SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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: 0-14961B
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 E. COLUMBIA STREET, TUCSON, AZ 85714
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(520) 512-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
On November 8, 2002, there were 22,379,912 shares of the Registrant's common
stock outstanding.
PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets................................................. 3
Unaudited Consolidated Statements of Operations............................. 5
Unaudited Consolidated Statement of Stockholders' Equity (Capital
Deficiency)............................................................... 6
Unaudited Consolidated Statements of Cash Flow.............................. 7
Notes to Unaudited Condensed Consolidated Financial Statements.............. 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 17
Item 3. Quantitative or Qualitative Disclosure About Market Risk.................... 20
Item 4. Controls and Procedures..................................................... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 21
Item 2. Changes in Securities and Use of Proceeds................................... 21
Item 6. Exhibits and Reports........................................................ 23
SIGNATURES ....................................................................................... 27
2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
ASSETS 2002 2002
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 255,580 $ 285,735
Accounts receivable - net of allowance for doubtful accounts of
approximately $374,000 and $400,000, respectively 6,207,278 6,348,534
Inventories - net 6,917,758 7,496,108
Prepaid expenses and other current assets 211,387 317,765
----------------- -----------------
Total current assets 13,592,003 14,448,142
PROPERTY, PLANT, AND EQUIPMENT - Net 1,042,649 1,139,935
INTANGIBLE ASSETS - Net of accumulated amortization of
approximately $269,000 and $267,000, respectively 141,382 143,272
GOODWILL - Net of accumulated amortization of approximately
$3,862,000 and $3,862,000, respectively 21,499,956 21,499,956
OTHER ASSETS - Net of accumulated amortization of approximately
$432,000 and $345,000, respectively 624,613 355,463
----------------- -----------------
TOTAL $ 36,900,603 $ 37,586,768
================= =================
(Continued)
3
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY SEPTEMBER 30, JUNE 30,
(CAPITAL DEFICIENCY) 2002 2002
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 3,926,130 $ 5,021,383
Accrued expenses 2,620,185 3,307,581
Accrued restructuring costs 897,590 1,111,133
Customer deposits 84,455 220,901
Lines of credit 7,786,935 8,097,378
Current portion of long-term debt 1,302,104 1,855,481
Current portion of capital lease obligations 37,678 36,923
----------------- -----------------
Total current liabilities 16,655,077 19,650,780
CAPITAL LEASE OBLIGATIONS - Net of current portion 36,421 47,789
LONG-TERM DEBT - Net of current portion 953,141 1,244,307
SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK -
$1.00 par value - authorized, 334,864 shares; issued and outstanding 0
and 334,864 shares, respectively; aggregate liquidation preference of $0
and $18,983,193, respectively 16,313,946
SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK -
No par value - authorized, 1,000,000 shares; issued and outstanding 0
and 325,000 shares, respectively; aggregate liquidation preference of $0
and $10,009,288, respectively 2,029,864
SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK -
No par value - authorized 5,221,248 shares; issued and outstanding 0
and 5,221,248 shares, respectively; aggregate liquidation preference
of $0 and $5,402,061, respectively 3,649,145
SERIES G REDEEMABLE, CONVERTIBLE PREFERRED STOCK -
No par value - authorized 230,000 shares; issued and outstanding
81,343 and 0 shares, respectively; aggregate liquidation preference of
$5,205,952
4,539,668
STOCKHOLDER'S EQUITY (CAPITAL DEFICIENCY):
Common stock, $0.01 par value - authorized 50,000,000 shares; issued
and outstanding 22,379,912 and 7,978,309, respectively 223,799 79,783
Additional paid-in capital 20,223,693 12,490,202
Accumulated deficit (5,731,196) (17,919,048)
----------------- -----------------
Net stockholder's equity (capital deficiency) 14,716,296 ( 5,349,063)
----------------- -----------------
TOTAL $ 36,900,603 $ 37,586,768
================= =================
See notes to unaudited condensed consolidated financial statements.
(Concluded)
4
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED
-----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
NET SALES $ 13,145,259 $16,025,675
COST OF SALES 8,518,361 10,187,709
----------------------- --------------------
GROSS PROFIT 4,626,898 5,837,966
----------------------- --------------------
OPERATING EXPENSES
Selling expense 1,975,882 2,601,956
General and administrative expense 1,697,110 2,554,915
Depreciation and amortization expense 200,593 583,788
----------------------- --------------------
Total operating expenses 3,873,585 5,740,659
----------------------- --------------------
OPERATING INCOME 753,313 97,307
INTEREST EXPENSE (334,013) (205,245)
OTHER INCOME 64,930 2,183
----------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 484,230 (105,755)
INCOME TAX PROVISION (151,200)
----------------------- --------------------
NET INCOME (LOSS) 484,230 (256,955)
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK (106,119) (738,875)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
----------------------- --------------------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS $ 12,187,852 $ (995,830)
======================= ====================
INCOME (LOSS) PER SHARE:
Basic $ 0.71 $ (0.13)
======================= ====================
Diluted $ 0.34 $ (0.13)
======================= ====================
See notes to unaudited condensed consolidated financial statements.
5
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
UNAUDITED
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------ PAID-IN ACCUMULATED EQUITY (CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY)
BALANCE, JUNE 30, 2002 7,978,309 $ 79,783 $ 12,490,202 $(17,919,048) $ (5,349,063)
Equity recapitalization 14,735,066 147,351 6,785,864 11,809,741 18,742,956
Warrants issued with issuance of Series
G preferred stock 1,031,000 1,031,000
Accretion of discount on Series G
preferred stock (77,796) (77,796)
Preferred stock dividends (28,323) (28,323)
Cancellation of shares in Sale of PEC
assets (200,500) (2,005) (62,155) (64,160)
Cancellation of shares in legal
settlement (132,963) (1,330) (41,218) (42,548)
Issuance of compensatory stock options
20,000 20,000
Net income
484,230 484,230
-------------- -------------- ----------------- ----------------- --------------
BALANCE, SEPTEMBER 30, 2002 22,379,912 $ 223,799 $20,223,693 $(5,731,196) $ 14,716,296
============== ============== ================= ================= ==============
See notes to unaudited condensed consolidated financial statements.
