.8 10,153.7 10,187.7 10,855.5 9,688.6 8,579.4
--------- ---------- --------- --------- --------- ---------- --------- ---------
Gross profit $ 4,091.2 $ 2,911.1 $ 4,328.8 $ 4,254.4 $ 5,838.0 $ 4,152.2 $ 4,896.5 $ 4,747.4
========= ========== ========= ========= ========= ========== ========= =========
Net loss $ (148.7) $(2,702.3) $ (639.1) $ (892.1) $ (257.0) $(5,039.9) $ (540.2) $ (353.5)
========= ========== ========= ========= ========= ========== ========= =========
Net loss per share $ (.05) $ (.94) $ (.14) $ (.19) $ (.13) $ (.73) $ (.12) $ (.13)
========= ========== ========= ========= ========= ========== ========= =========
COMPUTED AS DESCRIBED IN OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCORPORATED BY REFERENCE INTO THIS FORM
10-K.
Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to
quarterly fluctuations.
(1) In the quarter ended December 31, 2000, PrimeSource Surgical sold an entity for approximately $398,000, which resulted in a
recorded loss of approximately $732,000. In addition, in this quarter, PrimeSource Surgical approved plans for a major restructuring
of its operations resulting in total charges of $1,031,000.
(2) PrimeSource Healthcare discontinued an operational division of the Critical Care segment, which resulted in a recorded loss of
approximately $658,000 in quarter ended December 31, 2001 and $381,000 in quarter ending June 30, 2002.
(3) PrimeSource Healthcare approved plans for a major restructuring of its operations resulting in total charges of $2,463,000 in
quarter ended December 31, 2001, $341,000 in quarter ended March 31, 2002 and $112,000 in quarter ended June 30, 2002.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This analysis of our financial condition, capital resources and results of
operations should be read in conjunction with the accompanying consolidated
financial statements, including the notes thereto.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of net revenues for the fiscal years ended June 30, 2002, 2001 and
2000.
2002 2001 2000
----------------- ------------------ ------------------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 66.7% 69.5% 67.2%
Gross Profit 33.3% 30.5% 32.8%
Selling, General and Administrative Expense 35.8% 36.9% 31.1%
Restructuring Expense 6.7% 1.9%
Interest Expense 1.2% 1.8% 2.0%
Net Loss (10.5%) (8.6%) (2.5%)
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2001
NET SALES: Net sales of $58,945,273 for fiscal 2002 were $7,913,663 or 15.5%
higher than the $51,031,610 reported for fiscal 2001. The increase in net sales
in fiscal year 2002 was primarily a result of recognizing a full year of sales
contribution from the merger with Luxtec in March 2001 and the acquisition of
New England Medical Specialties ("NEMS") and Professional Equipment Co. Inc.
("PEC") in December 2000. In addition, we shifted our focus to implementing key
measures to grow and strengthen the existing core business which contributed to
our increase in net sales in fiscal 2002.
COST OF SALES: Cost of sales increased to $39,311,222 for fiscal 2002 from
$35,455,087 for fiscal 2001. The cost of sales for fiscal 2002 was 66.7% of net
sales compared to 69.5% of net sales for fiscal 2001. The increase in cost of
sales is primarily due to higher sales levels with the addition of full year
Luxtec, NEMS and PEC results. The decrease in cost of sales as a percentage of
net sales is primarily due to the full year addition of Luxtec's higher margin
sales in our consolidated financial results in 2002 compared to only three
months in 2001.
GROSS PROFIT: Gross Profit increased to $19,634,051, or 33.3% of net sales for
fiscal 2002, from $15,576,523, or 30.5% of net sales, for fiscal 2001. The
increase in gross profit is primarily due to higher, full year sales levels with
the addition of the Luxtec, NEMS and PEC. The increase in gross profit margins
is primarily due to the addition of a full year of Luxtec's financials results
in our consolidated financial results in 2002 compared to only three months in
2001.
23
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expenses increased to $21,116,385 for fiscal 2002, from $18,813,441 for fiscal
2001, an increase of $2,302,944, or 12.2%. The increase in expenses in fiscal
2002 is primarily due to increases in receivable reserves and inclusion of
partial year results in 2001 due to the acquisition of Luxtec in March 2001 and
the acquisition of NEMS and PEC in December 2000. The results of operations for
Luxtec, NEMS and PEC were not included in our consolidated general and
administrative expense for the entire fiscal year ended June 30, 2001.
RESTRUCTURING EXPENSE: In early November 2001, we commenced with a restructuring
plan involving narrowing the focus of our operations, the consolidation of
certain under performing sales regions, the reduction of corporate overhead
through workforce reductions, the restructuring of our balance sheet through the
refinancing of the PrimeSource Healthcare and the PrimeSource Surgical senior
bank debt and the reduction of debt levels through projected improved earnings
and potential asset sales. To date we have completed certain aspects of our new
business model, completed a reduction in workforce and executive staff, exited
the western sales region and have refinanced our existing debt. As a result of
this, restructuring expense were recorded of $ 2,915,673, or 4.9% of sales for
fiscal 2002. In addition, during 2002 we made a decision to dispose of the PEC
division, and the write-off of PEC goodwill and other impaired assets totaled
$1,038,825.
INTEREST EXPENSE: Interest expense decreased to $681,199 during fiscal 2002,
compared to $920,862 during fiscal 2001, a decrease of $239,663, or 26%. Our
interest cost decreased primarily as the result of a reduction in interest rates
during fiscal 2002.
NET LOSS: Our net loss increased to $6,190,563 during fiscal 2002, compared to
$4,382,164 during fiscal 2001, an increase of $2,085,699, or 50%. Our net loss
increased in fiscal 2002 primarily as a result of the costs incurred related to
our restructuring process.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2000
NET SALES: Net sales of $51,031,610 for fiscal 2001 were $3,379,445, or 6.2%,
lower than the $54,411,055 reported for fiscal 2000. The reduction in net sales
in fiscal year 2001 was primarily a result of our decision to discontinue the
distribution of certain non-core product lines and the loss of the exclusive
right to distribute certain product lines. In addition, several of our suppliers
switched from stocking distribution relationships to agency relationships
thereby leading to a reduction in reported net sales. We continue to generate
commission income from these agency lines.
COST OF SALES: Cost of sales decreased to $35,455,087 for fiscal 2001 compared
to $36,562,624 for fiscal 2000. The cost of sales for fiscal 2001 was 69.5% of
net sales compared to 67.2% of net sales for fiscal 2000. The increase in cost
of sales as a percentage of net sales was primarily due to the loss of several
higher margin product lines during fiscal 2001 as well as an increase in the
amount of lower-margin capital equipment sales.
GROSS PROFIT: Gross profit decreased to 15,576,523, or 30.5% of net sales for
fiscal 2001, as compared to $17,848,431, or 32.8% of net sales for fiscal 2000.
24
The reduction in gross profit was primarily due to lower sales levels and the
loss of several higher margin product lines during fiscal 2001 as well as an
increase in the amount of lower-margin capital equipment sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expense increased to $18,813,441 for fiscal 2001, compared to $16,940,243 for
fiscal 2000, an increase of $1,873,198, or 11.1%. The increase in expenses in
fiscal 2001 is due to the hiring of several additional senior management
personnel including our former Chief Executive Officer. We also incurred
increased severance, recruitment and relocation costs as a result of several
senior and mid-level management changes.
INTEREST EXPENSE: Interest expense decreased to $920,862 during fiscal 2001,
compared to $1,104,115 during fiscal 2000, a decrease of $183,253, or 16.6%. Our
interest cost decrease was primarily the result of a reduction in interest rates
during fiscal 2001.
NET LOSS: Our net loss increased to $4,382,164 during fiscal 2001, compared to
$1,383,654 during fiscal 2000, an increase of $2,998,510, or 217%. Our net loss
increased in fiscal 2001 as a result of lower net sales and gross profits and
increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had a working capital deficit of ($5,202,638) compared to a
deficit of ($6,309,266) at June 30, 2001. The decrease in our working capital
deficit was primarily a result of decreased accounts receivable and inventory
balances, offset by decreased amounts accounts payable and current obligations
for long-term debt. Operating losses during the twelve-month period ended June
30, 2002 were primarily offset by proceeds from the issuance of preferred stock.
The PrimeSource Surgical Credit Agreement (as defined below) with Citizens Bank
of Massachusetts, or "Citizens," contains covenants that require the maintenance
of defined financial ratios and income levels and limit additional borrowings
and capital expenditures. PrimeSource Surgical was not in compliance with those
financial covenants as of June 30, 2002, and accordingly was in default under
the PrimeSource Surgical Credit Agreement as of June 30, 2002. On August 6,
2002, PrimeSource Surgical amended the PrimeSource Surgical Credit Agreement
and, as of such date through the date of this Report, is no longer in default of
the PrimeSource Surgical Credit Agreement.
On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement, or, the "Luxtec Credit Agreement," for a $2,500,000 line of credit,
or, the "Luxtec Line of Credit," with ARK CLO 2000-1 LIMITED, or, "ARK." As of
June 30, 2002, the maximum amount available to borrow under the Luxtec Line of
Credit was limited to the lesser of $2,500,000 or a certain percentage of
accounts receivable and inventory, as defined ($1,275,302 at June 30, 2002). As
of June 30, 2002, borrowings bore interest at ARK's prime rate plus 2.0% (6.75%
at June 30, 2002). Unused portions of the Luxtec Line of Credit accrue a fee at
an annual rate of 1.00%. Borrowings are secured by substantially all of
PrimeSource Healthcare's assets, excluding the capital stock of, and assets held
by, PrimeSource Surgical. At June 30, 2002, there was no availability under the
25
Luxtec Line of Credit. As of June 30, 2002, borrowings under the Luxtec Line of
Credit were payable upon maturity on March 31, 2005. On August 6, 2002 we
amended the Luxtec Line of Credit, which changed the maximum amount available to
borrow under the Luxtec Line of Credit to the lesser of $1,250,000 or a certain
percentage of accounts receivable and inventory, as defined.
On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and Restated Term Note, or the "Luxtec Term Note," in the amount of $300,000
with ARK. As of June 30, 2002, the Luxtec Term Note bore interest at prime plus
0.5% (5.25% at June 30, 2002) and was secured by substantially all of
PrimeSource Healthcare's assets, excluding the capital stock of, and assets held
by, PrimeSource Surgical. As of June 30, 2002, the Luxtec Term Note required
monthly principal payments of $10,000 which commenced on March 31, 2001. The
Luxtec Term Note was scheduled to mature on March 31, 2002 with a balloon
payment of $150,000 on that date. ARK granted us an extension on the payment of
the Luxtec Term Note until May 31, 2002. At June 30, 2002, we had outstanding
borrowings of $150,000 under the Luxtec Term Note. On August 6, 2002 we paid off
the entire outstanding balance of the Luxtec Term Note in connection with the
Luxtec Credit Agreement amendment.
On March 2, 2001, as part of the Luxtec Credit Agreement, the Company executed
an Amended and Restated Equipment Note, or, the "Luxtec Equipment Note," in the
amount of $131,000 with ARK. Borrowings bore interest at the bank's prime rate
plus 1.0% and were secured by substantially all of PrimeSource Healthcare's
assets, excluding the capital stock of, and assets held by, PrimeSource
Surgical. The Luxtec Equipment Note required monthly principal payments of
$8,333 which commenced on March 31, 2001. The Luxtec Equipment Note matured on
June 30, 2002 and was fully paid at that date. At June 30, 2002, the Company had
no outstanding borrowings under the Luxtec Equipment Note.
The Luxtec Credit Agreement contains covenants that require the maintenance of
defined financial ratios and income levels and limit additional borrowings and
capital expenditures. We were in compliance with these financial covenants as of
June 30, 2002. However, the Luxtec Credit Agreement contains a cross-default
provision to our other credit agreements. As a result of this cross-default
provision and the default under the PrimeSource Surgical Credit Agreement as of
June 30, 2002 as described below, we were in default under the Luxtec Credit
Agreement as of June 30, 2002. On August 6, 2002, PrimeSource Surgical amended
the PrimeSource Surgical Credit Agreement and no longer is in default under the
PrimeSource Surgical Credit Agreement, and thus, as of such date through the
date of this Report, we are no longer in default under the Luxtec Credit
Agreement.
On June 14, 1999, the Company's wholly-owned subsidiary, PrimeSource Surgical,
entered into an Amended and Restated Credit Agreement, or the "PrimeSource
Surgical Credit Agreement," with Citizens for a line of credit, or the
"PrimeSource Surgical Line of Credit." As of June 30, 2002, the maximum amount
available to borrow under the PrimeSource Surgical Line of Credit was limited to
the lesser of $12,000,000 or a certain percentage of accounts receivable and
inventory, as defined by the PrimeSource Surgical Credit Agreement ($6,243,016
at June 30, 2002). As of June 30, 2002, Borrowings bore interest at Citizens'
prime rate plus 0.75% (5.50% at June 30, 2002). Unused portions of the
PrimeSource Surgical Line of Credit accrued a fee at an annual rate of 0.375%.
26
Borrowings are secured by substantially all assets directly held by PrimeSource
Surgical. At June 30, 2002, there was no availability under the PrimeSource
Surgical Line of Credit. Borrowings under the PrimeSource Surgical Line of
Credit were payable upon maturity in June 2003.
On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note, or, the
"PrimeSource Surgical Term Loan" in the original amount of $5,000,000 with
Citizens. The PrimeSource Surgical Term Loan is collateralized by substantially
all the assets directly held by PrimeSource Surgical. As of June 30, 2002, the
PrimeSource Surgical Term Loan bore interest at Citizens' prime rate plus 0.75%
(5.50% at June 30, 2002). As of June 30, 2002, the PrimeSource Surgical Term
Loan requires monthly principal payments of $133,334 between July 2002 and June
2003. As of June 30, 2002, the PrimeSource Surgical Term Loan was scheduled to
mature on June 1, 2003. As of June 30, 2002, PrimeSource Surgical had
outstanding borrowings of $2,258,307 under the PrimeSource Surgical Term Loan.
On August 6, 2002, we amended the PrimeSource Surgical Credit Agreement.
Pursuant to the amendment, we made a deferred payment in the amount of $675,000.
The interest rate is now a variable step interest rate and the required
PrimeSource Surgical Term Loan monthly principal payments are $50,000 per month
between August 2002 and January 2003, $75,000 per month between February 2003
and July 2003, and $100,000 per month between August 2003 and November 2003,
with the remainder due on December 2003. In addition, pursuant to the amendment
to the PrimeSource Surgical Credit Agreement, the maturity date of the revolving
line of credit under the PrimeSource Surgical Credit Agreement was extended to
March 31, 2004 and certain other changes were made. As a result of the amendment
to the PrimeSource Surgical Credit Agreement, as of August 6, 2002 and through
the date of this Report, we are not in default under the PrimeSource Surgical
Credit Agreement. Also on August 6, 2002, we amended the Luxtec Credit Agreement
pursuant to which ARK waived and amended certain provisions under the Luxtec
Credit Agreement. As a result of our compliance with the amended PrimeSource
Surgical Credit Agreement and the amendment to the Luxtec Credit Agreement, as
of August 6, 2002 and through the date of this Report, we are not in default
under the Luxtec Credit Agreement. Management expects that we will continue to
be in compliance with each of the PrimeSource Surgical Credit Agreement and the
Luxtec Credit Agreement.
The principal source of our short-term borrowings are the Luxtec Line of Credit
and the PrimeSource Surgical Line of Credit. As of June 30, 2002, both lines of
credit utilized substantially all of their respective available borrowing bases.
As of June 30, 2002, the interest rates on the lines of credit were 6.75% and
5.50%, respectively. As a result of the amendments to each of the PrimeSource
Surgical Credit Agreement and the Luxtec Credit Agreement on August 6, 2002, we
expect that the availability under our credit facilities and any cash flow from
operations will be sufficient to fund our operations for the next twelve months.
On August 6, 2002, we raised $2,254,464 in additional equity capital through the
issuance and sale of the Series G Stock and the warrants to purchase our common
27
stock. In addition, on September 15, 2002, we raised an additional $348,512 in
equity capital through the issuance and sale of additional shares of Series G
Stock. The proceeds from the offerings were used to pay certain trade payables
and to reduce outstanding borrowings under our credit facilities. If we satisfy
the terms and conditions of the Purchase Agreement, dated as of August 6, 2002,
we may raise an additional aggregate amount of $697,024 in equity capital
through the issuance of additional shares of Series G Stock through January
2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement was effective for us
on July 1, 2001, and there was no material impact on our financial position or
results of operations.
In June 2001, the FASB also issued SFAS No. 142 GOODWILL AND OTHER INTANGIBLE
ASSETS, which was effective for us on July 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires us to complete a transitional goodwill impairment test six months
from the date of adoption. We have completed the preliminary phase of our
evaluation of goodwill and intangible assets and it is likely we will have some
impairment of goodwill upon implementation of SFAS No. 142, however, the amount
of any impairment is not yet known.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The
standard is effective for our fiscal year beginning July 1, 2002. The
implementation of this standard is not expected to have a material impact on our
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The Statement is effective for disposal
activities that are initiated after December 31, 2002. The Company does not
expect this SFAS to have a material effect on its financial position or results
of operations.