6
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 484,230 $ (256,955)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 200,593 583,788
Loss on disposal of property, plant and equipment 244
Issuance of compensatory stock options 20,000
Gain on legal settlement (42,548)
Change in operating assets and liabilities:
Accounts receivable 141,256 (351,272)
Inventories 578,350 829,677
Income tax receivable and payable 107,536
Prepaid expenses and other current assets 42,218 35,901
Other assets (105,815) (85,168)
Accounts payable (1,095,253) (4,156,631)
Accrued expenses (727,418) (16,072)
Accrued restructuring cost (213,543)
Customer deposits (136,446) (168,518)
Other 5,491
----------------- -----------------
Net cash used in operating activities (854,132) (3,472,223)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (7,170) (41,910)
Proceeds from the sale of property, plant, and equipment 24
Acquisition of other assets (700) (24,773)
----------------- -----------------
Net cash used in investment activities (7,846) (66,683)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit
3,566,759 7,996,878
Repayments on lines of credit (3,877,202) (7,049,834)
Repayment of long-term debt (1,061,671) (392,499)
Repayment on capital leases (10,613) (10,687)
Proceeds from issuance of preferred stock - net of costs 2,214,550 3,171,684
----------------- -----------------
Net cash provided by financing activities 831,823 3,715,542
----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (30,155) 176,636
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 285,735 622,623
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 255,580 $ 799,259
================= =================
(Continued)
7
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
- --------------------------------------------------------------------------------
Three months ended
----------------------------------------
September 30, September 30,
2002 2001
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 166,307 $ 201,478
================= ===================
Income taxes $ 128,950
===================
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Issuance of note payable for debt refinancing costs $ 250,000
=================
Discount on issuance of note payable for legal services $ (40,023)
=================
Fair value of common stock cancelled in sale of asset $ 64,160
=================
Fair value of common stock cancelled in legal settlement $ 42,548
=================
Issuance of compensatory stock options $ 20,000
=================
Common stock issued for services $ 25,000
===================
See notes to unaudited condensed consolidated financial statements.
(Concluded)
8
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 1. (continued).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1) BASIS OF PRESENTATION OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The consolidated financial statements include the accounts of PrimeSource
Healthcare, Inc. and its subsidiaries ("PrimeSource" or the "Company"). The
Company's wholly-owned operating subsidiaries include PrimeSource Surgical,
Inc., Ruby Merger Sub, Inc. (dba New England Medical Specialties, Inc. and
Professional Equipment Co., Inc.) and Bimeco, Inc. All intercompany balances and
transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments and reclassifications considered necessary for a
fair and comparable presentation have been included and are of a normal
recurring nature. Operating results for the three months ended September 30,
2002 are not necessarily indicative of the results that may be expected for the
entire year.
PrimeSource, 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 September 20, 2002, Ruby Merger Sub, Inc., the Company's indirect wholly
owned subsidiary ("Ruby"), sold all of the assets of its former Professional
Equipment Co., Inc. ("PEC") line of business in exchange for the cancellation of
previously issued stock to the founder of PEC and the assumption of certain
liabilities with respect to the PEC line of business. The Company recognized a
loss on the transaction totaling $1,038,826 in the fiscal year ending June 30,
2002, as the assets were held for sale and deemed impaired at that date. In
accordance with Accounting Principles Board Opinion Number 30, which was in
effect for the Company prior to the implementation of Financial Accounting
Standards Board ("FASB") Statement No. 144 on July 1, 2002, the loss was
recognized as restructuring costs as a component of continuing operations. Ruby
released all former employees of its PEC line of business and the Company
cancelled unvested shares of restricted common stock for such employees. The
results of operations of PEC have been included in the results of operations
through the date of sale.
2) NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
In 2001, the FASB issued Statement No. 141, Accounting for Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. These
statements modified accounting for business combinations after June 30, 2001 and
affected the Company's treatment of goodwill and other intangible assets
effective July 1, 2002. The statements require that goodwill existing at the
date of adoption be reviewed for possible impairment and that impairment tests
be performed at least annually in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, and that
impaired assets be written-down to fair value. Additionally, existing goodwill
and intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease.
The Company has completed the preliminary phase of its evaluation of goodwill
and intangible assets and it is likely there will be some impairment of its
goodwill upon implementation of SFAS No. 142; however, the amount of that
impairment is not yet known.
9
The following table sets forth, for the periods presented, pro-forma net income
(loss) as if the Company had adopted SFAS No. 142 from the earliest period
presented:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
---------------- --------------
Net income (loss), as reported $ 484,230 $ (256,955)
Add back goodwill amortization, net of taxes 434,682
---------------- --------------
Adjusted net income $ 484,230 $ 177,727
================ ==============
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 did not have a material impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued 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 Statement to have a
material effect on its financial position or results of operations.
3) INVENTORIES
At September 30, 2002 and June 30, 2002, inventories consisted of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
Raw materials $ 1,125,293 $ 1,162,080
Work-in-process 135,325 29,168
Finished goods 7,259,376 7,903,032
Reserve for obsolescence (1,602,236) (1,598,172)
--------------- ---------------
Inventories - net $ 6,917,758 $ 7,496,108
=============== ===============
4) GOODWILL, INTANGIBLE AND OTHER ASSETS
At September 30, 2002, the Company had $21,499,956 of recorded goodwill that, in
accordance with FASB Statement No. 142 is not subject to amortization.