RISK FACTORS
IF WE ARE UNABLE TO ACHIEVE OUR BUSINESS OBJECTIVES AND COMPLY WITH THE
COVENANTS IN OUR CREDIT FACILITIES WE MAY HAVE TO SUSPEND OR CEASE OPERATIONS.
28
We incurred a net loss of $6,190,563 for our fiscal year ended June 30, 2002. If
we are unable to generate positive cash flow and/or raise additional equity or
debt capital, we may have insufficient funds to continue our operations. In
addition, if we are unable to comply with the covenants of our credit
facilities, our creditors may accelerate repayment of the borrowings under our
facilities.
THE INDUSTRY IN WHICH WE PARTICIPATE IS INCREASINGLY COMPETITIVE WHICH COULD
MAKE IT MORE DIFFICULT FOR US TO IMPROVE OUR FINANCIAL PERFORMANCE. The changing
health-care environment in recent years has led to increasingly intense
competition among health-care suppliers. Competition is focused on price,
service and product performance. Pressure in these areas is expected to
continue. Increased competition may lead to price and other forms of competition
that could have a material adverse effect on our market share, business and
results of operations. Also, we may face increased competition for acquisition
opportunities, which may inhibit our ability to consummate suitable acquisitions
on favorable terms.
OUR COMMON STOCK IS NOT LISTED ON AN EXCHANGE WHICH MAKES IT DIFFICULT FOR
OUR STOCKHOLDERS TO SELL THEIR STOCK. Although we are a public reporting
company, our shares of capital stock are not listed on any stock exchange or
quoted on any quotation system. We cannot assure that holders of our capital
stock will be able to dispose of their shares.
PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BY-LAWS COULD MAKE IT
HARDER FOR A THIRD PARTY TO ACQUIRE CONTROL OF US AND COULD DETER AN
ACQUISITION. Provisions of our Articles of Organization, as amended, and the
Amended and Restated By-Laws of the Massachusetts Business Corporation Law could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. Our Board
of Directors has the authority to issue shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by our
stockholders, subject to certain limitations. The rights of the holders of our
common stock may be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that we may issue in the future. The issuance
of preferred stock by us may have the effect of delaying, deferring or
preventing a change of our control without further action by our stockholders
and may adversely affect the voting and other rights of the holders of our
common stock. In addition, our Articles of Organization do not permit cumulative
voting. Further, the majority of the members of our Board of Directors serve a
staggered three-year term, which may also make it more difficult for a
third-party to gain control of our Board of Directors.
PRIMESOURCE SURGICAL HAS A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO PREDICT ITS FUTURE PERFORMANCE. PrimeSource Surgical, which is our
material subsidiary, commenced operations in 1996, and has grown rapidly through
the acquisition of a number of specialty medical products sales and marketing
organizations. Accordingly, PrimeSource Surgical has only a limited operating
history from which to evaluate and forecast its business. As a result of
PrimeSource Surgical's limited operating history, we may be unable to accurately
forecast financial results going forward. Moreover, failure to meet our revenue,
targets and financial projections may have an immediate and negative impact on
our total results of operations.
29
OUR BUSINESS WILL SUFFER IF WE FAIL TO ATTRACT AND RETAIN EXPERIENCED
SALES REPRESENTATIVES. The success and growth of our business depends on our
ability to attract and retain qualified and experienced sales representatives.
There is significant competition for experienced specialty medical products
sales representatives. It is uncertain whether we can continue to attract and
retain qualified personnel. If we cannot attract, retain and motivate qualified
sales personnel, we will not be able to expand our business and our ability to
perform under our existing contracts will be impaired, which would negatively
affect our results of operations.
OUR BUSINESS WOULD SUFFER IF WE LOST KEY SUPPLIERS. Our success is partly
dependent on our ability to successfully predict and adjust production capacity
to meet demand, which is partly dependent upon the ability of external suppliers
to deliver components at reasonable prices and in a timely manner. Capacity or
supply constraints, as well as purchase commitments, could adversely affect our
future operating results. We cannot assure that we will be able to maintain our
existing supplier relationships or secure additional suppliers as needed.
IF SUPPLIERS TERMINATE THEIR AGREEMENTS WITH US, OUR PRODUCT OFFERINGS MAY
SUFFER. Following an initial one-year term, many of our standard supplier
agreements may be terminated by either party on 90 days' notice. After
expiration of the initial term, such suppliers may terminate or seek to
renegotiate their agreements. If a significant number of suppliers terminate
their agreements with us, the range of products we will be able to offer would
be adversely affected. The ability of suppliers to terminate their agreements
may result in new agreement terms that are less favorable to us, which could
have a material adverse effect on our earnings.
SALES TO LARGER CUSTOMERS MAY INCREASE THE LENGTH OF OUR SALES CYCLE AND
DECREASE OUR PROFIT MARGINS. Increasing sales to larger buyers will be an
important element of our business strategy. As we sell more sophisticated
solutions to larger organizations, it is expected that the time from initial
contact to final approval will increase. During this sales cycle, we may expend
substantial funds and management resources without any corresponding revenue. If
approval of contracts is delayed or does not occur, our financial condition and
operating results for a particular period may be adversely affected. Approval of
contracts may be subject to delays for reasons over which we will have little or
no control, including:
* potential customers' internal approval processes;
* customers' concerns about implementing a new method of doing business;
and
* seasonal and other timing effects.
Increased sales to larger accounts may result in lower or negative profit
margins as larger customers typically have greater leverage in negotiating the
price and other terms of business relationships. If we do not generate
sufficient transaction volume to offset any lower margins, our operating results
may be materially and adversely affected.
GOVERNMENTAL OR PRIVATE INITIATIVES TO REDUCE HEALTHCARE COSTS COULD HAVE
A MATERIAL ADVERSE EFFECT ON THE SPECIALTY MEDICAL PRODUCTS INDUSTRY. The
primary trend in the United States healthcare industry is toward cost
containment. Comprehensive government healthcare reform intended to reduce
30
healthcare costs, the growth of total healthcare expenditures and expanded
healthcare coverage for the uninsured have been proposed in the past and may be
considered again in the near future. Implementation of government healthcare
reform may adversely affect specialty medical products companies, which could
decrease the business opportunities available to us. In addition, the increasing
use of managed care, centralized purchasing decisions and consolidations among,
and integration of, healthcare providers are continuing to affect purchasing and
usage patterns in the healthcare system. Decisions regarding the use of
specialty medical products are increasingly being consolidated into group
purchasing organizations, regional integrated delivery systems and similar
organizations and are becoming more economically focused, with decision makers
taking into account the cost of the product and whether a product reduces the
cost of treatment. Significant cost containment initiatives adopted by
government or private entities could have a material adverse effect on the
business of the Company.
IF WE ISSUE ADDITIONAL CAPITAL STOCK OUR CURRENT STOCKHOLDERS RIGHTS MAY
BE ADVERSELY AFFECTED. We may issue additional securities which would dilute the
ownership interests of our current stockholders. The terms and preferences of
any securities we may issue could be superior to those of our currently
outstanding capital stock. Current stockholders' rights to dividends and upon
liquidation may be adversely affected. We may undertake business combination
transactions wherein we would issue equity as consideration. Such transactions
would have a dilutive effect on our stockholders.
OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR
PREVENT A CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE
MANAGEMENT AND/OR OUR BUSINESS. As a result of its ownership of Series G
Preferred Stock and common stock, GE Capital Equity Investments, Inc., is able
to exercise substantial control over the election of our directors and determine
the outcome of most corporate actions requiring stockholder approval, including
a merger with or into another company, the sale of all or substantially all of
our assets and amendment to our Articles of Organization.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our market risk exposure relates to outstanding debt. The balance of our
outstanding bank debt at June 30, 2002 was approximately $10,505,685, all of
which is subject to interest rate fluctuations. A hypothetical 10% change in
interest rates applied to the fair value of debt would not have a material
impact on our earnings or cash flows.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
Consolidated Financial Statements
as of June 30, 2002 and 2001,
and for Each of the Three Years in the Period Ended
June 30, 2002, 2001 and 2000
Independent Auditors' Report
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-2 - F-4
Consolidated Statements of Operations for the Years Ended June
30, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the Years Ended June 30, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years Ended June
30, 2002, 2001 and 2000 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-31
32
INDEPENDENT AUDITORS' REPORT
Board of Directors
PrimeSource Healthcare, Inc.
Tucson, Arizona
We have audited the accompanying consolidated balance sheets of PrimeSource
Healthcare, Inc. and subsidiaries (the "Company") as of June 30, 2002 and 2001,
and the related consolidated statements of operations, stockholders' capital
deficiency, and cash flows for each of the three years in the period ended June
30, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of PrimeSource Healthcare, Inc. and
subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2002 in conformity with accounting principles generally accepted in the United
States of America.
Phoenix, Arizona
September 27, 2002
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 285,735 $ 622,623
Accounts receivable - net of allowance for doubtful accounts
of approximately $400,000 (2002) and $622,000 (2001) 6,348,534 8,771,207
Inventories - net 7,496,108 9,821,232
Income taxes receivable 110,000
Prepaid expenses and other current assets 207,765 152,260
-------------- --------------
Total current assets 14,448,142 19,367,322
PROPERTY, PLANT, AND EQUIPMENT - Net 1,139,935 1,740,340
INTANGIBLE ASSETS - Net of accumulated amortization
of approximately $267,000 (2002) and $221,000 (2001) 143,272 140,479
GOODWILL - Net of accumulated amortization
of approximately $3,862,000 (2002) and $2,175,000 (2001) 21,499,956 23,844,720
OTHER ASSETS - Net of accumulated amortization of
approximately $345,000 (2002) and $192,000 (2001) 355,463 357,093
-------------- --------------
TOTAL $ 37,586,768 $ 45,449,954
============== ==============
(Continued)
F-2
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 5,021,383 $ 10,994,075
Accrued expenses 3,307,581 2,747,957
Accrued restructuring costs 1,111,133
Customer deposits 220,901 568,116
Income taxes payable 9,500
Lines of credit 8,097,378 8,051,826
Current portion of long-term debt 1,855,481 3,259,885
Current portion of capital lease obligations 36,923 45,229
----------- -----------
Total current liabilities 19,650,780 25,676,588
----------- -----------
CAPITAL LEASE OBLIGATIONS - Net of current portion 47,789 72,339
----------- -----------
LONG-TERM DEBT - Net of current portion 1,244,307 84,015
----------- -----------
WARRANT PUT OBLIGATION 95,000
-----------
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK
$1.00 par value - authorized, 344,864 shares; issued and outstanding,
344,864 (2002) and 344,864 (2001) shares; aggregate liquidation
preference of $18,983,193 (2002) and $17,803,482 (2001) 16,313,946 15,134,235
----------- -----------
SERIES D EXCHANGEABLE, CONVERTIBLE PREFERRED STOCK
$1.00 par value - authorized, 20,000 shares; issued and outstanding
14,008 (2001) shares; aggregate liquidation preference of $4,949,397 (2001) 4,949,397
-----------
SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK
no par value - authorized, 1,000,000 shares; issued and outstanding,
325,000 (2002) shares; aggregate liquidation preference of $10,009,288 (2002) 2,029,864
-----------
SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK
no par value - authorized, 5,221,248 shares; issued and outstanding,
5,221,248 (2002) shares; aggregate liquidation preference of $5,402,061 (2002) 3,649,145
-----------
(Continued)
F-3
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY 2002 2001
STOCKHOLDERS' CAPITAL DEFICIENCY:
Common stock, $0.01 par value - authorized, 50,000,000 shares;
issued and outstanding, 7,978,309 (2002) and 7,959,704 (2001) shares 79,783 79,597
Additional paid-in capital 12,490,202 8,434,697
Accumulated deficit (17,919,048) (9,075,914)
-------------- --------------
Total stockholders' capital deficiency (5,349,063) (561,620)
-------------- --------------
TOTAL $ 37,586,768 $ 45,449,954
============== ==============
See notes to consolidated financial statements (Concluded)
F-4
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
NET SALES $58,945,273 $ 51,031,610 $ 54,411,055
COST OF SALES 39,311,222 35,455,087 36,562,624
------------ ------------- ------------
GROSS PROFIT 19,634,051 15,576,523 17,848,431
------------ ------------- ------------
OPERATING EXPENSES:
Selling, general, and administrative expenses 21,116,385 18,813,441 16,940,243
Restructuring expenses 3,954,498 1,031,011
------------ ------------- ------------
Total operating expenses 25,070,883 18,813,441 17,971,254
------------ ------------- ------------
OPERATING LOSS (5,436,832) (3,236,918) (122,823)
INTEREST EXPENSE (681,199) (920,862) (1,104,115)
OTHER EXPENSE (136,632) (11,184) (115,716)
------------ ------------- ------------
LOSS BEFORE INCOME TAX BENEFIT (PROVISION) (6,254,663) (4,168,964) (1,342,654)
INCOME TAX BENEFIT (PROVISION) 64,100 (213,200) (41,000)
------------ ------------- ------------
NET LOSS (6,190,563) (4,382,164) (1,383,654)
DIVIDENDS ON PREFERRED STOCK (2,652,571) (1,419,114) (955,481)
------------ ------------- ------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (8,843,134) $ (5,801,278) $ (2,339,135)
============= ============= ============
LOSS PER SHARE:
Basic $ (1.11) $ (1.37) $ (0.69)
============= ============= ============
Diluted $ (1.11) $ (1.37) $ (0.69)
============= ============= ============
See notes to consolidated financial statements.
F-5
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Series B Convertible Total
Preferred Stock Common Stock Additional Stockholders'
----------------------- ----------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
BALANCE, JUNE 30, 1999 47,243 $ 1,205,960 3,415,802 $ 34,159 $ 2,317,650 $ (935,501) $ 2,622,268
Repurchase of preferred stock (354) (10,417) (10,417)
Issuance of common stock 260,227 2,602 434,501 437,103
Repurchase of common stock (1,036,398) (10,364) (1,268,220) (1,278,584)
Exercise of stock options 234,535 2,345 39,255 41,600
Preferred stock dividends (955,481) (955,481)
Net loss - - - - - (1,383,654) (1,383,654)
------- ----------- --------- -------- ------------ ------------- ------------
BALANCE, JUNE 30, 2000 46,889 1,195,543 2,874,166 28,742 1,523,186 (3,274,636) (527,165)
Issuance of common stock in and
effect of reverse merger 3,335,000 33,350 4,649,905 4,683,255
Issuance of common stock 578,324 5,783 1,077,785 1,083,568
Conversion of preferred stock to common (46,889) (1,195,543) 1,172,214 11,722 1,183,821
Preferred stock dividends and accretion (1,419,114) (1,419,114)
Net loss - - - - - (4,382,164) (4,382,164)
------- ----------- --------- -------- ------------ ------------- ------------
BALANCE, JUNE 30, 2001 - - 7,959,704 79,597 8,434,697 (9,075,914) (561,620)
Issuance of common stock 18,605 186 24,814 25,000
Warrants and beneficial conversion
features of preferred stock 3,912,000 3,912,000
Preferred stock dividends and accretion (2,652,571) (2,652,571)
Restricted common stock vesting 118,709 118,709
Refund fractional shares (18) (18)
Net loss - - - - - (6,190,563) (6,190,563)
------- ----------- --------- -------- ------------ ------------- ------------
BALANCE, JUNE 30, 2002 - $ - 7,978,309 $ 79,783 $12,490,202 $(17,919,048) $(5,349,063)
======= =========== ========= ======== ============ ============== ============
F-6
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,190,563) $ (4,382,164) $ (1,383,654)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,491,011 1,727,082 1,210,506
Loss on sale of division 1,038,823 731,947
Change in fair value of warrant put obligation (95,000) (172,000) 124,000
Loss on disposal of property, plant, and equipment 124,132 8,179
Write off of intangible assets 12,405 25,132
Issuance of common stock for services 25,000 100,000
Compensation expense for vesting of stock 118,710
Changes in operating assets and liabilities - net of
effect of business acquisitions and dispositions:
Accounts receivable 2,208,904 873,575 (856,749)
Inventories 1,978,659 (822,554) (555,764)
Income taxes receivable and payable (119,500) 859,666 (836,116)
Prepaid expenses and other current assets 4,644 131,166 (145,312)
Other assets (181,504) (381,710)
Accounts payable (5,801,528) 779,767 2,651,440
Accrued expenses 568,636 316,944 (1,502,609)
Accrued restructuring costs 1,111,133
Customer deposits (347,215) 379,456
------------ ------------ ------------
Net cash used in operating activities (3,053,253) (557,461) (562,311)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (86,828) (475,280) (606,385)
Purchase of intangibles (64,166)
Acquisition of other assets (31,904) (210,444)
Proceeds from sale of property, plant, and equipment 6,462 7,200
(Cash paid) purchase price refunded for business
acquisitions - net (391,000) 945,000
Payment of business acquisition costs (785,159)
Proceeds from business disposition 198,130
------------ ------------ ------------
Net cash (used in) provided by investing activities (176,436) (1,644,239) 326,301
------------ ------------ ------------
(Continued)
F-7
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 20,072,856 28,043,512 27,583,557
Repayments under lines of credit (20,027,304) (28,674,599) (26,885,104)
Borrowings under long-term debt 600,000 11,854
Repayment of long-term debt (872,711) (2,361,116) (900,000)
Repayment on capital leases (47,192) (31,340) (41,716)
Proceeds from issuance of common stock 3,261 200,000
Proceeds from issuance of preferred stock - net of costs 3,167,170 5,706,061 904,360
Proceeds from the exercise of options 41,600
Stock repurchases (18) (1,089,001)
----------- ---------------- ------------
Net cash provided by (used in) financing activities 2,892,801 2,697,633 (186,304)
----------- ---------------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (336,888) 495,933 (422,314)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 622,623 126,690 549,004
----------- ---------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 285,735 $ 622,623 $ 126,690.00
=========== ================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:
Interest $ 741,905 $ 945,393.00 $ 1,023,288.00
=========== ================ ==============
Income taxes $ 256,100 $ 109,638.00 $ 1,220,582
=========== ================ ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS - During the years ended June
30, 2001, and 2000, the Company acquired entities in transactions summarized
as follows:
Fair value of assets acquired, including
transaction costs $ 17,076,173.00 $ 594,089.00
Issuance of common stock (4,254,000.00) (237,104.00)
Issuance of series D preferred stock (1,456,180.00)
Cash paid in business acquisition - net of refund (391,000.00) 945,000.00
---------------- --------------
Liabilities assumed $ 10,974,993.00 $ 1,301,985.00
================ ==============
Equipment acquired under capital lease $ 54,745 $ 39,906
=========== ================
Common stock issued for services $ 25,000 $ 100,000
=========== ================
See notes to consolidated financial statements. (Concluded)
F-8
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
PrimeSource Healthcare, Inc. ("PrimeSource" or the "Company"), a
Massachusetts corporation formerly known as Luxtec Corporation, is a specialty
medical products sales, marketing, manufacturing, and service company. The
Company sells a broad portfolio of specialty medical products, some of which it
manufactures, to hospitals and surgery centers nationwide through a dedicated
organization of sales and marketing professionals.