In addition included in intangible assets, at September 30, 2002, the Company
had intangible assets primarily consisting of trademarks and patents with a
total cost of $331,705 and accumulated amortization of $269,344 with useful
lives of 4 to 20 years.
The Company also had other assets included in other assets on the balance sheet
consisting of deferred financing costs with a total cost of $922,068 and
accumulated amortization of $431,714, at September 30, 2002. These costs are
being amortized over the life of the related debt.
10
Intangible and other asset amortization expense for the three months ended
September 30, 2002 was approximately $89,000. Estimated amortization expense
remaining for the five succeeding fiscal years and thereafter is as follows:
2003 $350,000
2004 133,000
2005 12,000
2006 10,000
2007 10,000
Thereafter 38,000
5) LINES OF CREDIT AND LONG-TERM DEBT
At September 30, 2002 and June 30, 2002 lines of credit and long-term debt
consisted of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
Term loan payable to bank - PrimeSource Surgical $ 1,357,124 $ 2,258,307
Term note payable to bank - Luxtec 150,000
Other notes payable 898,121 691,481
----------------- ------------------
Total debt 2,255,245 3,099,788
Less current portion (1,302,104) (1,855,481)
----------------- ------------------
Total long-term debt $ 953,141 $ 1,244,307
================= ==================
SEPTEMBER 30, JUNE 30,
2002 2002
Line of credit - PrimeSource Surgical $ 6,511,935 $ 6,822,076
Line of credit - Luxtec 1,275,000 1,275,302
----------------- ------------------
Total lines of credit $ 7,786,935 $ 8,097,378
================= ==================
On March 2, 2001, the Company 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".
On August 6, 2002 the Company amended the Luxtec Credit Agreement. Pursuant to
the amendment to the Luxtec Credit Agreement, ARK waived and amended certain
provisions under the Luxtec Credit Agreement. Under the amendment, as of
September 30, 2002, the maximum amount available to borrow under the Luxtec Line
of Credit was limited to the lesser of $1,275,000 or a certain percentage of
accounts receivable and inventory, as defined ($1,275,000 at September 30,
2002). As of September 30, 2002, borrowings bore interest at ARK's prime rate
plus 3.0% (7.75% at September 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 September 30, 2002, there
was no availability under the Luxtec Line of Credit. Borrowings under the Luxtec
Line of Credit are payable upon maturity on December 31, 2003.
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. The Luxtec Term Note bore interest at prime plus 0.5% and was
secured by substantially all of PrimeSource Healthcare's assets, excluding the
capital stock of, and assets held by, PrimeSource Surgical. The Luxtec Term Note
required monthly principal payments of $10,000 commencing 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 an extension on the payment of the
Luxtec Term Note until May 31, 2002. On August 6, 2002 the Company repaid the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Credit Agreement amendment.
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 September 30, 2002.
On June 14, 1999, the Company's wholly-owned subsidiary, PrimeSource Surgical
Inc., or "PrimeSource Surgical," entered into an Amended and Restated Credit
Agreement, or the "PrimeSource Surgical Credit Agreement," with Citizens Bank of
Massachusetts, or "Citizens," for a line of credit, or the "PrimeSource Surgical
Line of Credit." On August 6, 2002, PrimeSource Surgical amended the PrimeSource
11
Surgical Credit Agreement, pursuant to which 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. Under the amendment, as of September 30, 2002,
the maximum amount available to borrow under the PrimeSource Surgical Line of
Credit is limited to the lesser of $8,000,000 or a certain percentage of
accounts receivable and inventory, as defined by the PrimeSource Surgical Credit
Agreement ($5,939,830 at September 30, 2002). As of September 30, 2002,
borrowings bore a variable step interest rate at Citizens' prime rate plus 3.00%
(7.75% at September 30, 2002). Unused portions of the PrimeSource Surgical Line
of Credit accrue a fee at an annual rate of 0.375%. Borrowings are secured by
substantially all assets directly held by PrimeSource Surgical. At September 30,
2002, there was $250,333 of availability under the PrimeSource Surgical Line of
Credit, before giving consideration to outstanding checks totaling $822,438.
Borrowings under the PrimeSource Surgical Line of Credit are payable upon
maturity in March 31, 2004.
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. On August 6, 2002,
PrimeSource Surgical 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, with the remainder due on
December 2003. As of September 30, 2002, the PrimeSource Surgical Term Loan bore
interest at Citizens' prime rate plus 3.00% (7.75% at September 30, 2002). The
PrimeSource Surgical Term Loan matures on December 31, 2003.
The PrimeSource Surgical Term Loan is also subject to a term loan facility fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
is obligated to pay additional $75,000 fees under the PrimeSource Surgical Term
Loan on the last day of each calendar quarter, beginning on September 30, 2002
and for every quarter thereafter until the earlier of payment in full of the
PrimeSource Surgical Term Loan or December 31, 2003. The accrued term loan
facility fees will be reduced by 100% if Citizens receives payment of the
PrimeSource Surgical Term Loan in full by the last banking day of December 2002;
60% if Citizens receives payment in full of the PrimeSource Surgical Term Loan
by the last banking day of March 2003; 40% if Citizens receives payment of the
PrimeSource Surgical Term Loan in full by the last banking day of June 2003; and
10% if Citizens receives payment of the PrimeSource Surgical Term Loan in full
by the last banking day of September 2003. PrimeSource Surgical may extend the
final payment date for all accrued term loan facility fees from on or before the
last banking day of December 2003 until on or before the last banking day of
March 2004, provided PrimeSource Surgical makes a $100,000 cash payment against
the principal balance of the accrued term loan facility fees on or before the
last banking day of December 2003 and Citizens earns another $75,000 term loan
facility fee which will be due and payable with all unpaid accrued term loan
facility fees on or before the last banking day of March 2004.