On March 2, 2001, Luxtec Corporation ("Luxtec"), a Massachusetts publicly
held corporation, completed a merger (the "Merger") with PrimeSource Surgical,
Inc., a Delaware corporation ("PrimeSource Surgical"), resulting in PrimeSource
Surgical becoming a wholly-owned subsidiary of Luxtec. Pursuant to the agreement
and Plan of Merger, dated November 27, 2000, as amended, the former stockholders
of PrimeSource Surgical received Luxtec capital stock in exchange for their
PrimeSource Surgical capital stock. On June 22, 2001, the stockholders of Luxtec
approved a name change to PrimeSource Healthcare, Inc.
Luxtec's year-end was previously October 31 but changed to June 30,
PrimeSource Surgical's year-end. Luxtec was a delisted public company at the
time of the acquisition. For accounting purposes, the acquisition has been
treated as the acquisition of Luxtec by PrimeSource Surgical with PrimeSource
Surgical as the acquirer (reverse acquisition). The acquisition has been
accounted for using the purchase method of accounting, and the results of
operations have been included from March 2, 2001, the date of acquisition. The
historical financial statements prior to March 2, 2001 are those of PrimeSource
Surgical. All shares and per share data prior to the acquisition have been
restated to reflect the par value and capital structure of Luxtec.
The Merger between PrimeSource Surgical and Luxtec was effected by Luxtec
acquiring 100 percent of the issued and outstanding common stock of PrimeSource
Surgical in exchange for 3,301,239 shares of common stock, par value $.01 per
share (the "Common Stock"), 46,889 shares of Series B Convertible Preferred
Stock, par value $1.00 per share (the "Series B Stock"), 344,864 shares of
Series C Redeemable, Convertible Preferred Stock, par value $1.00 per share (the
"Series C Stock"), and 9,674 shares of Series D Exchangeable, Convertible
Preferred Stock, par value $1.00 per share (the "Series D Stock") of Luxtec. In
addition, the Company assumed PrimeSource Surgical options to purchase 2,519,542
shares of common stock and PrimeSource Surgical warrants to purchase 578,088
shares of common stock. On March 3, 2001, the Company issued 4,334 shares of
Series D Stock and 450,000 shares of common stock in exchange for 10,000 shares
of the Company's previously outstanding Series A Redeemable Preferred Stock and
warrants to purchase 450,000 shares of common stock at $3.00 per share (Note 3).
On December 29, 2000, PrimeSource Surgical acquired all the outstanding
common stock of New England Medical Specialties, Inc. ("NEMS") and Professional
Equipment Co., Inc. ("PEC"), two specialty distribution organizations in the
northeastern United States. The transaction was accounted for using the purchase
method of accounting. PrimeSource Surgical acquired the companies for aggregate
F-9
consideration of $1,310,000, of which $391,000 was paid in cash and $919,000 was
paid by issuing 390,804 shares of common stock. An additional 21,262 shares of
common stock with a fair value of $50,000 were issued to certain employees of
the acquired companies. These shares are restricted, and vest 33 percent on the
first, second, and third anniversaries of the acquisition (Note 3).
The following unaudited pro forma combined condensed financial information
for the fiscal years ended June 30, 2001 and 2000 includes the results of
operations for the Company, presented as if PrimeSource Surgical had been
combined with Luxtec, NEMS, and PEC for all of 2001 and 2000, along with
adjustments that give effect to events that are directly attributable to the
transaction and expected to have a continuing impact.
2001 2000
Net sales $ 58,991,021 $ 70,096,810
============= =============
Net loss $ (7,834,540) $ (2,835,332)
============= =============
Loss per share, basic and diluted $ (1.22) $ (0.47)
============= =============
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The Company has incurred losses of $6,190,563 in
2002, $4,382,164 in 2001, and $1,383,654 in 2000. The Company's business plan
continues to focus on improving operations through internal growth of its
specialty medical products lines and through additional manufacturing
acquisitions of strategic businesses. The Company is focusing its marketing
efforts on forming partnerships with other medical products companies to widen
the customer base for its products. The Company intends to continue with its
current strategy during fiscal 2003.
The Company's primary debt financing is provided under loans from two
different banks. As of June 30, 2002, the Company had $9,080,383 of outstanding
borrowings under the PrimeSource Surgical credit agreement (the "PrimeSource
Surgical Credit Agreement"), and $1,425,302 outstanding under the Luxtec credit
agreement (the "Luxtec Credit Agreement"), as further discussed in Notes 6 and
7. The two credit agreements discussed above include certain financial
covenants, with which the Company was out of compliance at June 30, 2002. The
Company has received waivers of its defaults as of June 30, 2002 and for all
prior periods. Subsequent to June 30, 2002, the Company amended both the
PrimeSource Surgical Credit Agreement and the Luxtec Credit Agreement to revise
certain financial covenants and principal payment requirements, and as of such
date cured its defaults under each of the PrimeSource Surgical Credit Agreement
and the Luxtec Credit Agreement. Management expects that we will continue to be
in compliance with each of the PrimeSource Surgical Credit Agreement and the
Luxtec Credit Agreement. As a result of the amendments to each of the
PrimeSource Surgical Credit Agreement and the Luxtec Credit Agreement on August
6, 2002, we expect that the availability under our credit facilities and any
cash flow from operations will be sufficient to fund our operations for the next
twelve months.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries: PrimeSource
Surgical; Ruby Merger Sub (dba NEMS and PEC); and Bimeco, Inc. All intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity date of three months or less to
be cash equivalents.
F-10
CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company primarily sells to hospitals and other
healthcare providers, and ongoing customer credit evaluations are performed with
respect to the Company's customers. Collateral is generally not required. In
addition, the Company routinely maintains cash in excess of $100,000 in certain
banks to pay general accounts payable, payroll, etc. The Company, by policy,
places the investments with financial institutions evaluated as highly
creditworthy. At June 30, 2002, the Company's had uninsured cash balances
totaling $345,129.
INVENTORIES consist of raw materials, work-in-process, and finished goods,
stated at the lower of cost or market. Cost is recorded using the first in first
out method (FIFO) for Luxtec and average costing for the remaining companies.
PROPERTY, PLANT, AND EQUIPMENT are recorded at cost. Depreciation and
amortization have been provided using the straight-line method over estimated
useful lives, generally three to ten years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful life of
the asset or the lease term.
LONG-LIVED ASSETS - The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS No. 121,
long-lived assets to be held are reviewed for events or changes in circumstances
that indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether impairment to such value has occurred.
INTANGIBLE ASSETS consist primarily of goodwill, which has been amortized
on a straight-line basis over 10 to 20 years. Intangible assets are recorded at
cost, net of accumulated amortization.
OTHER ASSETS consist principally of deposits and deferred financing costs.
Deferred financing costs are amortized over the life of the related debt using
the effective interest method.
REVENUE RECOGNITION - The Company recognizes stocking revenue at the time
of shipment and passage of title. The Company also receives revenues under
certain agency arrangements and recognizes revenue when the agency sale is
complete. Provision is made currently for estimated sales returns and
allowances, which have historically been insignificant. Warranty costs are
provided for the Company's Luxtec's division sales of manufactured product. The
Company expenses warranty costs as incurred as amounts have historically been
insignificant and Luxtec offers minimal warranty of products. There were no
warranty costs for the year ended June 30, 2002 and for the year ended June 30,
2001, total costs were approximately $11,000 and are included in cost of goods
sold in the accompanying consolidated statements of operations.
RESEARCH AND DEVELOPMENT COSTS are incurred by the Company's Luxtec
division and are charged to operations as incurred. Total research and
development costs for the year ended June 30, 2002 and 2001 were approximately
$87,000 and $76,000 respectively.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, income taxes are
recognized for: (a) the amount of taxes payable or refundable for the current
year, and (b) deferred tax liabilities and assets for the future tax
F-11
consequences of events that have been recognized in the Company's financial
statements or tax returns. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic-value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES.
FINANCIAL INSTRUMENTS - Pursuant to SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, the Company is required to estimate the fair
value of all financial instruments included on its balance sheets at June 30,
2002 and 2001. The Company generally considers the carrying value of such
amounts in the financial statements to approximate their fair value due to the
relatively short period of time between origination of the instruments and their
expected realization or the variable interest rate nature of such instruments.
At June 30, 2002 and 2001, the estimated fair value of the Company's long-term
borrowings was approximately $3,119,200 and approximately $3,343,900,
respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
COMPREHENSIVE INCOME - The Company has adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This statement establishes standards for the reporting of
comprehensive income and its components. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. There was no difference between net loss and comprehensive loss for any
year presented.
LOSS PER COMMON SHARE - SFAS No. 128, EARNINGS PER SHARE, requires the dual
presentation of basic and diluted earnings (loss) per share on the face of the
statement of operations and the disclosure of the reconciliation between the
numerators and denominators of basic and diluted earnings (loss) per share
calculations. Earnings (loss) per share amounts for the years ended June 30,
2002, 2001, and 2000 are calculated using only weighted-average outstanding
shares of 7,975,208, 4,249,494, and 3,383,382, respectively. Options and
warrants to purchase common stock totaling 5,713,342, 4,409,289, and 1,951,549
shares at June 30, 2002, 2001, and 2000, respectively, and shares to be issued
upon conversion of preferred stock were not used for computing diluted earnings
(loss) per share because the result would be antidilutive. Put warrants totaling
282,022 for each of the years ended June 30, 2002, 2001, and 2000 were not used
for computing diluted earnings (loss) per share because the result would be
antidilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 141, BUSINESS COMBINATIONS. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. The statement was effective for the Company on
July 1, 2001, and there was no material impact on the Company's financial
position or results of operations.
In June 2001, the FASB also issued SFAS No. 142 GOODWILL AND OTHER
INTANGIBLE ASSETS, which was effective for the Company on July 1, 2002. SFAS No.
142 requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification of
F-12
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company has
completed the preliminary phase of its evaluation of goodwill and intangible
assets and it is likely they will have some impairment of its goodwill upon
implementation of SFAS No. 142, however, the amount of that impairment is not
yet known.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that long
- -lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The standard is effective for the Company's fiscal year beginning
July 1, 2002. The implementation of this standard is not expected to have a
material impact on the Company's financial position or results of operations.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The Statement is effective for disposal
activities that are initiated after December 31, 2002. The Company does not
expect this SFAS to have a material effect on its financial position or results
of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2001
consolidated financial statements to conform to the 2002 presentation.
3. ACQUISITIONS AND DISPOSALS
LUXTEC ACQUISITION - As discussed in Note 1, on March 2, 2001, Luxtec
completed a merger with PrimeSource Surgical for aggregate consideration of
$4,791,180, which was paid in stock, at fair value and by assumption of
liabilities. Liabilities assumed, net of assets acquired, and costs, totaled
$3,931,462. Total goodwill arising from this transaction was $8,722,642, which
is being amortized over 10 years. The acquisition was accounted for using the
purchase method of accounting, and the operating results have been included in
the Company's consolidated financial statements from the date of acquisition.
In connection with the Merger, for each share of PrimeSource Surgical
common stock, par value $0.001 per share, the PrimeSource Surgical stockholders
received .744183 of a share of Luxtec common stock, par value $0.01 per share.
For each share of PrimeSource Surgical Series A preferred stock, par value
$0.001 per share, Series B-1 preferred stock, par value $0.001 per share, and
Series B-2 preferred stock, par value $0.001 per share, the PrimeSource Surgical
stockholders received .02976732 of a share of Luxtec Series B Stock, par value
$1.00 per share. Each share of Series B Stock was subsequently converted to 25
shares of PrimeSource common stock, as further discussed at Note 8.
For each share of PrimeSource Surgical Series B-3 preferred stock, par
value $0.001 per share, Series C convertible preferred stock, par value $0.001
F-13
per share, Series C-2 convertible preferred stock, par value $0.001 per share,
the PrimeSource Surgical stockholders received .02976732 of a share of Luxtec
Series C Stock, par value $1.00 per share.
For each share of PrimeSource Surgical Series C-3 exchangeable preferred
stock, par value $0.001 per share, the PrimeSource Surgical stockholders
received .02976732 of a share of Luxtec Series D Stock, par value $1.00 per
share.
NEMS AND PEC ACQUISITIONS - As discussed in Note 1, effective December 29,
2000, the Company acquired NEMS and PEC for aggregate consideration of
$1,310,000, of which $391,000 was paid in cash and by issuing 390,804 shares of
the Company's common stock with an estimated fair value of $919,000. Total
goodwill arising from this transaction was $1,384,792, which is being amortized
over 20 years. The acquisition was accounted for using the purchase method of
accounting, and the operating results have been included in the Company's
consolidated financial statements from the date of acquisition.
OTHER ACQUISITIONS AND DISPOSALS - Effective June 30, 2002, the Company set
forth a plan to dispose of the business of PEC based upon the fact that PEC's
products and services did not fit with the Company's current business lines and
growth strategies. Goodwill and other impaired assets were written off in June
2002, resulting in a loss of $1,038,826 which is recorded in restructuring
expense in the statement of operations. In August 2002, the Company consummated
the disposition of the PEC assets.
Effective June 30, 2000, the Company sold an entity for $398,130, of which
$198,130 was received in cash and the remainder was received as 119,069 shares
of the Company's own stock with an estimated fair value of $1.68 per share. The
Company recorded a loss of $731,947 as a result of this transaction.
Effective April 1, 2000, the Company acquired an entity for $405,000, of
which $305,000 was paid in cash and $100,000 was recorded as a payable based on
the holdback provision of the agreement. Total goodwill arising from this
transaction was $205,602 and is being amortized over 20 years. The acquisition
was accounted for using the purchase method of accounting with the results of
operations of the acquired entity being included in the Company's consolidated
financial statements from the date of acquisition.
Effective June 14, 1999, the Company acquired four entities from a single
seller for a cash payment of $17,000,000, subject to adjustment based on final
net asset valuations. During fiscal 2000, the Company received a $1,250,000
refund of the purchase price, which, net of incremental costs and adjustments to
net assets acquired, resulted in a $153,830 reduction of goodwill. Total
goodwill arising from this transaction was $13,178,836 and is being amortized
over 20 years. The acquisition was accounted for using the purchase method of
accounting with the results of operations of the acquired entities being
included in the Company's consolidated financial statements from the date of the
acquisition.
Effective March 1, 1999, the Company acquired an entity for $196,400, of
which $46,400 was paid in cash and $150,000 was paid by issuing 111,627 shares
of the Company's common stock with an estimated fair value of $1.34 per share.
Total goodwill arising from this transaction was $166,234 and is being amortized
over 20 years. The acquisition was accounted for using the purchase method of
accounting, and the operating results have been included in the Company's
consolidated financial statements from the date of acquisition.
F-14
4. INVENTORIES
Inventories consist of the following at June 30:
2002 2001
Raw materials $ 1,162,080 $ 1,346,752
Work-in-process 29,168 62,884
Finished goods 7,903,032 10,071,006
Reserve for obsolescence (1,598,172) (1,659,410)
------------ -----------
Inventories - net $ 7,496,108 $ 9,821,232
============ ===========
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following at June 30:
2002 2001
Office equipment $ 708,211 $ 844,943
Furniture and fixtures 305,627 338,851
Machinery and equipment 568,061 655,735
Automobiles 151,843
Leasehold improvements 395,604 407,487
------------ -----------
Total 1,977,503 2,398,859
Less accumulated depreciation and amortization (837,568) (658,519)
------------ -----------
Property, plant, and equipment - net $ 1,139,935 $1,740,340
============ ===========
Depreciation expense totaled $536,707, $355,313 and $285,237 in fiscal year
2002, 2001 and 2000, respectively. Property and equipment held under capital
leases amounted to $81,194 and $191,107, less accumulated amortization of
$26,705 and $9,817, at June 30, 2002 and 2001, respectively.