The PrimeSource Surgical Term Loan is also subject to an additional repayment
obligation. Commencing with the three-month period ending December 31, 2002, and
for each three-month period thereafter, 50% of excess cash flow, as defined in
the PrimeSource Credit Agreement, generated during the three-month period will
be paid to Citizens and applied to reduce the principal amount of the
PrimeSource Surgical Term Loan.
The PrimeSource Surgical Credit Agreement contains covenants that require the
maintenance of defined financial ratios and income levels and limit additional
borrowings and capital expenditures. PrimeSource Surgical was in compliance with
these covenants as of September 30, 2002.
Other notes payable include a $100,000 note payable for tenant improvements to
Luxtec's leased premises, which bears interest at 9.5% 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. At September 30, 2002, Luxtec had outstanding borrowing of
$88,144 under the tenant note payable. In addition, other notes payable include
a PrimeSource Surgical $559,977 non-interest bearing demand note payable (net of
unamortized discount of $40,023 based on an imputed interest rate of 8%) to its
special legal counsel in payment of existing outstanding accounts payable, which
matures May 30, 2004. Monthly principal payments are $30,000 commencing on
October 20, 2002. Finally, other notes payable include a PrimeSource Surgical
$250,000 note payable to Citizens in payment of the bank refinancing amendment
12
fee. Equal principal payments on the note of $62,500 each are due March 31,
2003, June 30, 2003, September 30, 2003 and December 31, 2003. At September 30,
2002, PrimeSource Surgical had outstanding borrowings of $250,000 with respect
to this note payable to Citizens. This note has been recorded as deferred
financing costs and is being amortized over the life of the PrimeSource Surgical
Credit Agreement.
6) RESTRUCTURING AND OTHER CHARGES:
In October 2001, PrimeSource engaged a restructuring agent to evaluate the
Company's operations for possible reorganization. In November 2001, the Company
commenced with a restructuring plan involving narrowing the focus of the
Company's operations, the consolidation of certain underperforming 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.
As a result of the restructuring plan, during fiscal year 2002, the Company
recorded restructuring costs of approximately $4.0 million consisting of
$800,000 in specialized restructuring consultants, $500,000 related to a
remaining facility lease liability, $300,000 in costs for exited product lines
related to the closure of the western sales region, $1.4 million in employee
severance and $1.0 million attributable to the loss on disposal of a division.
Approximately twenty-nine administrative employees were released along with
several 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 for the three-month
period ended September 30, 2002 consisted of the following:
EMPLOYEE OTHER
RELATED CONTRACTS TOTAL
Balances June 30, 2002 $ 653,000 $ 458,133 $1,111,133
Cash payments (157,724) (41,580) (199,304)
Other adjustments (14,239) (14,239)
---------- ---------- -----------
Balances September 30, 2002 $ 495,276 $ 402,314 $ 897,590
========== ========== ===========
7) INCOME TAXES
At September 30, 2002 and June 30, 2002 the Company had deferred tax assets
resulting from federal net operating loss carryforwards of approximately
$5,875,000 and $6075,000. A full valuation allowance has been provided against
these deferred tax assets as of September 30, 2002 as it is more likely than not
that sufficient taxable income will not be generated to realize these temporary
differences. During the quarter ended September 30, 2002, the company had
taxable income for federal and state purposes, and as a result recognized a
portion of the net operating loss carryforwards through a reduction in the
valuation allowance of approximately $200,000.
8) SEGMENT REPORTING:
The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing, Specialty
Distribution Services - Surgical, and Specialty Distribution Services - Critical
Care. A description of each segment and principal products and operations
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.
SPECIALTY DISTRIBUTION SERVICES - 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.
13
SPECIALTY DISTRIBUTION SERVICES - 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. Within this segment, the primary specialties include maternal and
childcare and neonatal intensive care. In the quarter ended September 30, 2002,
the Company disposed of a division in the Critical Care segment, Professional
Equipment Co., Inc.
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. 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, intangibles and
other assets.
Following the merger (the "Merger") of the Company with PrimeSource Surgical on
March 2, 2001, certain products of the Specialty Medical Products Manufacturing
segment were sold to the Specialty Distribution - Surgical segment. Total sales
between these segments totaled approximately $1,382,858 and $1,150,270 for the
three months ended September 30, 2002 and September 30, 2001, respectively.
Effective quarter ending September 30, 2002, the Company implemented a
management fee allocation for financial statement purposes. This allocation
reclassifies a portion of the corporate expense to the operating segments.
Disclosures regarding the Company's reportable segments with reconciliations to
consolidated totals are presented below.
THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------------------------------------------------
DISTRIBUTION - DISTRIBUTION - CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 6,313,090 $ 4,919,022 $ 1,913,147 $13,145,259
============= ============ ============ ============
Net income (loss) $ 115,180 $ 204,224 $ 550,083 $ (385,257) $ 484,230
============= ============ ============ ============ ============
Total assets $ 25,044,306 $ 6,035,509 $ 5,452,292 $ 368,496 $36,900,603
============= ============ ============ ============ ============
Depreciation and
amortization $ 64,856 $ 4,544 $ 34,785 $ 96,408 $ 200,593
============= ============ ============ ============ ============
Interest expense $ 84,025 $ 65,280 $ 33,869 $ 150,839 $ 334,013
============= ============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------------------
DISTRIBUTION - DISTRIBUTION - CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 8,491,150 $ 5,579,707 $ 1,954,818 $16,025,675
============= ============ ============ ============
Net income (loss) $ 135,275 $ 614,217 $ 208,121 $(1,214,568) $ (256,955)
============= ============ ============ ============ ============
Total assets $ 34,166,391 $ 5,199,140 $ 4,799,134 $ 517,316 $44,681,981
============= ============ ============ ============ ============
Depreciation and
amortization $ 268,980 $ 40,508 $ 247,863 $ 26,437 $ 583,788
============= ============ ============ ============ ============
Interest expense $ 118,979 $ 55,456 $ 30,810 $ 205,245
============= ============ ============ ============
14
9) NET INCOME (LOSS) PER SHARE
Net income (loss) per share amounts are calculated using net income (loss)
available to common stockholders and weighted average common shares outstanding,
which consisted of the following for the three months ended September 30:
2002 2001
Numerator:
Net income (loss) $ 484,230 $ (256,955)230
Preferred dividends and accretion (106,119) (738,875)
Effect of equity recapitalization 11,809,741
---------------------------------
Net income (loss) available to common stockholders $ 12,187,852 $ (995,830)
=================================
Denominator:
Basic weighted average common shares outstanding 17,146,909 7,965,906
Dilutive effect of:
Warrants 7,737,803
Assumed conversion of Series G Stock 11,133,409
---------------------------------
Weighted average common shares for the purpose
of caculating diluted earning per share 36,018,121 7,965,906
=================================
Options and warrants to purchase common stock totaling 7,653,822 at September
30, 2002, were not included in weighted average common shares for the purpose of
calculating diluted earnings per share because the result would be antidilutive.
Options and warrants to purchase common stock totaling 7,965,906 at September
30, 2001, and shares to be issued upon conversion of preferred stock were not
included in weighted average common shares for the purpose of calculated diluted
earnings per share because the result would be antidilutive. Put warrants
outstanding totaling 282,022 at September 30, 2002 and 2001 were not included in
weighted average common shares for the purpose of calculating diluted earning
per share because the result would be antidilutive.
10) PREFERRED STOCK
On August 6, 2002, the Company created a new series of preferred stock, 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 on that date for
proceeds of $1,866,038, net of cost of $388,422. 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 become exercisable upon the earlier of
December 31, 2002 or an increase in the number of authorized shares of common
stock to at least 68,000,000, 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, subject to adjustment, at the
option of the holder at any time after the sooner of December 31, 2002 or an
increase in authorized common stock to at least 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 outstanding
stock of the Company. Series G Stock accrues dividends at the rate of 8% 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 and a 10-year life. 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 was recorded as additional paid-in capital. The resultant
beneficial conversion feature, if any, will be recorded when the Series G Stock
is convertible on the earlier of December 31, 2002 or the increase in authorized
common stock to at least 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
15
Stock was converted into 27.5871 shares of the Company's common stock. In
connection with the conversion of the Series G Stock, the Company issued the
former holders of the Series C Stock warrants to purchase an aggregate of
7,390,613 shares of our common stock with an exercise price of $.01 per share
and a 10-year life. These warrants become exercisable upon the earlier of
December 31, 2002 or an increase in the number of authorized shares of common
stock to at least 68,000,000, 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 was recorded as additional paid-in capital. 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, the Company 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 and a 10-year life.
The warrants become exercisable upon the earlier of December 31, 2002 or an
increase in the number of authorized shares of common stock to at least
68,000,000, and expire on August 6, 2012. Additionally, the exercise price on
previously issued warrants to purchase an aggregate of 1,751,130 shares of
common stock was adjusted from $1.00 per share to $.01 per share. The value of
the warrants issued and the warrants which were repriced was recorded as
additional paid-in capital. 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,
the Company 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 per share. These warrants become exercisable upon the earlier of December
31, 2002 or an increase in the number of authorized shares of common stock to at
least 68,000,000, and expire on August 6, 2012. Additionally, in accordance with
their terms, exercise prices on 1,625,000 warrants to purchase common stock
previously issued to certain Series E Stockholders were repriced from $1.00 per
share to $.01 per share. The value of the warrants issued and the warrants which
were repriced were recorded as additional paid-in capital. The value of these
warrants totaled $763,000 and was calculated using the Black-Scholes method,
expected life of 7 years, volatility of 50% and a zero coupon rate of 4.09%.
Under the restructuring, former holders of Series C Stock, Series F Stock and
Series E Stock received consideration totaling approximately $10,183,000,
including common stock, Series G Stock, new warrants and the repricing of
certain existing warrants, in exchange for the retirement of Series C Stock,
Series F Stock and Series E Stock with a carrying value of approximately
$21,993,000. The difference of approximately $11,810,000 has been credited to
retained earnings.
11) COMMITMENTS AND CONTINGENCIES
LITIGATION - 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 is has meritorious defenses and
it intends to defend its position with respect to this complaint. The outcome of
this action cannot be determined at the present time and not assurance can be
given as to the occurrence of any particular outcome.
In addition, during the quarter ended September 30, 2002, the Company resolved
an outstanding matter relating to alleged non-compete violations with a former
employee. Pursuant to the terms of the settlement, the former employee paid the
Company a cash settlement and returned for cancellation 132,963 shares of common
stock valued at $42,548.
The Company is also 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.
EXECUTIVE COMPENSATION- In August 2002, the Company entered into a two-year
employment agreement with its President and Chief Executive Officer. The
employment agreement committed the Company to minimum compensation, severance
amounts, and future equity-based incentives.
******
16
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2002
All statements contained herein that are not historical facts, including but not
limited to, statements regarding our expectations concerning future operations,
margins, profitability, liquidity, capital expenditures and capital resources,
are based on current expectations. These statements are forward-looking in
nature and involve a number of risks and uncertainties. Generally, the words
"anticipates," believes," "estimates," "expects" and similar expressions as they
relate to us and our management are intended to identify forward-looking
statements. Although we believe that the expectations in such forward-looking
statements are reasonable, we cannot assure that any forward-looking statements
will prove to be correct. We wish to caution readers not to place undue reliance
on any forward-looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995. The forward-looking statements contained
in this quarterly report on Form 10-Q speak only as of the date that we have
filed the report. We expressly disclaim any obligation or undertaking to update
or revise any forward-looking statement contained in this report, including to
reflect any change in our expectations with regard to that forward-looking
statement or any change in events, conditions or circumstances on which that
forward-looking statement is based.
RESULTS OF OPERATIONS
NET SALES: Net sales decreased to $13,145,259 for the three months ended
September 30, 2002, compared to $16,025,675 for the same period in 2001. The net
sales decrease of $2,880,416, or 18.0%, in the three-month period ended
September 30, 2002 relative to the comparable period in 2001 was primarily due
to the closure of the western sales territory as a result of the Company's
restructuring plan initiated in November 2001.
COST OF SALES: Cost of sales decreased to $8,518,361, or 64.8% of net sales, for
the three months ended September 30, 2002, compared to $10,187,709, or 63.6% of
net sales, for the same period in 2001. The decrease of $1,669,348, or 16.4%, in
the three-month period ended September 30, 2002 relative to the comparable
period in 2001 was primarily due to lower sales levels due primarily to the
closure of the western sales territory. The increase in cost of sales as a
percentage of net sales is primarily due to the difference in product mix sold
in the three-month period ended September 30, 2002 compared to the same period
in 2001.
GROSS PROFIT: Gross profit decreased to $4,626,898, or 35.2% of net sales, for
the three months ended September 30, 2002, compared to $5,837,966, or 36.4% of
net sales, for the same period in 2001. The decrease of $1,211,068, or 20.7%, in
the three-month period ended September 30, 2002 relative to the comparable
period in 2001 is primarily due to lower sales levels due to the closure of the
western sales territory. The decrease in gross profit margins is primarily due
to the difference in product mix sold in the three-month period ended September
30, 2002 compared to the same period in 2001.
SELLING EXPENSE: Selling expense decreased to $1,975,882, or 15.0% of net sales,
for the three months ended September 30, 2002, compared to $2,601,956, or 16.2%,
of net sales for the same period in 2001. The decrease of $626,074, or 24.1%, is
primarily a result of the closure of the western sales territory as a result of
the Company's restructuring plan initiated in November 2001.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense was
$1,697,110, or 12.9% of net sales, for the three months ended September 30,
2002, compared to $2,554,915, or 15.9% of net sales, for the same period in
2001. The decrease of $857,805, or 33.6%, is primarily a result of the Company's
restructuring plan initiated in November 2001. The restructuring plan decreased
general and administrative expenses by narrowing the focus of the Company's
operations and reducing corporate overhead through workforce reductions.
DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization expense
decreased to $200,593, or 1.5% of net sales, for the three months ended
September 30, 2002, compared to $583,788, or 3.6% of net sales, for the same
period in 2001. The decrease of $383,195, or 65.6%, in depreciation and
amortization expense is the result of the implementation of Statement of
Financial Accounting Standard ("SFAS") No. 142 Goodwill and Other Intangible
Assets ("SFAS No. 142"), effective July 1, 2002, which requires, among other
things, the discontinuance of goodwill amortization.
17
INTEREST EXPENSE: Interest expense increased to $334,013 for the three months
ended September 30, 2002, compared to $205,245 for the same period in 2001. The
increase of $128,768, or 62.7%, is the result of increased interest rates and
fees related to the restructuring of the Company's debt.
INCOME TAX PROVISION: There was no recorded income tax provision for the three
months ended September 30, 2002, compared to a provision of $151,200 for the
same period in 2001. The income tax provision in the prior year resulted
primarily from taxes due for taxable income generated at Luxtec, where in the
current fiscal year Luxtec has projected operating losses. In addition, in the
quarter ended September 30, 2002 the Company's current year taxable income for
federal and certain states was eliminated due to the use of net operating loss
carryforwards to offset federal and state income tax liabilities.
NET INCOME (LOSS): Net income increased to $484,230 for the three months ended
September 30, 2002, compared to a net loss of ($256,955) for the same period in
2001. The increase of $741,185, or 288%, resulted primarily from expense
reductions related to our fiscal 2002 restructuring and decreased amortization
expense related to SFAS No. 142 implementation.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had a working capital deficit of $3,063,074 compared
to a deficit of $5,202,638 at June 30, 2002. The decrease in our working capital
deficit was primarily the result of decreased inventory balances, offset by
decreased accounts payable, accrued expenses and current obligations for
long-term debt.
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". On
August 6, 2002 we amended the Luxtec Credit Agreement. Pursuant to the amendment
to the Luxtec Credit Agreement, ARK waived and amended certain provisions under
the Luxtec Credit Agreement. Under the amendment, as of September 30, 2002, the
maximum amount available to borrow under the Luxtec Line of Credit was limited
to the lesser of $1,275,000 or a certain percentage of accounts receivable and
inventory, as defined ($1,275,000 at September 30, 2002). As of September 30,
2002, borrowings bore interest at ARK's prime rate plus 3.0% (7.75% at September
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 September 30, 2002, there was no availability under the
Luxtec Line of Credit. Borrowings under the Luxtec Line of Credit are payable
upon maturity on December 31, 2003.