6. LINES OF CREDIT
Lines of credit at June 30 consist of the following:
2002 2001
PrimeSource Surgical Line of Credit $ 6,822,076 $ 6,793,639
Luxtec Line of Credit 1,275,302 1,258,187
------------ -----------
Total $8,097,378 $ 8,051,826
========== ===========
The PrimeSource Surgical Credit Agreement (as defined below) with Citizens
Bank of Massachusetts, or "Citizens," contains covenants that require the
maintenance of defined financial ratios and income levels and limit additional
borrowings and capital expenditures. PrimeSource Surgical was not in compliance
with those financial covenants as of June 30, 2002, and accordingly was in
F-15
default under the PrimeSource Surgical Credit Agreement as of June 30, 2002. On
August 6, 2002, PrimeSource Surgical refinanced the PrimeSource Surgical Credit
Agreement and, as of such date through the date of this Report, is no longer in
default of the financial covenants. Accordingly, at June 30, 2002 the borrowings
were classified in accordance with contractual maturities as contained within
the refinanced agreements. At June 30, 2001, the Company was in default and
accordingly, borrowings were classified as current.
On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement, or, the "Luxtec Credit Agreement," for a $2,500,000 line of credit,
or, the "Luxtec Line of Credit," with ARK CLO 2000-1 LIMITED, or, "ARK". As of
June 30, 2002, the maximum amount available to borrow under the Luxtec Line of
Credit was limited to the lesser of $2,500,000 or a certain percentage of
accounts receivable and inventory, as defined ($1,275,302 at June 30, 2002). As
of June 30, 2002, borrowings bore interest at ARK's prime rate plus 2.0% (6.75%
at June 30, 2002). Unused portions of the Luxtec Line of Credit accrue a fee at
an annual rate of 1.00%. Borrowings are secured by substantially all of
PrimeSource Healthcare's assets, excluding the capital stock of, and assets held
by, PrimeSource Surgical. At June 30, 2002, there was no availability under the
Luxtec Line of Credit. As of June 30, 2002, borrowings under the Luxtec Line of
Credit were payable upon maturity on March 31, 2005. On August 6, 2002 the
Company amended the Luxtec Line of Credit which changed the maximum amount
available to borrow under the Luxtec Line of Credit to the lesser of $1,250,000
or a certain percentage of accounts receivable and inventory, as defined. The
amendment also changed the maturity to December 31, 2003 and increased the
interest rate to ARK's prime rate plus 3%.
On June 14, 1999, the Company's wholly-owned subsidiary, PrimeSource
Surgical, entered into an Amended and Restated Credit Agreement, or the
"PrimeSource Surgical Credit Agreement," with Citizens for a line of credit, or
the "PrimeSource Surgical Line of Credit." As of June 30, 2002, the maximum
amount available to borrow under the PrimeSource Surgical Line of Credit was
limited to the lesser of $12,000,000 or a certain percentage of accounts
receivable and inventory, as defined by the PrimeSource Surgical Credit
Agreement ($6,243,016 at June 30, 2002). As of June 30, 2002, Borrowings bore
interest at Citizens' prime rate plus 0.75% (5.50% at June 30, 2002). Unused
portions of the PrimeSource Surgical Line of Credit accrued a fee at an annual
rate of 0.375%. Borrowings are secured by substantially all assets directly held
by PrimeSource Surgical. At June 30, 2002, there was no availability under the
PrimeSource Surgical Line of Credit. Borrowings under the PrimeSource Surgical
Line of Credit are payable upon maturity in June 2003. On August 6, 2002, the
Company amended the PrimeSource Surgical Line of Credit to extend the maturity
date to March 31, 2004 and amended the interest rates under the PrimeSource
Surgical Term Note is paid.
F-16
7. LONG-TERM DEBT
Long-term debt at June 30 consists of the following:
2002 2001
Term loan payable to bank - PrimeSource Surgical $ 2,258,307 $ 2,904,709
Term note payable to bank - Luxtec 150,000 250,000
Equipment note - Luxtec 89,191
Other notes payable 691,481 100,000
------------ -----------
Total 3,099,788 3,343,900
Less current portion (1,855,481) (3,259,885)
------------ -----------
Total $ 1,244,307 $ 84,015
============ ============
On March 2, 2001, as part of the Luxtec Credit Agreement, the Company
executed an Amended and Restated Term Note, or the "Luxtec Term Note," in the
amount of $300,000 with ARK. As of June 30, 2002, the Luxtec Term Note bore
interest at prime plus 0.5% (5.25% at June 30, 2002) and was secured by
substantially all of PrimeSource Healthcare's assets, excluding the capital
stock of, and assets held by, PrimeSource Surgical. As of June 30, 2002, the
Luxtec Term Note requires monthly principal payments of $10,000 which commenced
on March 31, 2001. The Luxtec Term Note was scheduled to mature on March 31,
2002 with a balloon payment of $150,000 on that date. ARK granted us an
extension on the payment of the Luxtec Term Note until May 31, 2002. At June 30,
2002 and 2001, we had outstanding borrowings of $150,000 and $250,000,
respectively, under the Luxtec Term Note. On August 6, 2002 we paid off the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Line of Credit amendment.
On March 2, 2001, as part of the Luxtec Credit Agreement, the Company
executed an Amended and Restated Equipment Note, or, the "Luxtec Equipment
Note," in the amount of $131,000 with ARK. Borrowings bore interest at the
bank's prime rate plus 1.0% (5.75% at March 31, 2002) and were secured by
substantially all of PrimeSource Healthcare's assets, excluding the capital
stock of, and assets held by, PrimeSource Surgical. The Luxtec Equipment Note
required monthly principal payments of $8,333 which commenced on March 31, 2001.
The Luxtec Equipment Note matured on June 30, 2002. At June 30, 2002, the
Company had no outstanding borrowings under the Luxtec Equipment Note, and at
June 30, 2001 the Company had $89,190 outstanding.
The Luxtec Credit Agreement contains covenants that require the maintenance
of defined financial ratios and income levels and limit additional borrowings
and capital expenditures. The Company was in compliance with these financial
covenants as of June 30, 2002. However, the Luxtec Credit Agreement contains a
cross-default provision to our other credit agreements. As a result of this
cross-default provision and the default under the PrimeSource Surgical Credit
Agreement as described below, the Company was in default under the Luxtec Credit
Agreement as of June 30, 2002. On August 6, 2002, PrimeSource Surgical
successfully refinanced the PrimeSource Surgical Credit Agreement and no longer
is in default under the PrimeSource Surgical Credit Agreement.
F-17
On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note, or, the
"PrimeSource Surgical Term Loan" in the original amount of $5,000,000 with
Citizens. The PrimeSource Surgical Term Loan is collateralized by substantially
all the assets directly held by PrimeSource Surgical. As of June 30, 2002, the
PrimeSource Surgical Term Loan bore interest at Citizens' prime rate plus 0.75%
(5.50% at June 30, 2002). As of June 30, 2002, the PrimeSource Surgical Term
Loan requires monthly principal payments of $133,334 between July 2002 and June
2003. The PrimeSource Surgical Term Loan matures on June 1, 2003. At June 30,
2002 and 2001, PrimeSource Surgical had outstanding borrowings of $2,258,307 and
$2,904,709, respectively, under the PrimeSource Surgical Term Loan.
On August 6, 2002, we amended the PrimeSource Surgical Credit Agreement.
Pursuant to the August 6, 2002 amendment, previously deferred payments of
$675,000 were paid, the interest rate was modified to a variable step interest
rate and the required PrimeSource Surgical Term Loan monthly principal payments
are $50,000 between August 2002 and January 2003, $75,000 between February 2003
and July 2003, $100,000 between August 2003 and November 2003 and the remainder
due on December 2003.
Other notes payable include a $100,000 note payable for tenant improvements
to Luxtec's leased premises, which bears interest at 9.5 percent and is due
September 19, 2005. Payments are interest only for the first 12 months, with
remaining payments calculated on a 7-year amortization table with a balloon
payment in September 19, 2005. Future minimum payments total $23,157 (2003),
$25,456 (2004), $27,982 (2005), and $7,420 (2006). In addition, subsequent to
year-end the Company negotiated a $600,000 non-interest bearing note payable to
its special legal counsel in payment of existing outstanding accounts payable
which is due May 30, 2004. Future minimum payments total $270,000 (2003) and
$330,000 (2004).
8. COMMON AND PREFERRED STOCK
SERIES B CONVERTIBLE PREFERRED STOCK - Series B Stock was issued in the
Merger and was convertible into 25 shares of common stock automatically upon
amendment of the Company's articles of organization to increase the authorized
number of shares of common stock to 50,000,000. In June 2001, the Company's
stockholders approved the amendment to increase the Company's authorized number
of common shares to 50,000,000. As a result, the 46,889 shares of Series B Stock
automatically converted into 1,172,214 shares of common stock.
SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK - Series C Stock issued in
the Merger was convertible into approximately 28 shares of common stock at the
option of the holder at any time, based upon the conversion ratio at June 30,
2002, as defined. Each share of Series C Stock has one vote for each share of
common stock into which it would be convertible. In addition, Series C Stock
ranked senior to Series B Stock and common stock and ranks junior to the Series
D Stock, Series E Stock and Series F Stock. Series C Stock accrued dividends at
8 percent per annum of the original issue price of $42.76 per share. Series C
Stock had a liquidation preference equal to the greater of (i) $50.50 per share
plus an amount in cash equal to all accrued but unpaid dividends or (ii) the
amount the holders would have received had the holders converted their shares of
Series C Stock into common stock immediately prior to a liquidation event. The
Series C Stock had a mandatory redemption date of June 3, 2005, and was
redeemable at the original issue price of $42.76 per share plus accrued but
unpaid dividends. Due to the redemption feature, the Series C Stock had been
excluded from stockholders' equity. The Series C Stock also had special consent
F-18
rights to certain of the Company's activities, including, but not limited to,
amendment of the Company's articles or bylaws and merger or consolidation of the
Company. Accrued dividends for the year ended June 30, 2002 and 2001 totaled
$1,567,561 and $387,850, respectively, see note 15.
SERIES D EXCHANGEABLE, CONVERTIBLE PREFERRED STOCK - Series D Stock issued
in the Merger was exchangeable for equity securities of the Company to be issued
in the future and was convertible into 200 shares of common stock at the option
of the holder. Each share of Series D Stock had one vote for each share of
common stock into which it would be convertible. In addition, Series D Stock
ranked senior to Series C Stock and common stock and junior to the Series E
Stock and Series F Stock. Series D Stock accrued dividends at the rate of 10
percent per year of the stated liquidation value of $342.08 per share and had a
liquidation preference equal to $342.08 per share plus an amount in cash equal
to all accrued but unpaid dividends. Accrued dividends for the year ended June
30, 2001 totaled $157,540. On January 23, 2002, all the outstanding shares of
Series D Exchangeable, Convertible Preferred Stock were automatically exchanged
for shares of Series F Redeemable Convertible Preferred Stock, no par value (the
"Series F Preferred Stock"). The Company issued an aggregate of 5,221,248 shares
of Series F Preferred Stock upon exchange of the Series D Preferred Stock. No
cash proceeds were received in connection with the issuance of the Series F
Preferred Stock. Pursuant to the provisions of the Certificate of Vote
establishing the Series D Preferred Stock, as of January 23, 2002, the Series D
Preferred Stock is no longer outstanding. The holders of the formerly
outstanding Series D Stock held warrants to purchase common stock and the number
of shares and price under such warrants were determined based on the Company
consummating a qualified equity financing, as defined. At January 23, 2002, the
exercise price per share was set at $1.00 and the aggregate number of shares of
our common stock subject to purchase pursuant to such warrants was set at
1,751,130. See further discussion of the accounting treatment for the warrants
at the Series F Stock below.
SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK - On June 29, 2001, the
Company created a new stock class, Series E preferred stock (the "Series E
Stock"), with 1,000,000 authorized shares and no par value per share. In July
2001, the Company issued 325,000 shares for gross proceeds of $3,250,000.
Warrants to purchase five shares of common stock at $1.00 per share were issued
with each share of Series E Stock. These warrants vested immediately and expire
June 28, 2011. Series E Stock was convertible into 10 shares of common stock at
the option of the holder at any time. Each share of Series E Stock had one vote
for each share of common into which it would be convertible. In addition, Series
E Stock ranked senior to common stock, Series C stock and Series D stock. Series
E Stock accrued dividends at the rate of 8 percent per year of the original
issuance price of $10.00 per share and had a liquidation preference equal to
$30.00 per share plus an amount equal to all accrued but unpaid dividends. The
Series E Stock had a mandatory redemption date of June 3, 2005, and was
redeemable at the original issue price of $10.00 per share plus accrued but
unpaid dividends. The Series E Stock also had special consent rights to certain
of the Company's activities, including, but not limited to, amendment of the
Company's articles or bylaws and merger or consolidation of the Company. As
noted above, in connection with the Series E Stock issuance, warrants to
purchase an aggregate of 1,625,000 shares of common stock were issued with an
exercise price of $1.00 per share. The value of these warrants was calculated
using the Black-Scholes method, an expected life of 7 years, volatility of 50%
and a zero-coupon bond rate of 5.1%. The resulting value of $950,000 was
recorded directly to additional paid in capital. The resultant beneficial
conversion feature of $950,000 was also recorded directly to additional paid in
capital, see note 15.
F-19
SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK - On January 23, 2002, the
Company created a new stock class, Series F preferred stock (the "Series F
Stock"), with 5,221,248 authorized shares and no par value per share. Series F
Stock was convertible into 5,221,248 shares of common stock at the option of the
holder at any time. Each share of Series F Stock had one vote for each share of
common into which it would be convertible. In addition, Series F Stock ranked
senior to all other stock of the Company outstanding at June 30, 2002. Series F
Stock accrued dividends at the rate of 8 percent per year of the original
issuance price and has a liquidation preference equal to $1.00 per share plus an
amount equal to all accrued but unpaid dividends. The Series F Stock has a
mandatory redemption date of June 3, 2005, and was redeemable at the original
issue price plus accrued but unpaid dividends. The Series F Stock also had
special consent rights to certain of the Company's activities, including, but
not limited to, amendment of the Company's articles or bylaws and merger or
consolidation of the Company. As noted above, in connection with the Series F
Stock issuance, the terms of certain warrants were determined at a price per
share at $1.00 for an aggregate of 1,751,130 shares of our common stock. The
value of these warrants was calculated using the Black-Scholes method, an
expected life of 7 years, volatility of 50% and a zero-coupon bond rate of
4.790%. The resulting value of $1,006,000 was recorded directly to additional
paid in capital. The resultant beneficial conversion feature of $1,006,000 was
also recorded directly to additional paid in capital, see note 15.
REVERSE STOCK SPLIT - In connection with the Merger described in Note 1,
the Company had a reverse stock split, resulting in the exchange of .744183 of a
share of Luxtec common stock for each share of PrimeSource Surgical common
stock. In addition, certain PrimeSource Surgical stock classes were exchanged
for Luxtec stock classes, as discussed in Note 3. The effect of the reverse
stock split and exchange of stock classes has been reflected retroactively for
all periods presented.
9. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS - In January 1997, PrimeSource Surgical adopted a stock
option plan (the "1997 Plan") for the grant of stock options and other awards to
certain officers, key employees, or other persons affiliated with the Company.
The maximum number of shares of common stock that may be issued pursuant to the
1997 Plan is 8,000,000. Options have been granted with an exercise price not
less than the estimated fair market value of the underlying common stock and
vest 25 percent one year from the grant date and 75 percent ratably over the
next 36 months. The vested options may be exercised at any time and generally
expire 10 years from the date of grant.
In addition to the 1997 Plan, the Company has adopted several stock option
plans sponsored by Luxtec. The 1992 stock plan (the "1992 Plan") provides for
the grant of incentive stock options, nonqualified stock options, stock awards,
and direct sales of stock. Under the 1992 Plan, incentive stock options may be
granted at an exercise price not less than the fair market value of the
Company's common stock on the date of grant. The Board of Directors at its
discretion may grant nonqualified options. The 1992 Plan also provides for
various vesting schedules, as determined by the compensation committee of the
Board of Directors, and have terms not to exceed 10 years. Under the 1992 Plan,
500,000 total shares are authorized for issuance.
The 1992 plan, previously sponsored by Luxtec, is available to issue up to
an aggregate of 25,000 shares of common stock in semiannual offerings. Stock is
sold at 5 percent of fair market value, as defined. No shares were subscribed to
or issued under the 1993 Plan in the period from March 2, 2001 through June 30,
2002.
F-20
The 1995 directors' plan (the "1995 Director Plan") was adopted for
non-employee directors and provides that an aggregate of up to 200,000
nonqualified options may be granted to non-employee directors, as determined by
the compensation committee of the Board of Directors. Under the terms of the
1995 Director Plan, options are granted at not less than the fair market value
of the Company's common stock on the date of grant. The 1995 Director Plan also
provides that the options are exercisable at varying dates, as determined by the
compensation committee, and that they have terms not to exceed 10 years. At June
30, 2002 and 2001, there were 68,000 , and 88,000 shares respectively, available
for future grant under the 1995 Director Plan.