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. The Luxtec Term Note bore interest at prime plus 0.5% and was secured
by substantially all of PrimeSource Healthcare's assets, excluding the capital
stock of, and assets held by, PrimeSource Surgical. The Luxtec Term Note
required monthly principal payments of $10,000 commencing 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. On August 6, 2002 we paid off the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Credit Agreement amendment.
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 September 30, 2002.
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 Bank of Massachusetts, or "Citizens,"
for a line of credit, or the "PrimeSource Surgical Line of Credit." On August 6,
2002, PrimeSource Surgical amended the PrimeSource Surgical Credit Agreement,
pursuant to which 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. Under the amendment, as of September 30, 2002 the maximum amount
available to borrow under the PrimeSource Surgical Line of Credit is limited to
the lesser of $8,000,000 or a certain percentage of accounts receivable and
inventory, as defined by the PrimeSource Surgical Credit Agreement ($5,939,830
at September 30, 2002). As of September 30, 2002, borrowings bore a variable
step interest rate at Citizens' prime rate plus 3.00% (7.75% at September 30,
2002). Unused portions of the PrimeSource Surgical Line of Credit accrue a fee
18
at an annual rate of 0.375%. Borrowings are secured by substantially all assets
directly held by PrimeSource Surgical. At September 30, 2002, there was $250,333
of availability under the PrimeSource Surgical Line of Credit, before giving
consideration to outstanding checks totaling $822,438. Borrowings under the
PrimeSource Surgical Line of Credit are payable upon maturity in March 31, 2004.
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. On August 6, 2002,
PrimeSource Surgical 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, with the remainder due on
December 2003. As of September 30, 2002, the PrimeSource Surgical Term Loan bore
interest at Citizens' prime rate plus 3.00% (7.75% at September 30, 2002). The
PrimeSource Surgical Term Loan matures on December 31, 2003. At September 30,
2002, PrimeSource Surgical had outstanding borrowings of $1,357,124 under the
PrimeSource Surgical Term Loan.
The PrimeSource Surgical Term Loan is also subject to a term loan facility fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
is obligated to pay additional $75,000 fees under the PrimeSource Surgical Term
Loan on the last day of each calendar quarter, beginning on September 30, 2002
and for every quarter thereafter until the earlier of payment in full of the
PrimeSource Surgical Term Loan or December 31, 2003. The accrued term loan
facility fees will be reduced by 100% if Citizens receives payment of the
PrimeSource Surgical Term Loan in full by the last banking day of December 2002;
60% if Citizens receives payment in full of the PrimeSource Surgical Term Loan
by the last banking day of March 2003; 40% if Citizens receives payment of the
PrimeSource Surgical Term Loan in full by the last banking day of June 2003; and
10% if Citizens receives payment of the PrimeSource Surgical Term Loan in full
by the last banking day of September 2003. PrimeSource Surgical may extend the
final payment date for all accrued term loan facility fees from on or before the
last banking day of December 2003 until on or before the last banking day of
March 2004, provided PrimeSource Surgical makes a $100,000 cash payment against
the principal balance of the accrued term loan facility fees on or before the
last banking day of December 2003 and Citizens earns another $75,000 term loan
facility fee which will be due and payable with all unpaid accrued term loan
facility fees on or before the last banking day of March 2004.
The PrimeSource Surgical Term Loan is also subject to an additional repayment
obligation. Commencing with the three-month period ending December 31, 2002, and
for each three-month period thereafter, 50% of excess cash flow, as defined in
the PrimeSource Credit Agreement, generated during the three-month period will
be paid to Citizens and applied to reduce the principal amount of the
PrimeSource Surgical Term Loan.
The PrimeSource Surgical Credit Agreement contains covenants that require the
maintenance of defined financial ratios and income levels and limit additional
borrowings and capital expenditures. PrimeSource Surgical was in compliance with
these covenants as of September 30, 2002.
Other notes payable include a $100,000 note payable for tenant improvements to
Luxtec's leased premises, which bears interest at 9.5% 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. At September 30, 2002, Luxtec had outstanding borrowing of
$88,144 under the tenant note payable. In addition, other notes payable include
a PrimeSource Surgical $559,977 non-interest bearing demand note payable (net of
unamortized discount of $40,023 based on an imputed interest rate of 8%) to its
special legal counsel in payment of existing outstanding accounts payable, which
matures May 30, 2004. Monthly principal payments are $30,000 commencing on
October 20, 2002. At September 30, 2002, PrimeSource Surgical had outstanding
borrowings of $559,977, net of unamortized discount of $40,023. Finally, other
notes payable include a PrimeSource Surgical $250,000 note payable to Citizens
in payment of the bank refinancing amendment fee. Equal principal payments on
the note of $62,500 each are due March 31, 2003, June 30, 2003, September 30,
2003 and December 31, 2003. At September 30, 2002, PrimeSource Surgical had
outstanding borrowings of $250,000 with respect to this note payable to
Citizens. This note has been recorded as deferred financing costs and is being
amortized over the life of the PrimeSource Surgical Credit Agreement.
The principal sources of our short-term borrowings are the Luxtec Line of Credit
and the PrimeSource Surgical Line of Credit. As of September 30, 2002, we had an
aggregate of approximately $250,333 available under the Luxtec Line of Credit
and the PrimeSource Surgical Line of Credit. As of September 30, 2002, the
interest rates on both lines of credit were 7.75%. 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.
19
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 common
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.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the bank debt at September 30, 2002 is $9,394,059, 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
earnings or cash flows of the Company.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES - The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's reports filed or submitted under the
Exchange Act.
(b) CHANGES IN INTERNAL CONTROLS - Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
20
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
We are also 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 6, 2002, the Company created a new series of preferred stock, 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 gross proceeds
of $2,254,460 on that 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 become exercisable upon the earlier of December 31, 2002 or an
increase in the number of authorized shares of common stock to at lease
68,000,000, 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, subject to adjustment, at the option of the holder at
any time after the sooner of December 31, 2002 or the increase in authorized
common stock to at least 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 outstanding stock of the Company.