WARRANTS - Related to a private placement of its preferred stock, in
January 2001, the Company granted warrants to purchase shares of the Company's
common stock. The quantity and price of these warrants was dependent upon
certain future events which were completed in January 2002. 1,751,130 warrants
with exercise prices of $1.00 per share were issued in January 2002. The
warrants vested immediately and expire in December 2010, see note 15.
Related to a private placement of its preferred stock, in July 2001, the
Company granted warrants to purchase 1,625,000 shares of the Company's common
stock at $1.00 per share. The warrants vested immediately and expire in July
2011, see note 15.
An additional 118,650 warrants were issued to certain other stockholders
related to prior year grants with expiration dates of June 2011, and exercise
prices of $1.00 and $2.35.
Prior to the merger with PrimeSource Surgical, Luxtec issued warrants to
certain lenders and other purchasers of Luxtec's stock. Total warrants issued
entitled the holders to purchase 438,171 shares of the Company's common stock,
at exercise prices of $3.00 to $6.00 per share. The warrants expired December
31, 2001.
Related to a private placement of its preferred stock, in September 2000,
the Company granted warrants to purchase 157,861 shares of the Company's common
stock at $1.68 per share. The warrants vested immediately and expire in
September 2011, see note 15.
Additionally, as discussed in Note 7, the Company issued detachable
warrants to purchase 282,022 shares of the Company's common stock at $1.01 per
share. The warrants vested immediately and expire in 2003.
During the years ended June 30, 1999 and 1998, the Company granted to two
employees warrants to purchase 63,787 (at $1.18 per share) and 74,418 (at $1.01
per share) shares of the Company's common stock, respectively, which the Board
of Directors deemed to be the fair value of the stock at the date of grant. The
warrants vested immediately and expire in February 2003.
F-21
Changes in shares under options and warrants, in common stock equivalents,
for the years ended June 30 are as follows:
Options Warrants
---------------------------- ----------------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Outstanding Price Outstanding Price
------------- ------------- ------------- -------------
Balance, June 30, 1999 687,573 0.78 420,227 1.03
Grants 1,212,981 1.76
Canceled (134,697) 1.56
Exercised (234,535)
------------- -------------
Balance, June 30, 2000 1,531,322 1.63 420,227 1.03
Grants 1,903,210 1.58 157,861 1.68
Outstanding Luxtec options at acquisition 454,500 3.03 438,171 5.70
Canceled (496,002)
------------- -------------
Balance, June 30, 2001 3,393,030 1.81 1,016,259 3.15
Grants 112,000 1.00 3,494,780 1.01
Canceled (1,864,554) 1.72 (438,173) 5.70
------------- -------------
Balance, June 30, 2002 1,640,476 1.85 4,072,866 1.04
============= =============
Vested and exercisable, June 30, 2002 996,076 4,072,866
============= =============
Vested and exercisable, June 30, 2001 1,182,204 1,016,259
============= =============
Vested and exercisable, June 30, 2000 477,611 420,227
============= =============
The weighted-average fair value of option and warrant grants in fiscal
2002, 2001 and 2000 was approximately $1,559,000, $972,000, and $1,020,000,
respectively.
F-22
Outstanding stock options and warrants at June 30, 2002 consist of the
following:
Options Warrants
---------------------------------------------- ----------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Contractual Exercise Contractual Exercise
Exercise Prices Shares Life (Years) Price Shares Life (Years) Price
$1.00 - $1.35 689,806 6.20 $ 1.04 3,896,356 7.70 $ 1.00
$1.68 - $2.50 718,019 2.96 $ 1.97 176,510 8.29 $ 1.75
$2.63 - $6.00 232,651 1.08 $ 3.91
--------- ----------
1,640,476 3.61 $ 1.85 4,072,866 7.72 $ 1.04
========== ===========
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does
not require, companies to record compensation cost based on the fair value of
employee stock option and warrant grants. The Company has chosen to continue to
account for employee option and warrant grants using intrinsic value under APB
Opinion No. 25. Accordingly, no compensation expense has been recognized for
employee stock option and warrant grants. Had compensation expense for the
employee stock option and warrant grants been determined based on the fair value
at the grant dates, consistent with SFAS No. 123, the Company's net loss for the
years ended June 30, 2002, 2001, and 2000 would have been increased to the pro
forma amounts indicated below:
2002 2001 2000
Net loss:
As reported $(6,190,563) $ (4,382,164) $ (1,383,654)
Pro forma (6,591,748) (4,993,500) (1,523,459)
Pro forma loss per share - basic and diluted (0.86) (1.17) (0.45)
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model, with the following
weighted-average assumptions:
2002 2001 2000
Risk-free interest rate 5.21% 5.28% 6%
Expected dividend yield 0% 0% 0%
Expected lives 7 years 7 years 10 years
Expected volatility 50% 50% 50%
F-23
10. 401(k) RETIREMENT PLAN
The Company and PrimeSource Surgical separately maintain qualified 401(k)
retirement plans. The plans cover substantially all employees who have over six
months of service and have attained ages 18 and 21 for the Company and
PrimeSource Surgical plans, respectively. The 401(k) plans provide for a
contribution by the Company each year, at the Company's discretion. The Company
match totaled $169,347, $148,959, and $129,400, for the years ended June 30,
2002, 2001, and 2000, respectively.
11. INCOME TAXES
The (benefit) provision for income taxes for the years ended June 30 is
based on the following components:
2002 2001 2000
Current income taxes -
State $ (64,100) $ 213,200 $ 41,000
--------------- --------------- ---------------
Deferred income taxes:
Federal (1,458,900) (1,269,400) (248,400)
State (209,200) (217,900) (49,200)
--------------- --------------- ---------------
Total deferred (1,668,100) (1,487,300) (297,600)
--------------- --------------- ---------------
Change in valuation allowance 1,668,100 1,487,300 297,600
--------------- --------------- ---------------
Total $ (64,100) $ 213,200 $ 41,000
=============== =============== ===============
A reconciliation of the provision for income taxes to the amount of income
tax (benefit) expense that would result from applying the federal statutory rate
(35%) to loss before income tax benefit (provision) is as follows:
2002 2001 2000
Income tax benefit at statutory rate $ (2,248,400) $ (1,459,100) $ (469,900)
Nondeductible warrant put expense (income) 33,250 (60,200) 43,400
State tax (expense) benefit, net of federal benefit (202,350) (3,100) 26,600
Meals and entertainment 14,300 22,800 29,600
Nondeductible goodwill 613,100 225,500 79,000
Change in valuation allowance 1,668,100 1,487,300 297,600
General business credit 45,000
Other 12,900 34,700
--------------- --------------- ---------------
Total $ (64,100) $ 213,200 $ 41,000
=============== =============== ===============
F-24
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at June 30:
2002 2001
Current:
Restructuring reserve $ 387,400
Accrued vacation 57,500 $ 51,400
Inventory valuation adjustment 80,500 858,500
Bad debt reserve 152,200 256,300
State taxes (89,600)
Accrued distributor costs 394,400 410,000
Other 120,600 165,600
--------------- ---------------
Total current 1,917,100 1,652,200
--------------- ---------------
Long-term:
Depreciation and amortization 155,700 (24,700)
State taxes (235,100)
Credit carryforward 256,900 301,900
Capital loss carryforward 300,100 300,100
Net operating loss carryforward 6,075,000 5,066,000
--------------- ---------------
Total long-term 6,793,400 5,390,200
--------------- ---------------
Total 8,710,500 7,042,400
Valuation allowance (8,710,500) (7,042,400)
--------------- ---------------
Total $ - $ -
=============== ===============
At June 30, 2002 and 2001, the Company had federal net operating loss
carryforwards of approximately $15,274,350 and $12,843,200 and state net
operating loss carry forwards of $12,149,146 and $9,512,800, respectively. The
Company's federal and state net operating losses expire in the tax years ending
June 30, 2003 through 2022. At June 30, 2002, the Company had federal and State
credit carry forwards of approximately $144,800 and $112,100, respectively. At
June 30, 2001, the Company had federal and state credit carryforwards of
approximately $189,800 and $112,100, respectively. The Company's federal and
state credits will generally expire in the tax years ended June 30, 2002 through
2022. The Company also has a federal capital loss carryforward of approximately
$732,000. The Company's federal capital loss carryforward will begin to expire
in the tax year ending June 30, 2005.
A full valuation allowance has been provided against the Company's deferred
tax assets as of June 30, 2002 and 2001, as it is more likely than not that
sufficient taxable income will not be generated to realize these temporary
differences. Any future reduction of the valuation allowance established at the
dates of the acquisitions (Note 3) will reduce the goodwill related to such
acquisition.
F-25
12. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space and certain computer equipment and
software under capital and noncancelable operating leases. Rent expense for the
years ended June 30, 2002, 2001, and 2000 was $726,455, $584,944 and $475,037,
respectively. Minimum annual lease payments under capital and noncancelable
operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
2003 $ 42,906 $ 627,498
2004 33,181 572,476
2005 13,967 482,291
2006 6,800 187,149
2007 41,884
-------------- --------------
Total minimum lease payments 96,854 $ 1,911,298
==============
Amount representing interest (12,142)
--------------
Present value of future minimum lease payments 84,712
Less current portion of capital lease obligations (36,923)
--------------
Capital lease obligations - net of current portion $ 47,789
==============
EXECUTIVE COMPENSATION - In May 2001, the Company entered into an
employment agreement with its former President and Chief Executive Officer. The
employment agreement committed the Company to minimum compensation, severance
amounts, and future equity-based incentives. Two other executive officers had
employment agreements that provide for compensation and severance amounts. In
connection with the restructuring discussed in Note 14, all three agreements
were severed. At June 30, 2002, executive officers of the Company's subsidiaries
had employment agreements that provide for compensation and severance.
Subsequent to June 30, 2002, the Company entered into a new employment agreement
with its President and Chief Executive Officer.
LITIGATION - The Company is involved in litigation incidental to its
business. Management does not believe the ultimate disposition of this
litigation will have a material adverse effect on the Company's consolidated
financial statements.
On September 5, 2002, two former executive officers and directors of the
Company filed a complaint against the Company in Arizona Superior Court, County
of Pima. The complaint alleges a breach by the Company of the severance
agreements with each of them and seeks an aggregate of at least $1.2 million in
compensatory damages. The Company believes that it has meritorious defenses and
it intends to defend its position with respect to this complaint.
13. BUSINESS SEGMENTS
The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing, Specialty
F-26
Distribution Services - Surgical, and Specialty Distribution Services - Critical
Care. A description of each segment and principal products and operations are as
follows:
SPECIALTY MEDICAL PRODUCTS MANUFACTURING - This segment includes
the Luxtec division acquired in March 2001, which designs and
manufactures fiber optic headlight and video camera systems, light
sources, cables, retractors, and custom-made and other surgical
equipment for the medical and dental industries. There were no
operations for this segment in 2000.
SPECIALTY DISTRIBUTION SERVICES - PRIMESOURCE SURGICAL - The
surgical segment is a national sales and marketing organization that
markets and sells surgical products primarily to hospitals and surgery
centers nationwide. The primary specialty areas include gynecology,
cardiovascular, endoscopy, and general surgery. These products and
services are primarily used in hospital operating rooms and in
outpatient surgery centers. This segment does business as PrimeSource
Surgical.
SPECIALTY DISTRIBUTION SERVICES - PRIMESOURCE CRITICAL CARE - The
critical care segment is a regional sales and marketing organization
that sells products primarily to hospitals and surgery centers in the
southeastern and northeastern United States and includes the Bimeco,
Inc., NEMS, and PEC operations. Within this segment, the primary
specialties include maternal and childcare and neonatal intensive
care.
Operations that are not included in any of the segments are
included in the category "Other" and consist primarily of corporate
staff operations, including selling, general, and administrative
expenses of $4,194,680 and $2,655,817 and $2,011,185 for 2002, 2001,
and 2000, respectively.
Operating income for each segment consists of net revenues less
cost of products sold, operating expense, depreciation and
amortization, and the segment's selling general and administrative
expenses. The sales between segments are made at market prices. Cost
of products sold reflects current costs adjusted, where appropriate,
for lower of cost or market inventory adjustments.
The total assets of each segment consist primarily of net
property, plant, and equipment, inventories, accounts receivable, and
other assets directly associated with the segments operations.
Included in the total assets of the corporate staff operations are
property, plant, and equipment and other assets.
Following the Merger, certain products of the Specialty Medical
Products Manufacturing segment were sold to the Specialty Distribution
- Surgical segment. Total sales between these segments totaled
approximately $5,178,351 and $1,480,000 for years ended June 30, 2002
and 2001.
F-27
Disclosures regarding the Company's reportable segments including a
corporate management fee allocation with reconciliation to consolidated totals
are presented below.
2002
--------------------------------------------------------------------------------
DISTRIBUTION - DISTRIBUTION -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 29,412,136 $ 21,993,101 $ 7,540,036 $ 58,945,273
============== ============= =========== ============= =============
Net (loss)
income $ (1,914,899) $ (961,584) $ 880,600 $(4,194,680) $ (6,190,563)
============== ============= =========== ============= =============
Total assets $ 24,274,210 $ 6,171,408 $ 6,684,070 $ 457,080 $ 37,586,768
============== ============= =========== ============= =============
Restructuring expense $ 1,038,823 $ 2,915,675 $ 3,954,498
============= ============= =============
Depreciation and
amortization $ 1,169,527 $ 107,746 $ 150,375 $ 1,063,363 $ 2,491,011
============== ============= =========== ============= =============
Interest expense $ 273,612 $ 209,811 $ 159,218 $ 38,558 $ 681,199
============== ============= =========== ============= =============
2001
-------------------------------------------------------------------------------
DISTRIBUTION - DISTRIBUTION -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 33,698,000 $ 14,453,934 $ 2,879,676 $ 51,031,610
============== ============= =========== =============
Net (loss)
income $ (2,703,417) $ (386,039) $ 1,363,109 $ (2,655,817) $ (4,382,164)
============== ============= =========== ============= =============
Total assets $ 32,846,222 $ 8,017,389 $ 4,113,415 $ 472,928 $ 45,449,954
============== ============= =========== ============= =============
Depreciation and
amortization $ 1,061,475 $ 79,961 $ 324,743 $ 260,903 $ 1,727,082
============== ============= =========== ============= =============
Interest expense $ 527,003 $ 325,425 $ 68,434 $ 920,862
============== ============= =========== =============
2000
------------------------------------------------------------------
DISTRIBUTION - DISTRIBUTION -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE OTHER TOTAL
Net sales $ 43,096,162 $ 11,314,893 $ 54,411,055
============= ============= ============
Net (loss) income $ (800,210) $ 1,427,741 $ (2,011,185) $ (1,383,654)
============ ============ ============== =============
Total assets $ 26,840,890 $ 3,908,566 $ 547,773 $ 31,297,229
============= ============ ============= ============
Restructuring expense $ 1,031,011 $ 1,031,011
============= ============
Depreciation and
amortization $ 959,252 $ 96,254 $ 155,000 $ 1,210,506
============= ============ ============= ============
Interest expense $ 901,963 $ 202,152 $ 1,104,115
============= ============ ============
F-28
PrimeSource Surgical and its subsidiaries have no significant sales to
foreign companies; however, Luxtec has several foreign customers. The Company's
external sales, based upon the customer's country of origin by geographic area
for the year ended June 30, 2002 and 2001, totaled $56,937,000 and $50,401,000
respectively for sale in the United States and $2,008,000 and $631,000 for sales
to other foreign companies. There were no significant sales to foreign companies
in the year ended June 30, 2000.
14. RESTRUCTURING
In fiscal year 2000, PrimeSource Surgical approved plans for a major
restructuring of its operations, with the goal of centralizing distribution
facilities, eliminating unprofitable divisions, and reducing costs. The
restructuring was substantially completed in the first quarter of fiscal 2001.
In fiscal year 2002, the Company approved plans for further restructuring
of operations involving narrowing the focus of the Company's operations, the
consolidation of certain under performing sales regions, the reduction of
corporate overhead through workforce reductions, the restructuring of the
Company's balance sheet through the refinancing of the company's and PrimeSource
Surgical's senior bank debt and the reduction of debt levels through improved
earnings. During the year ended June 30, 2002, approximately twenty-nine
administrative employees were released along with several former members of the
Company's senior management team, including the Company's former Chief Executive
Officer, its former Chief Financial Officer and its former chairman and
Executive Vice President. Activity consists of the following:
LOSS ON DISPOSAL
EMPLOYEE RELATED OF DIVISION OTHER CONTRACTS TOTAL
Estimated costs for 2000 restructuring $ 258,000 $ 732,000 $ 41,000 $ 1,031,000
Cash payments (217,000) (17,000) (234,000)
Other adjustments - (732,000) - (732,000)
----------- ------------ ----------- ------------
Balance 30, 2000 41,000 - 24,000 65,000
Other adjustments (41,000) - (24,000) (65,000)
----------- ------------ ----------- ------------
Balance 30, 2001 - - - -
Estimated costs for 2002 restructuring 1,379,000 1,038,825 1,537,133 3,954,958
Cash payments (585,000) - (901,000) (1,486,000)
Other adjustments (141,000) (1,038,825) (178,000) (1,357,825)
----------- ------------ ----------- ------------
Balance June 30, 2002 $ 653,000 $ - $ 458,133 $ 1,111,133
=========== ============ =========== ============
F-29
15. SUBSEQUENT EVENTS
SERIES G CONVERTIBLE, REDEEMABLE, PREFERRED STOCK AND EQUITY
RECAPITALIZATION - On August 6, 2002, the Company created a new stock class,
Series G Convertible Redeemable Preferred Stock, no par value (the "Series G
Stock"), and the Company issued and sold 70,452 shares of Series G Stock for
proceeds of $2,254,460 on such date. The Series G Stock has 230,000 authorized
shares. In connection with the issuance of the Series G Stock, the Company
issued warrants to purchase an aggregate of 3,300,000 shares of common stock at
$.01 per share. These warrants vested immediately and expire August 6, 2012. In
addition, on September 15, 2002, the Company issued and sold an additional
10,891 shares of Series G Stock for proceeds of $348,512. Each share of Series G
Stock is convertible into 100 shares of common stock at the option of the holder
at any time after the sooner of December 31, 2002 or the approval by the Board
of Directors of an increase in authorized common stock to 68,000,000 shares.
Each share of Series G Stock has one vote for each share of common into which it
would be convertible. In addition, Series G Stock ranks senior to all other
stock of the Company. Series G Stock accrues dividends at the rate of 8 percent
per year of the original issuance price of $32.00 per share and has a
liquidation preference equal to $64.00 per share plus an amount equal to all
accrued but unpaid dividends. The Series G Stock has a mandatory redemption date
of June 3, 2005, and is redeemable at the original issue price of $32.00 per
share plus accrued but unpaid dividends. The Series G Stock also has special
consent rights to certain of the Company's activities, including, but not
limited to, amendment of the Company's articles or bylaws and merger or
consolidation of the Company. As noted above, in connection with the Series G
Stock issuance, the Company issued warrants to purchase an aggregate of
3,300,000 shares of common stock with an exercise price of $.01 per share. The
value of these warrants was calculated using the Black-Scholes method, an
expected life of 7 years, volatility of 50% and a zero-coupon bond rate of
4.09%. The resulting value of $1,031,000 will be recorded directly to additional
paid in capital in the first quarter of fiscal year 2003. The resultant
beneficial conversion feature of $1,031,000 will be recorded when the Series G
Stock is convertible on the earlier of December 31, 2002 or the approval of an
increase in authorized common stock to 68,000,000 shares.
On August 6, 2002 and prior to the issuance and sale of the Series G Stock,
the Company recapitalized its equity structure. Each outstanding share of Series
C Stock was converted into 27.58 shares of our common stock. In connection with
the conversion of the Series G Stock, we issued the former holders of the Series
C Stock warrants to purchase an aggregate of 7,390,614 shares of our common
stock with an exercise price of $.01. These warrants vested immediately and
expire on August 6, 2012. Additionally, exercise prices on warrants to purchase
an aggregate of 140,330 shares of our common stock previously issued to certain
Series C Stockholders were repriced from $1.68 per share to $.01 per share. The
value of the warrants issued and the warrants which were repriced will be
recorded to additional paid-in capital in the first quarter of fiscal 2003. The
value of these warrants totaled $2,359,000 and was calculated using the
Black-Scholes method, an expected life of 7 years, volatility of 50% and a zero
coupon rate of 4.09%.
Simultaneously with the conversion of the Series C Stock, each outstanding
share of Series F Stock was converted into one share of common stock. In
connection with the conversion of the Series F Stock, we issued the former
holders of the Series F Stock warrants to purchase an aggregate of 1,614,560
shares of our common stock with an exercise price of $.01. These warrants vested
immediately and expire on August 6, 2012. In accordance with the terms of the
1,751,130 previously issued warrants, the exercise price of such warrants were
repriced from $1.00 to .01. The value of the warrants issued and the warrants
which were repriced will be recorded to additional paid-in capital in the first
quarter of fiscal 2003. The value of these warrants totaled $1,052,000 and was
calculated using the Black-Scholes method, an expected life of 7 years,
volatility of 50% and a zero coupon rate of 4.09%.
On August 6, 2002 and subsequent to the conversion of the Series C Stock
and Series F Stock, each outstanding share of Series E Stock was exchanged for
..3125 shares of Series G Stock. In connection with the exchange of the Series E
Stock, we issued the former holders of the Series E Stock warrants to purchase
F-30
an aggregate of 817,000 shares of our common stock with an exercise price of
$.01 and a 10 year life for each share of common stock received upon conversion
of the Series C Stock. Additionally, exercise prices on 817,000 warrants to
purchase common stock previously issued to certain Series E Stockholders were
repriced from $1.00 to $.01 per share. These warrants vested immediately and
expire on August 6, 2012. The value of the warrants issued and the warrants
which were repriced were repriced will be recorded to additional paid-in capital
in the first quarter of fiscal 2003. The value of these warrants totaled
$763,000 and was calculated using the Black-Scholes method, an expected life of
7 years, volatility of 50% and a zero coupon rate of 4.09%.
DEBT RESTRUCTURING - On August 6, 2002, the Company also amended the
PrimeSource Surgical Credit Agreement and the Luxtec Credit Agreement. Pursuant
to the amendment to the PrimeSource Surgical Credit Agreement, the maturity date
of the revolving line of credit under the PrimeSource Surgical Credit Agreement
was extended to March 31, 2004, the maturity date of the term loan was extended
to December 31, 2003, and certain other changes were made including
modifications to interest rates and covenant requirements. Pursuant to the
amendment to the Luxtec Credit Agreement, ARK waived and amended certain
provisions under the Luxtec Credit Agreement. See further discussion at Notes 6
and 7.
******
F-31
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of PrimeSource:
Board of Directors
Name Age Director Since Position Term Ends
---- --- -------------- -------- ---------
William H. Lomicka 64 2001 Director and Chairman of the Board 2004
Larry H. Coleman, Ph.D 58 2001 Director 2004
Nicholas C. Memmo 39 2001 Director 2004
James J. Goodman 42 1996 Director 2002
James Berardo 41 1995 Director 2003
James W. Hobbs 52 1993 Director 2003
Bradford C. Walker 44 2002 Director, Chief Executive Officer and 2002
President
CLASS I DIRECTORS SERVING A TERM
EXPIRING AT THE 2004 ANNUAL MEETING
WILLIAM H. LOMICKA, DIRECTOR-- Mr. Lomicka was appointed to our Board of
Directors on March 2, 2001, pursuant to our merger with PrimeSource Surgical.
Mr. Lomicka is the Chairman of Coulter Ridge Capital, a private investment firm.
From 1989 to 1998, Mr. Lomicka was President of Mayfair Capital, a private
investment firm. Mr. Lomicka, formerly the Senior V.P. Finance of Humana, Inc.,
presently serves on the boards of numerous companies, both public and private.
Representative companies include: Pomeroy Computer Resources, Spectracare,
Medventure Technologies, Broadband Laboratories and Franklin Health. Mr. Lomicka
graduated from the College of Wooster in Wooster, Ohio, and earned his M.B.A.
from the Wharton Graduate School of the University of Pennsylvania.
LARRY H. COLEMAN, PH.D., DIRECTOR-- Dr. Coleman was appointed to our Board of
Directors on March 2, 2001, pursuant to our merger with PrimeSource Surgical.
Dr. Coleman is the founder and Managing General Partner of Coleman Swenson Booth
Inc., a private venture capital fund established in 1986. Dr. Coleman began his
venture capital career in 1983 as President of HCA Capital, a wholly-owned
subsidiary of Columbia/HCA Healthcare Corporation. Dr. Coleman has served as a
director on the boards of over 20 companies and is currently a board member of
MediSphere Health Partners, Inc., LifeMetrix, Inc., ClearTrack Information
Network, Inc., and Active Services Corporation. Dr. Coleman graduated from the
University of North Carolina with an A.B. and earned his Ph.D. from the
University of South Dakota.
NICHOLAS C. MEMMO, DIRECTOR-- Mr. Memmo was appointed to our Board of Directors
on March 2, 2001, pursuant to our merger with PrimeSource Surgical. Mr. Memmo is
64
a Partner with Kline Hawkes & Co., a venture capital firm with interests in
information technology, telecommunications and services. Previously, Mr. Memmo
was a founding executive and member of the Board of Directors of U.S. Filter
Corporation, a Fortune 300 company and the leading global provider of water and
wastewater treatment systems, products and services. Mr. Memmo received his B.S.
degree in chemical engineering from Drexel University and his M.B.A. from the
Anderson School at U.C.L.A.
CLASS II DIRECTORS SERVING A TERM
EXPIRING AT THE 2002 ANNUAL MEETING
JAMES J. GOODMAN, DIRECTOR - Mr. Goodman has been on our Board of Directors
since 1996. Mr. Goodman is President of Gemini Investors LLC, a private firm
based in Wellesley, MA that invests in emerging growth companies across a wide
range of industries. Gemini (and its predecessor) has raised three private
equity funds and invested in more than 35 companies over the last six years.
Prior to founding Gemini, Mr. Goodman was Vice President at Berkshire Partners,
a leading private equity firm, from 1989 to 1993. Mr. Goodman currently serves
on the board of directors of nine other companies in addition to our board of
directors. He received his A.B., J.D. and M.B.A. degrees from Harvard
University.
BRADFORD C. WALKER, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Walker
has over twenty years of experience managing and advising companies in variety
of industries. Mr. Walker has served as our President since October 2001, a
Director since May 16, 2002 and our Chief Executive Officer since August 2002.
Prior to his permanent position with us, Mr. Walker had served as our Chief
Restructuring Officer since October 2001. Prior to his work at PrimeSource, Mr.
Walker was a Managing Director with Corporate Revitalization Partners, where he
consulted companies undertaking a restructuring. From 1988 to 2001, Mr. Walker
lead or participated in over 30 corporate turnarounds. In addition to turnaround
work, Mr. Walker has a strong background with mergers and acquisitions. From
1983-1988, Mr. Walker was a partner with Beane Walker & Co where he was
responsible for its "high tech" venture capital investments. During that time,
Mr. Walker has also served as president of InCare, the nations first PC based
intranet-billing network for physicians. Mr. Walker began his career in 1980 at
Arthur Andersen & Co. Mr. Walker graduated cum laude from Baylor University with
majors in Business Administration and Computer Sciences.
CLASS III DIRECTORS SERVING A TERM
EXPIRING AT THE 2003 ANNUAL MEETING
JAMES BERARDO, DIRECTOR-- Mr. Berardo has been on our Board of Directors since
1995. Mr. Berardo currently serves as President of Darlco, Inc., a real estate
development and investment management company. Mr. Berardo joined Darlco in
1986, serving in various financial capacities prior to assuming his current
position in March, 1995.
JAMES W. HOBBS, DIRECTOR-- Mr. Hobbs has been on our Board of Directors since
1993. From March, 1993, to March 1, 2001, Mr. Hobbs served as our President and
Chief Executive Officer. Prior to that, Mr. Hobbs was the Chief Executive
Officer of Graylyn Associates from 1992 to 1993, where he currently serves as
65
Chairman. Graylyn is an investment firm founded by Mr. Hobbs to invest in early
stage medical technology. Prior to Graylyn, Mr. Hobbs served as the President
and Chief Executive Officer of Genica Pharmaceutical Inc. from 1989 to 1992.
Acquired by Elan Corporation, Genica Pharmaceutical Inc. was a corporation
engaged in providing new diagnostic assays and conducting therapeutic research
for neurological disorders. Mr. Hobbs was with Johnson and Johnson as the Vice
President and General Manager of Johnson and Johnson Professional Diagnostics
from 1985 to 1989. Mr. Hobbs received his B.S. degree from Wake Forest
University and earned his M.B.A. from the University of North Carolina.
(b) Executive Officers of the Company
Reference is made to "Executive Officers of the Registrant"
in Part I.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, our
directors, some of our officers and persons holding more than ten percent of our
common stock are required to report their ownership of our common stock and any
changes in such ownership to the Securities and Exchange Commission and us. To
our knowledge, based solely on a review of copies of those reports furnished to
us, all Section 16(a) filing requirements applicable to these persons were
complied with during our fiscal year ended June 30, 2002.
66
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of our Chief Executive
Officer, and the other executive officers of the Company as of June 30, 2002,
or, collectively, the "Named Executive Officers":
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- AWARDS
------------
SECURITIES
UNDERLYING
FISCAL OTHER ANNUAL OPTIONS (#) /
YEAR COMPENSATION RESTRICTED
NAME AND PRINCIPAL POSITION ENDED(2) SALARY($) BONUS($) ($)(1) SEVERANCE STOCK AWARDS($)
---------------------------- -------- --------- -------- ------------- --------- ---------------
Bradford C. Walker June 30, 2002 N/A N/A (4) N/A 0
Current President, Chief June 30, 2001 N/A N/A N/A N/a N/A
Executive Officer and Oct. 31, 2000 N/A N/A N/A N/A N/A
Director (3)
James L. Hersma June 30, 2002 105,941 0 28,253 17,875 0
Former President, Chief June 30, 2001 159,359 0 8,868 1,166,274/59,535
Executive Officer and Oct. 31, 2000 N/A N/A N/A N/A
Director (5)
Shaun D. McMeans June 30, 2002 138,591 9,990 0 0
Chief Operating and June 30, 2001 115,267 0 0 50,000
Financial Officer
Oct. 31, 2000 65,267 N/A N/A N/A
Joe Potenza June 30, 2002 166,637 0 4,800 0
Senior Vice President, June 30, 2001 55,267 0 3,600 148,837
Sales & Marketing
Oct. 31, 2000 N/A N/A N/A N/A
Bruce Hoadley June 30, 2002 132,818 47,173 4,800
Regional Vice President June 30, 2001 111,888 30,088 4,800
Oct. 31, 2000 101,500 16,852 4,800
Mark Jungers June 30, 2002 209,254 0 0 0
Regional Vice President June 30, 2001 180,603 N/A N/A 37,500
Oct. 31, 2000 181,718 N/A N/A 7,442
- ---------
(1) Automobile allowance for Joe Potenza and Bruce Hoadley and monthly living
allowance, auto allowance and life insurance pursuant to Mr. Hersma's
employment agreement.
(2) Effective March 2, 2001, we changed our fiscal year end to June 30 from
October 31. Accordingly, our last three fiscal year ends are June 30, 2002,
June 30, 2001 and October 31, 2000. Annual compensation disclosed is for
twelve months ended each of these fiscal years.
(3) We appointed Mr. Walker as President and Chief Restructuring Officer in
October 2001. In August 2002, we appointed Mr. Walker as President and
Chief Executive Officer.
(4) For our fiscal year ended June 30, 2002, Mr. Walker was not an employee of
PrimeSource. Beginning in October 2001 and through June 30, 2002, Corporate
Revitalization Partners provided consulting services to PrimeSource in
connection with PrimeSource's restructuring and PrimeSource paid consulting
fees to Corporate Revitalization Partners. During that period, Mr. Walker
was a Managing Director of Corporate Revitalization Partners.
(5) Mr. Hersma resigned as our President, Chief Executive Officer and Director
effective December 7, 2001.
67
During our fiscal year ended June 30, 2002, no stock option grants were
issued to the Named Executive Officers.
The following table sets forth information with respect to options to
purchase our common stock granted to the Named Executive Officers as of our
fiscal year ended June 30, 2002:
FISCAL YEAR ENDED JUNE 30, 2002 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------ ----------------- ------------------------- -------------------------
NAME
----
Bradford C. Walker 0 0 0/0 0/0
James L. Hersma 0 0 0/0 0/0
Shaun D. McMeans 0 0 31,104/56,105 0/ 0
Joseph Potenza 0 0 37,209/111,628 0/0
Bruce Hoadley 0 0 19069/37209 0/0
Mark Jungers 0 0 12,165/34,637 0/0
(1) Value is based on an estimated fair market value of our common stock on
June 30, 2002 of $0.32, minus the exercise price under such options.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
As of June 30, 2002, we do not pay our non-employee directors for
attendance meetings of the Board of Directors or meetings of a committee
thereof. We do, however, pay expenses for attendance at meetings of the board of
directors and committees thereof. In addition, non-employee directors are
compensated with options to purchase shares of our common stock, in accordance
with the 1995 Stock Option Plan for Non-Employee Directors, or the "Directors
Plan." Under the terms of the Directors Plan, we grant our non-employee
directors non-qualified stock options to purchase a total of 12,000 shares of
common stock upon their election or appointment to the Board of Directors, with
4,000 options vesting on the date of grant, and 4,000 shares vesting annually
thereafter provided the individual continues to serve on the Board of Directors.
The options granted pursuant to the 1995 Director Plan have an exercise price
equal to one-hundred percent of the fair market value per share of our common
stock on the date the option is granted.
68
EMPLOYMENT CONTRACTS
WALKER EMPLOYMENT AGREEMENT
On August 6, 2002, we entered into an Employment Agreement with Bradford C.
Walker, our President, Chief Executive Officer and Director, or the "Walker
Agreement." The term of the Walker Agreement will expire on August 6, 2004 and
offers no renewal option.
Mr. Walker is entitled to a base salary of $250,000 per year for the first
year of his employment after which year, said salary will be reviewed by the
Board of Directors. Upon review and at the Board's of Director's discretion, the
salary may be increased but not decreased. Mr. Walker is also entitled to
receive an annual bonus of not less than $50,000 based upon an incentive bonus
program established by the Chairman of the Compensation Committee and approved
by the Board of Directors.