Series G Stock accrues dividends at the rate of 8% 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. Our
sale of the Series G Stock and the related warrants was exempt from registration
21
with the Securities 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. The proceeds from the Series G Stock issuance were
used to reduce the Company's current obligations for long-term debt and accounts
payable.
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 27.5871 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 7,390,613 shares of our common
stock with an exercise price of $.01 per share and a 10-year life. These
warrants become exercisable upon the earlier of December 31, 2002 or an increase
in the number of authorized shares of common stock to at least 68,000,000, and
expire on August 6, 2012.
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 per share and a 10-year life. The
warrants become exercisable upon the earlier of December 31, 2002 or an increase
in the number of authorized shares of common stock to at least 68,000,000, and
expire on August 6, 2012.
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 an
aggregate of 817,000 shares of our common stock with an exercise price of $.01
per share. These warrants become exercisable upon the earlier of December 31,
2002 or an increase in the number of authorized shares of common stock to at
least 68,000,000 and expire on August 6, 2002.
22
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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).
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).
23
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 on 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).
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 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).
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 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. (Incorporated by reference to Form
10-K, File No. 0-14961, filed September 30, 2002).
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. (Incorporated by reference to Form 10-K, File No.
0-14961, filed September 30, 2002).
24
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.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 2002).
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).
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.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 2002).
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).
10.12 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).
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.
25
(b) Reports on Form 8-K: The Company filed the following current
reports on Form 8-K during the three month period ended September
30, 2002:
(1) On July 5, 2002, the Company filed a current report on Form
8-K, announcing under Item 5, the receipt by the Company of a
Notice of Demand from Citizens.
(2) On July 10, 2002, the Company filed a current report on Form
8-K, announcing under Item 5 the receipt by the Company of a
proposed term sheet from Citizens.
(3) On August 8, 2002, the Company filed a current report on Form
8-K, announcing under Item 5 (i) the execution of the Conversion
and Exchange Agreement, dated as of August 6, 2002, (ii) the
amendment and restatement of the Company's Bylaws, (iii) the
execution of the Purchase Agreement, dated as of August 6, 2002,
(iv) the execution of the Co-Sale Agreement, dated as of August
6, 2002, (v) the execution of the Second Amended and Restated
Registration Rights Agreement, dated as of August 6, 2002, (vi)
the execution of an amendment to the Citizens Credit Agreement,
dated as of August 6, 2002, (vii) the execution of an amendment
to the ARK Credit Agreement, dated as of August 6, 2002 and
(viii) the appointment of Bradford C. Walker as the Company's
President and Chief Executive Officer.
(4) On September 17, 2002, the Company filed a current report on
Form 8-K, announcing under Item 5 the consummation by the Company
of the First Additional Closing under the Purchase Agreement,
dated as of August 6, 2002.
26
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
November 14, 2002 /s/ SHAUN MCMEANS
- -------------------- -------------------
Date Shaun McMeans
Chief Financial Officer
(Principal Accounting Officer and Duly
Authorized Executive Officer)
27
I, Bradford C. Walker, certify that:
1. I have reviewed this quarterly report on Form 10Q of PrimeSource
Healthcare, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrants, other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made know to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrants, other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and repot financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6. The registrants, other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------
/s/ BRADFORD C. WALKER
-------------------------
Name: Bradford C. Walker
Title: President and Chief Executive Officer
28
I, Shaun McMeans, certify that:
1. I have reviewed this quarterly report on Form 10Q of PrimeSource
Healthcare, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrants, other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made know to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrants, other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and repot financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6. The registrants, other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------
/s/ SHAUN MCMEANS
-------------------
Name: Shaun McMeans
Title: Chief Operating Officer and
Chief Financial Officer
29
INDEX TO EXHIBITS
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).
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).
30
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 on 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).
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 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).
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 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. (Incorporated by reference to Form
10-K, File No. 0-14961, filed September 30, 2002).
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. (Incorporated by reference to Form 10-K, File No.
0-14961, filed September 30, 2002).
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.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 2002).
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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).
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.
(Incorporated by reference to Form 10-K, File No. 0-14961, filed
September 30, 2002).
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).
10.12 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).
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: The Company filed the following current reports on
Form 8-K during the three month period ended September 30, 2002:
(1) On July 5, 2002, the Company filed a current report on Form 8-K,
announcing under Item 5, the receipt by the Company of a Notice of
Demand from Citizens.
(2) On July 10, 2002, the Company filed a current report on Form 8-K,
announcing under Item 5 the receipt by the Company of a proposed term
sheet from Citizens.
(3) On August 8, 2002, the Company filed a current report on Form 8-K,
announcing under Item 5 (i) the execution of the Conversion and
Exchange Agreement, dated as of August 6, 2002, (ii) the amendment and
restatement of the Company's Bylaws, (iii) the execution of the
Purchase Agreement, dated as of August 6, 2002, (iv) the execution of
the Co-Sale Agreement, dated as of August 6, 2002, (v) the execution of
the Second Amended and Restated Registration Rights Agreement, dated as
of August 6, 2002, (vi) the execution of an amendment to the Citizens
Credit Agreement, dated as of August 6, 2002, (vii) the execution of an
amendment to the ARK Credit Agreement, dated as of August 6, 2002 and
(viii) the appointment of Bradford C. Walker as the Company's President
and Chief Executive Officer.
(4) On September 17, 2002, the Company filed a current report on Form
8-K, announcing under Item 5 the consummation by the Company of the
First Additional Closing under the Purchase Agreement, dated as of
August 6, 2002.
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