In connection with the execution of the Walker Agreement, we granted Mr.
Walker an incentive stock option to purchase 1,950,000 shares of our common
stock at an exercise price per share equal to the fair market value of a share
of our common stock on the date of grant as determined by the Board of
Directors. Additionally, we granted Mr. Walker an option to purchase 7,500
shares of our Series G Convertible Redeemable Preferred Stock at an exercise
price equal to $16 per share. Subsequently, upon the first anniversary of the
Effective Date, Mr. Walker will be granted an additional incentive stock option
to purchase 1,300,000 shares of our common stock at an exercise price per share
equal to the fair market value of a share of common stock on the date of grant
as determined by the Board of Directors. The described stock options will become
fully vested and exercisable on the first anniversary of the date of grant of
each such option.
If we terminate Mr. Walker other than for death, disability or cause or
should he be deemed to be terminated by us, all unvested stock options will
immediately become vested. Additionally, upon a change in control as defined in
the Walker Agreement, all unvested stock options will become vested.
If we terminate Mr. Walker other than for death, disability or cause, upon
execution by Mr. Walker of a waiver and release of claims against us, we will be
obligated to pay Mr. Walker a lump sum amount equal to the lesser of six (6)
months base salary or the base salary from the effective date of termination
through the expiration date of the Walker Agreement.
If Mr. Walker's employment with us terminates for any reason, he may not
compete with us or solicit our employees for a period of one year from his date
of termination or during any period he is receiving severance payments from us.
HERSMA EMPLOYMENT AGREEMENT
On May 4, 2001, we entered into an employment agreement with James L.
Hersma, our former President, Chief Executive Officer and Director, or the
"Hersma Agreement." On December 7, 2001, Mr. Hersma resigned his employment
relationship with the PrimeSource. Pursuant to the terms of the Hersma
69
Agreement, Mr. Hersma was entitled to continuation of base salary and medical
benefits for 18 months following his resignation and may not compete with us or
solicit our employees for a period of one (1) year from his date of resignation
or during any period he is receiving severance payments from us.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Our executive compensation program is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee is comprised of
non-employee Directors who approve or recommend to the Board of Directors salary
and bonus amounts and other annual compensation for the Named Executive
Officers.
During our fiscal year ended June 30, 2002, the annual salary of our former
President and Chief Executive Officer, James L. Hersma, was set forth in his
employment agreement. Mr. Hersma resigned effective December 7, 2001 and,
pursuant to the terms of his employment agreement, is entitled to receive
severance payments from PrimeSource.
In October 2001, the Board of Directors appointed Bradford C. Walker as our
President and Chief Restructuring Officer. At the time of Mr. Walker's
appointment as our President and Chief Restructuring Officer, and until August
6, 2002, he was a Managing Director with Corporate Revitalization Partners.
Accordingly, Mr. Walker was not an employee of PrimeSource during our fiscal
year ended June 30, 2002. The Company, however, expensed aggregate consulting
fees and expenses in the amount of $436,800 and $56,933, respectively, to
Corporate Revitalization Partners during our fiscal year ended June 30, 2002 for
Mr. Walker' services. On August 6, 2002, the Board of Directors appointed Mr.
Walker as our President and Chief Executive Officer and PrimeSource entered into
an employment agreement with Mr. Walker.
The annual salaries of our other executive officers during our fiscal year
ended June 30, 2002 were determined based on their past salaries and salaries
paid by comparable companies. Shaun McMeans, our Chief Financial Officer and
Chief Operating Officer, received a cash bonus in the amount of $9,990 for our
fiscal year ended June 30, 2002, as a result of his exemplary contributions to
PrimeSource. No other executive officers received bonuses or options to purchase
our common stock in our fiscal year ended June 30, 2002 due to our performance.
Factors taken into account by the Compensation Committee in determining bonuses
include return on investment, net sales, and net income compared to the business
plan.
The Compensation Committee:
William H. Lomicka, Chair
Nicholas C. Memmo
On November 17, 2000, our common stock was delisted from the American Stock
Exchange because we no longer met the continued listing requirements of the
American Stock Exchange. Since November 17, 2000, our common stock has not been
listed or quoted on an exchange. A performance graph comparing our common stock
performance with the performance of the S&P Small Cap 600 Index and our peer
group index is provided. Because our common stock is not listed or quoted on an
70
exchange, all values subsequent to November 17, 2000 are estimates only. The
following performance graph is intended to reflect the performance of our
business for our last five completed fiscal year periods, which are October 31,
1998, October 31, 1999, October 31, 2000, June 30, 2001 and June 30, 2002.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG PRIMESOURCE,
THE STANDARD & POOR'S ("S&P") SMALL CAP 600 INDEX AND PRIMESOURCE'S PEER
GROUP INDEX (1)
PERFORMANCE GRAPH
GRAPH OMMITTED
CHART BELOW REFLECTS GRAPH
10/31/97 10/31/98 10/31/99 10/31/00 6/30/01 6/30/02
-------------------------------------------------------------------------------------------------------
PrimeSource $100.00 105.79 96.71 46.95 47.00 15.04
-------------------------------------------------------------------------------------------------------
S&P Smallcap 600 $100.00 88.25 98.07 121.99 129.27 129.10
-------------------------------------------------------------------------------------------------------
PrimeSource's Peer Group $100.00 166.79 199.13 283.26 142.19 125.92
-------------------------------------------------------------------------------------------------------
- ----------
(1) This graphic presentation assumes (a) one-time $100 investments in our
common stock and in market capital base-weighted amounts apportioned among
all the companies whose equity securities constitute the above named broad
equity market index and PrimeSource's selected peer group index, in each
case made as of the market close on October 31, 1997 and (b) the automatic
reinvestment of dividends, if any, in additional shares of the same class of
equity securities constituting such investments at the frequency with which
dividends were paid on such securities during the applicable fiscal years.
We selected our peer group in good faith based on companies in a similar
industry or line-of-business. PrimeSource's peer group is made up of the
following six companies:
Bio Vascular, Inc. Cantel Medical Corp.
Conmed Corp. Fisher Scientific International Inc.
PrimeSource Healthcare, Inc. Patterson Dental Co.
71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMPANY SECURITIES
The following tables furnish certain information as of September 16, 2002
(except as otherwise noted), as to our equity securities beneficially owned by
each of our directors, by each of the individuals named in the Summary
Compensation Table and by all of our directors and executive officers as a
group, and, to our knowledge, by any beneficial owner of more than 5% of any
class or series of our outstanding equity securities.
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
Name of Beneficial Owner Number of Shares of Number of Shares of Aggregate Number of Percent of Class
Common Stock Series G Convertible Shares of Common Stock Voting Power
Beneficially Owned RedeemablePreferred Beneficially Owned or Presently Held3
Stock Beneficially Underlying Preferred
Owned(1) Stock Beneficially Owned(2)
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
GE Capital Equity (5)
Investments, Inc.(4) 9,715,278 106,060 20,321,278 44.08%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
Coleman Swenson Hoffman (7)
Booth IV L.P. (6) 4,455,041 62,500 10,705,041 23.22%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(9)
Webbmont Holdings L.P.(8) 2,281,890 10,606 3,342,490 7.25%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
Geneva Middle Market (11)
Investors, SBIC, L.P. (10) 2,607,181 0 2,607,181 5.66%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(12)
James Berardo 178,520 0 178,520 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(7)
Larry H. Coleman, Ph.D. (13) 4,455,041 62,500 10,705,041 23.22%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(14)
James J. Goodman 2,627,181 0 2,627,181 5.70%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(15)
James W. Hobbs 117,470 0 117,470 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(16)
William H. Lomicka 621,326 3,739.5 1,066,949 2.31%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(17)
Shaun McMeans 31,104 31,104 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(18)
Nicholas C. Memmo 29,527 0 29,527 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(19)
Joseph Potenza 37,209 0 37,209 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
Bradford Walker 0 0 0 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
James L. Hersma 59,535 0 59,535 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
Mark Jungers 100,000 0 100,000 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
(20)
Bruce Hoadley 19,069 0 19,069 *
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
All directors and
executive officers as a
group (12 persons) 10,602,542 66,239 18,287,092 39.63%
- --------------------------- ----------------------- ----------------------- -------------------------- --------------------
- ----------------------------------------------
Unless otherwise indicated, the address of each person is care of PrimeSource
Healthcare, Inc. 3700 E. Columbia Street, Tucson, Arizona 85714. Shares of
common stock subject to options or warrants exercisable within sixty days of
September 16, 2002, are deemed outstanding for purposes of computing the
percentage ownership of the person holding such options or warrants but are not
outstanding for purposes of computing the percentage of any other person.
* Less than 1%.
1 Each share of Series G Convertible Redeemable Preferred Stock entitles
its holder to one hundred votes, subject to adjustment, in any vote of
the holders of our common stock and may be converted into 100 shares
of our common stock, subject to adjustment.
72
2 Includes common stock and the common stock underlying the Series G
Convertible Redeemable Preferred Stock owned as of September 16, 2002
and common stock underlying options and warrants that are exercisable
within sixty days of September 16, 2002.
3 Based upon the aggregate number of shares of our common stock
outstanding and underlying outstanding shares of the Series G
Convertible Redeemable Preferred Stock owned as of September 16, 2002
and options and warrants exercisable within sixty days of September
16, 2002 to acquire our common stock.
4 The address of GE Capital Equity Investments is 120 Long Ridge Road,
Stamford, Connecticut 06927.
5 Includes 3,721 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002. Also includes
1,744,183 shares of our common stock subject to purchase pursuant to
warrants that are exercisable within sixty days of September 16, 2002.
Does not include warrants to purchase an aggregate of 7,654,456 shares
of our common stock, at $.01 per share, which may not be exercisable
within sixty days of September 16, 2002.
6 The address of Coleman Swenson Hoffman Booth IV L.P. is 237 Second
Avenue South, Franklin, Tennessee 37064-2649.
7 Includes 9,860 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002. Also includes
872,092 shares of our common stock subject to purchase pursuant to
warrants that are exercisable within sixty days of September 16, 2002.
Does not include warrants to purchase an aggregate of 3,508,264 shares
of our common stock, at $.01 per share, which may not be exercisable
within sixty days of September 16, 2002.
8 The address of Webbmont Holdings L.P. is 1355 Peachtree Street, Suite
1100, Atlanta, Georgia 30309.
9 Includes 310,496 shares of our common stock subject to purchase
pursuant to warrants that are exercisable within sixty days of
September 16, 2002. Includes 15,930 shares of our common stock held of
record by Robert Neale Fisher, 8,434 shares of our common stock held
of record by Virginia A. Fisher, 353,057 shares of our common stock
held of record by Investors Equity, Inc. and 1,586,531 shares of our
common stock held of record by Webbmont Holdings, L.P., all of which
are considered beneficially held by Robert W. Fisher. Mr. Fisher is
the President of Woodcrest Associates, Ltd., the general partner of
Webbmont Holdings, L.P. Also includes 7,442 shares of our common stock
underlying options held by Mr. Fisher that are exercisable within
sixty days of September 16, 2002. Does not include warrants held by
Webbmont Holdings, Robert Neale Fisher, Virginia A. Fisher and
Investors Equity to purchase an aggregate of 1,146,380 shares of our
common stock, at $.01 per share, which may not be exercisable within
sixty days of September 16, 2002.
10 The address of Geneva Middle Market Investors SBIC, L.P. is care of
Gemini Investors LLC, 20 William Street, Wellesley, Massachusetts
02481.
73
11 Includes 541,832 shares of our common stock subject to purchase
pursuant to warrants that are exercisable within sixty days of
September 16, 2002. Does not include warrants to purchase an aggregate
of 499,512 shares of our common stock, at $.01 per share, which may
not be exercisable within sixty days of September 16, 2002.
12 Includes 154,520 shares of our common stock held by various trusts of
which Mr. Berardo is a trustee and over which Mr. Berardo shares
investment and voting control. Mr. Berardo disclaims beneficial
ownership of such shares. Also includes 24,000 shares of our common
stock underlying options that are exercisable within sixty days of
September 16, 2002.
13 Dr. Coleman is the Managing General Partner of CSHB Ventures IV L.P.,
the General Partner of Coleman Swenson Booth IV, L.P.
14 Consists of 450,000 shares of our common stock held of record by
Geneva Middle Market Investors SBIC, L.P., of which Mr. Goodman is
President. Includes 541,832 shares of common stock subject to purchase
pursuant to warrants that are exercisable within sixty days of
September 16, 2002. Also includes 20,000 shares of common stock
underlying options that are exercisable within sixty days of September
16, 2002. Does not include warrants to purchase an aggregate of
499,512 shares of our common stock, at $.01 per share, which may not
be exercisable within sixty days of September 16, 2002.
15 Includes 70,300 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002.
16 Includes 23,813 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002. Also includes
47,857 shares of our common stock subject to purchase pursuant to
warrants that are exercisable within sixty days of September 16, 2002.
Does not include warrants to purchase an aggregate of 138,837 shares
of our common stock, at $.01 per share, which may not be exercisable
within sixty days of September 16, 2002.
17 Includes 31,104 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002.
18 Includes 21,022 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002. Also includes
8,505 shares of our common stock subject to purchase pursuant to
warrants that are exercisable within sixty days of September 16, 2002.
Does not include warrants to purchase an aggregate of 18,227 shares of
our common stock, at $.01 per share, which may not be exercisable
within sixty days of September 16, 2002.
19 Includes 37,209 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002.
20 Includes 19,069 shares of our common stock underlying options that are
exercisable within sixty days of September 16, 2002.
74
ITEM 13. CERTAIN RELATIONSHIPS AMD RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Beginning in October 2000 and through August 6, 2002, we engaged Corporate
Revitalization Partners, or CRP, as consultants to assist us in our
restructuring. Bradford C. Walker, who was appointed as our President and Chief
Restructuring Officer in October 2002, a member of our Board of Directors in May
2002 and our President and Chief Executive Officer on August 6, 2002, was a
Managing Director of CRP throughout the period of October 2000 through August 6,
2002. We expensed aggregate consulting fees and expenses in the amount of
$436,800 and $56,933, respectively, to CRP for Mr. Walker's services from
October 2001 through June 30, 2002. On August 6, 2002, we entered into an
employment agreement with Mr. Walker in connection with his appointment as our
President and Chief Executive Officer. See "Employment Agreements--Walker
Employment Agreement."
On August 6, 2002, we entered into a Purchase Agreement, or the Purchase
Agreement, with GE Capital Equity Investments, Inc., or GE Capital, Coleman
Swenson Hoffman Booth IV L.P., or Coleman Swenson, Webbmont Holdings, L.P., or
Webbmont, Investors Equity, Inc., or Investors Equity, and William H. Lomicka.
Pursuant to the Purchase Agreement, we have issued and sold an aggregate of
81,343 shares of Series G Stock and warrants to purchase an aggregate of
3,300,000 shares of our common stock for an aggregate consideration of
$2,602,976. In addition, subject to the terms and conditions of the Purchase
Agreement, we may sell up to an additional 21,782 shares of Series G Stock to
these purchasers for an additional aggregate consideration of up to $697,024. GE
Capital is known to us to be a record holder of more than five percent of a
class of our voting securities. Larry H. Coleman, who is a member of our Board
of Directors, is the Managing General Partner of CSHB Ventures IV L.P., the
General Partners of Coleman Swenson, and Coleman Swenson is known to us to be a
record holder of more than five percent of a class of our voting securities.
Webbmont and Investors are considered affiliated parties and are known to us to
collectively be a record holder of more than five percent of a class of our
voting securities. Finally, Mr. Lomicka is a member of our Board of Directors
and is known to us to be a record holder of more than five percent of a class of
our voting securities.
Also on August 6, 2002, we entered into a Conversion and Exchange Agreement
with GE Capital, Coleman Swenson, Webbmont, Investors Equity and Mr. Lomicka.
Pursuant to the Conversion and Exchange Agreement, the holders of the Series C
Stock converted all outstanding shares of Series C Stock into an aggregate of
9,513,797 shares of common stock and received warrants to purchase an aggregate
of 7,390,614 shares of our common stock at a price of $.01 per share, the
holders of the Series F Stock converted all outstanding shares of Series F Stock
into an aggregate of 5,221,248 shares of common stock and received warrants to
purchase an aggregate of 1,614,560 shares of our common stock at a price of $.01
per share, and the holders of the Series E Stock exchanged all of the
outstanding shares of Series E Stock for an aggregate of 101,562.5 shares of
Series G Stock and received warrants to purchase an aggregate of 817,000 shares
of our common stock at a price of $.01 per share.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
---------------------------------
Independent Auditor's Report
Consolidated Balance Sheets as of June 30, 2002 and June 30, 2001.
Consolidated Statements of Operations
for the years ended June 30, 2002, June 30, 2001 and June 30, 2000.
Consolidated Statements of Stockholders'
Equity (Capital Deficiency) for the years ended June 30, 2002, June 30,
2001 and June 30, 2000.
Consolidated Statements of Cash Flows for the years ended June 30, 2002,
June 30, 2001 and June 30, 2000
Notes to Consolidated Financial Statements
76
2. Financial Statement Schedules
-----------------------------
Additions
Balance at the beginning Charged to costs Charged to other Balance at the
of period and expenses amounts Deductions end of the period
FOR THE YEAR ENDED JUNE 30, 2001:
Accounts receivable allowances
for doubtful accounts 521,007 257,865 96,289 (252,774) 622,387
Inventory reserves - primarily for
obsolescence 1,428,545 250,850 149,040 (169,025) 1,659,410
Deferred income tax valuation
allowance 5,555,100 1,487,300 7,042,400
---------- ---------- ---------- ---------- ------------
Total allowances deducted from assets 7,504,652 508,715 1,732,629 (421,799) 9,324,197
FOR THE YEAR ENDED JUNE 30, 2002:
Accounts receivable allowances for
doubtful accounts 622,387 539,207 ( 33,697) (727,524) 400,373
Inventory reserves - primarily for
obsolescence 1,659,410 705,693 ( 76,977) (689,954) 1,598,172
Deferred income tax valuation
allowance 7,042,400 1,668,100 8,710,500
---------- ---------- ---------- ----------- -----------
Total allowances deducted from assets 9,324,197 1,244,900 1,557,426 (1,417,478) 10,709,045
========== ========== ========== =========== ===========
77
3. Exhibits
--------
Each exhibit set forth below in the Index to Exhibits is filed as a part of this
report. All exhibits not filed herewith are incorporated herein by reference to
a prior filing as indicated.
2.1 Agreement and Plan of Merger, dated November 27, 2000, by and
between Luxtec Corporation, Laser Merger Sub, Inc. and PrimeSource
Surgical, Inc. (Incorporated by reference to Form 8-K, File No.
0-14961, filed on November 30, 2000).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated February
8, 2001, by and between Luxtec Corporation, Laser Merger Sub, Inc.
and PrimeSource Surgical, Inc. (Incorporated by reference to Form
8-K, File No. 0-14961, filed on March 16, 2001).
3.1 Articles of Organization. (Incorporated by reference to Form S-18,
File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B, declared
effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B, declared
effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1995).
3.6 Amendment, dated October 20, 1995, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1995).
3.7 Amendment, dated September 16, 1996, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1996).
3.8 Certificate of Vote of Directors Establishing a Series of a Class of
Stock dated September 16, 1996. (Incorporated by reference to Form
10-K, File No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.9 Certificate of Correction dated October 4, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal year
ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal year
ended October 31, 1996).
78
3.11 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series B Convertible Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.12 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series C Convertible Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.13 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series D Exchangeable Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.14 Certificate of Correction dated March 2, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File No.
0-14961, filed on March 16, 2001).
3.15 Certificate of Correction dated March 2, 2001. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.16 Articles of Amendment to Articles of Organization, dated as of June
27, 2001. (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on July 11, 2001).
3.17 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated June 28, 2001 (Series E Convertible Preferred Stock).
(Incorporated by reference to Form 8-K, File No. 0-14961, filed on
July 11, 2001).
3.18 Certificate of Correction dated July 13, 2001. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed October 15, 2001.
3.19 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated January 23, 2002 (Series F Convertible Redeemable
Preferred Stock). (Incorporated by reference to Form 10-Q, File No.
0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated August 6, 2002 (Series G Convertible Redeemable
Preferred Stock). (Incorporated by reference to Form 8-K, File No.
0-14961, filed on August 8, 2002).
3.21 Amended and Restated By-Laws (Incorporated by reference to Form 8-K,
File No. 0 -14961, filed August 8, 2002).
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to
Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
4.2 Registration Rights Agreement made as of June 3, 1996, between the
Company and the Purchasers identified therein. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed September 13, 1996).
79
4.3 Second Amended and Restated Registration Rights, dated as of August
6, 2002, by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein. (Incorporated by reference to Form
8-K, File No. 0-14961, filed August 8, 2002).
4.4 Amended and Restated Co-Sale Agreement, dated June 28, 2001, by and
among PrimeSource Healthcare, Inc. and the persons listed as
Stockholders therein. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed October 15, 2001).
4.5 Co-Sale Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. and the persons listed as Stockholders
on the signature pages thereto. (Incorporated by reference to Form
8-K, File No. 0-14961, filed August 8, 2002).
10.1 Employment Agreement, entered into between PrimeSource Healthcare,
Inc. and Bradford C. Walker, effective upon the Initial Closing (as
defined in the Purchase Agreement dated as of August 6, 2002).
10.2 Employment Agreement entered into between James L. Hersma and Luxtec
Corporation, a Massachusetts corporation, dated as of May 4, 2001.
(Incorporated by reference to Form 10-Q, File No. 0-14961, filed May
21, 2001).
10.3 Amended and Restated Credit Agreement, dated as of June 14, 1999, by
and among PrimeSource Surgical, Inc, a Delaware corporation, Bimeco,
Inc., a Florida corporation ("Bimeco"), Medical Companies Alliance,
Inc., a Utah corporation, Douglas Medical, Inc., a Florida
corporation and Citizens Bank of Massachusetts.
10.4 First Amendment to Amended and Restated Credit Agreement, dated as
of August 22, 2000, by and among PrimeSource Surgical, Inc, a
Delaware corporation, Bimeco, Inc., a Florida corporation, and
Citizens Bank of Massachusetts.
10.5 Second Amendment to Amended and Restated Credit Agreement, dated as
of December 15, 2000, by and among PrimeSource Surgical, Inc.,
Bimeco, Inc. Ruby Merger Sub, Inc. and Citizens Bank of
Massachusetts.
10.6 Third Amendment to Amended and Restated Credit Agreement, dated as
of March 2, 2001, by and among PrimeSource Surgical, Inc, a Delaware
corporation, Bimeco, Inc., a Florida corporation, Ruby Merger Sub,
Inc., a Delaware corporation, Luxtec Corporation, a Massachusetts
corporation and Citizens Bank of Massachusetts. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).
10.7 Fourth Amendment to Amended and Restated Credit Agreement, dated as
of August 6, 2002, among PrimeSource Surgical, Inc., Bimeco, Inc.,
Ruby Merger Sub, Inc., PrimeSource Healthcare, Inc. and Citizens
Bank of Massachusetts. (Incorporated by reference to Form 8-K, File
No 0-14961, filed August 8, 2002).
10.8 Amended and Restated Loan and Security Agreement, dated March 2,
2001, by and among Luxtec Corporation, Fiber Imaging Technologies,
80
Inc., Cathtec Incorporated, CardioDyne, Inc. and ARK CLO 2000-1,
Limited. (Incorporated by reference to Form 10-Q, File No. 0-14961,
filed May 21, 2001).
10.9 First Amendment to Amended and Restated Loan and Security Agreement,
dated as of August 31, 2001, by and among PrimeSource Healthcare,
Inc. (f/k/a Luxtec Corporation), Fiber Imaging Technologies, Inc.,
Cathtec Incorporated, and Cardiodyne, Inc., and Ark CLO 2000-1,
Limited.
10.10 Second Amendment and Waiver to the Amended and Restated Loan and
Security Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber
Imaging Technologies, Inc., Cathtec Incorporated, and Cardiodyne,
Inc., and Ark CLO 2000-1, Limited. (Incorporated by reference to
Form 8-K, File No 0-14961, filed August 8, 2002).
10.11 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed January 28, 1994).
10.12 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.13 Tucson Medical Corporation 1997 Stock Option / Stock Issuance Plan,
as amended. (Incorporated by reference to Schedule 14A, File No.
0-14961, filed June 1, 2001).
10.14 Unit Purchase Agreement among PrimeSource Healthcare, Inc. and the
Purchasers named in Schedule I thereto, dated as of June 28, 2001.
(Incorporated by reference to Form 8-K, File No. 0-14961, filed July
11, 2001).
10.15 Form of Warrant. (Incorporated by reference to Form 8-K, File No.
0-14961, filed July 11, 2001).
10.16 Conversion and Exchange Agreement, dated as of August 6, 2002, by
and among PrimeSource Healthcare, Inc. and the persons listed in the
signature pages thereto. (Incorporated by reference to Form 8-K,
File No 0-14961, filed August 8, 2002).
10.17 Purchase Agreement, dated as of August 6, 2002, among PrimeSource
Healthcare, Inc. and the Initial Purchasers named in Schedule I
thereto. (Incorporated by reference to Form 8-K, File No 0-14961,
filed August 8, 2002).
10.18 Lease Agreement, dated as of March 1, 2000, by and between Holualoa
Butterfield Industrial, L.L.C. and PrimeSource Surgical, Inc.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed on
October 15, 2001).
21.1 Subsidiaries of the Registrant.
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
filed herewith.
(b) Reports on Form 8-K:
81
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.
PRIMESOURCE HEALTHCARE, INC.
by s/Bradford C. Walker
------------------------------
Bradford C. Walker, President and
Chief Executive Officer
September 30, 2002
82
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 Title Date
- --------- ----- ----
s/William H. Lomicka Director September 30, 2002
- ----------------------
William H. Lomicka
s/James Berardo Director September 30, 2002
- ----------------------
James Berardo
s/Larry H. Coleman Director September 30, 2002
- ----------------------
Larry H. Coleman
s/James J. Goodman Director September 30, 2002
- ----------------------
James J. Goodman
s/Bradford C. Walker President, Chief September 30, 2002
- ---------------------- Executive Officer, Director
Bradford C. Walker
s/James W. Hobbs Director September 30, 2002
- ----------------------
James W. Hobbs
s/Nicholas C. Memmo Director September 30, 2002
- -------------------
Nicholas C. Memmo
s/Shaun McMeans Chief Financial Officer, September 30, 2002
- ---------------------- Chief Operating Officer
Shaun McMeans And Treasurer
83
I, Bradford C. Walker, certify that:
1. I have reviewed this annual report on Form 10-K of PrimeSource
Healthcare, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 30, 2002
/s/ Bradford C. Walker
-----------------------------------
Name: Bradford C. Walker
Title: President and Chief
Officer
84
I, Shaun McMeans, certify that:
1. I have reviewed this annual report on Form 10-K of PrimeSource
Healthcare, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 30, 2002
/s/ Shaun McMeans
-----------------------------
Name: Shaun McMeans
Title: Chief Operating Officer
and Chief Financial Officer
85
Exhibit Index
-------------
2.1 Agreement and Plan of Merger, dated November 27, 2000, by and
between Luxtec Corporation, Laser Merger Sub, Inc. and PrimeSource
Surgical, Inc. (Incorporated by reference to Form 8-K, File No.
0-14961, filed on November 30, 2000).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated February
8, 2001, by and between Luxtec Corporation, Laser Merger Sub, Inc.
and PrimeSource Surgical, Inc. (Incorporated by reference to Form
8-K, File No. 0-14961, filed on March 16, 2001).
3.1 Articles of Organization. (Incorporated by reference to Form S-18,
File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B, declared
effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B, declared
effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1995).
3.6 Amendment, dated October 20, 1995, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1995).
3.7 Amendment, dated September 16, 1996, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed for
the fiscal year ended October 31, 1996).
3.8 Certificate of Vote of Directors Establishing a Series of a Class of
Stock dated September 16, 1996. (Incorporated by reference to Form
10-K, File No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.9 Certificate of Correction dated October 4, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal year
ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal year
ended October 31, 1996).
86
3.11 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series B Convertible Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.12 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series C Convertible Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.13 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated February 27, 2001 (Series D Exchangeable Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on March 16, 2001).
3.14 Certificate of Correction dated March 2, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File No.
0-14961, filed on March 16, 2001).
3.15 Certificate of Correction dated March 2, 2001. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.16 Articles of Amendment to Articles of Organization, dated as of June
27, 2001. (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on July 11, 2001).
3.17 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated June 28, 2001 (Series E Convertible Preferred Stock).
(Incorporated by reference to Form 8-K, File No. 0-14961, filed on
July 11, 2001).
3.18 Certificate of Correction dated July 13, 2001. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed October 15, 2001).
3.19 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated January 23, 2002 (Series F Convertible Redeemable
Preferred Stock). (Incorporated by reference to Form 10-Q, File No.
0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a Class of
Stock, dated August 6, 2002 (Series G Convertible Redeemable
Preferred Stock). (Incorporated by reference to Form 8-K, File No.
0-14961, filed on August 8, 2002).
3.21 Amended and Restated By-Laws (Incorporated by reference to Form 8 K,
File No. 0 -14961, filed August 8, 2002).
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to
Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
4.2 Registration Rights Agreement made as of June 3, 1996, between the
Company and the Purchasers identified therein. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed September 13, 1996).
4.3 Second Amended and Restated Registration Rights, dated as of August
6, 2002, by and among PrimeSource Healthcare, Inc. and the persons
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listed as Stockholders therein. (Incorporated by reference to Form
8-K, File No. 0-14961, filed August 8, 2002).
4.4 Amended and Restated Co-Sale Agreement, dated June 28, 2001, by and
among PrimeSource Healthcare, Inc. and the persons listed as
Stockholders therein. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed October 15, 2001).
4.5 Co-Sale Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. and the persons listed as Stockholders
on the signature pages thereto. (Incorporated by reference to Form
8-K, File No. 0-14961, filed August 8, 2002).
10.1 Employment Agreement, entered into between PrimeSource Healthcare,
Inc. and Bradford C. Walker, effective upon the Initial Closing as
defined in the Purchase Agreement dated as of August 6, 2002). =
10.2 Employment Agreement entered into between James L. Hersma and Luxtec
Corporation, a Massachusetts corporation, dated as of May 4, 2001.
(Incorporated by reference to Form 10-Q, File No. 0-14961, filed May
21, 2001).
10.3 Amended and Restated Credit Agreement, dated as of June 14, 1999, by
and among PrimeSource Surgical, Inc, a Delaware corporation, Bimeco,
Inc., a Florida corporation ("Bimeco"), Medical Companies Alliance,
Inc., a Utah corporation, Douglas Medical, Inc., a Florida
corporation and Citizens Bank of Massachusetts.
10.4 First Amendment to Amended and Restated Credit Agreement, dated as
of August 22, 2000, by and among PrimeSource Surgical, Inc, a
Delaware corporation, Bimeco, Inc., a Florida corporation, and
Citizens Bank of Massachusetts.
10.5 Second Amendment to Amended and Restated Credit Agreement, dated as
of December 15, 2000, by and among PrimeSource Surgical, Inc.,
Bimeco, Inc. Ruby Merger Sub, Inc. and Citizens Bank of
Massachusetts.
10.6 Third Amendment to Amended and Restated Credit Agreement, dated as
of March 2, 2001, by and among PrimeSource Surgical, Inc, a Delaware
corporation, Bimeco, Inc., a Florida corporation, Ruby Merger Sub,
Inc., a Delaware corporation, Luxtec Corporation, a Massachusetts
corporation and Citizens Bank of Massachusetts. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).
10.7 Fourth Amendment to Amended and Restated Credit Agreement, dated as
of August 6, 2002, among PrimeSource Surgical, Inc., Bimeco, Inc.,
Ruby Merger Sub, Inc., PrimeSource Healthcare, Inc. and Citizens
Bank of Massachusetts. (Incorporated by reference to Form 8-K, File
No 0-14961, filed August 8, 2002).
10.8 Amended and Restated Loan and Security Agreement, dated March 2,
2001, by and among Luxtec Corporation, Fiber Imaging Technologies,
Inc., Cathtec Incorporated, CardioDyne, Inc. and ARK CLO 2000-1,
Limited. (Incorporated by reference to Form 10-Q, File No. 0-14961,
filed May 21, 2001).
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10.9 First Amendment to Amended and Restated Loan and Security Agreement,
dated as of August 31, 2001, by and among PrimeSource Healthcare,
Inc. (f/k/a Luxtec Corporation), Fiber Imaging Technologies, Inc.,
Cathtec Incorporated, and Cardiodyne, Inc., and Ark CLO 2000-1,
Limited.
10.10 Second Amendment and Waiver to the Amended and Restated Loan and
Security Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber
Imaging Technologies, Inc., Cathtec Incorporated, and Cardiodyne,
Inc., and Ark CLO 2000-1, Limited. (Incorporated by reference to
Form 8-K, File No 0-14961, filed August 8, 2002).
10.11 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed January 28, 1994).
10.12 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.13 Tucson Medical Corporation 1997 Stock Option / Stock Issuance Plan,
as amended. (Incorporated by reference to Schedule 14A, File No.
0-14961, filed June 1, 2001).
10.14 Unit Purchase Agreement among PrimeSource Healthcare, Inc. and the
Purchasers named in Schedule I thereto, dated as of June 28, 2001.
(Incorporated by reference to Form 8-K, File No. 0-14961, filed July
11, 2001).
10.15 Form of Warrant. (Incorporated by reference to Form 8-K, File No.
0-14961, filed July 11, 2001).
10.16 Conversion and Exchange Agreement, dated as of August 6, 2002, by
and among PrimeSource Healthcare, Inc. and the persons listed in the
signature pages thereto. (Incorporated by reference to Form 8-K,
File No 0-14961, filed August 8, 2002).
10.17 Purchase Agreement, dated as of August 6, 2002, among PrimeSource
Healthcare, Inc. and the Initial Purchasers named in Schedule I
thereto. (Incorporated by reference to Form 8-K, File No 0-14961,
filed August 8, 2002).
10.18 Lease Agreement, dated as of March 1, 2000, by and between Holualoa
Butterfield Industrial, L.L.C. and PrimeSource Surgical, Inc.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed on
October 15, 2001).
21.1 Subsidiaries of the Registrant.
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
filed herewith.
(b) Reports on Form 8-K:
None.
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