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 December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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On February 7, 2003, there were 22,379,345 shares of the Registrant's common
stock outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
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 Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 3. Quantitative or Qualitative Disclosure About Market Risk 28
Item 4. Controls and Procedures 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports 30
SIGNATURES 33
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND JUNE 30, 2002
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December 31, June 30,
ASSETS 2002 2002
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 620,874 $ 285,735
Accounts receivable--net of allowance for doubtful accounts
of approximately $323,000 and $400,000, respectively 5,904,505 6,348,534
Inventories--net 6,241,613 7,496,108
Income tax receivable 21,069 110,000
Prepaid expenses and other current assets 117,891 207,765
------------ ------------
Total current assets 12,905,952 14,448,142
PROPERTY, PLANT, AND EQUIPMENT--Net 1,065,040 1,139,935
INTANGIBLE ASSETS--Net of accumulated amortization
of approximately $272,000 and $267,000, respectively 138,793 143,272
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 $539,000 and $345,000, respectively 513,549 355,463
------------ ------------
TOTAL $ 36,123,290 $37,586,768
============ ============
(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND JUNE 30, 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
(CAPITAL DEFICIENCY) 2002 2002
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 4,704,031 $ 5,587,886
Accrued expenses 2,587,457 3,307,581
Accrued restructuring costs 679,223 1,111,133
Customer deposits 104,661 220,901
Lines of credit 6,006,883 7,530,875
Current portion of long-term debt 1,809,425 1,855,481
Current portion of capital lease obligations 37,780 36,923
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Total current liabilities 15,929,460 19,650,780
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CAPITAL LEASE OBLIGATIONS--Net of current portion 31,994 47,789
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LONG-TERM DEBT--Net of current portion 220,227 1,244,307
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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,
193,797 and 0 shares, respectively; aggregate liquidation preference
of $12,402,976 and $0, respectively 4,045,323
------------
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Common stock, $0.01 par value--authorized 75,000,000 and 50,000,000
shares, respectively; issued and outstanding, 22,379,345 and 7,978,309
shares, respectively 223,793 79,783
Additional paid-in capital 21,288,768 12,490,202
Accumulated deficit (5,616,275) (17,919,048)
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Net stockholder's equity (capital deficiency) 15,896,286 (5,349,063)
------------ ------------
TOTAL $36,123,290 $37,586,768
============ ============
See notes to unaudited condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
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Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
NET SALES $ 13,110,664 $ 15,007,744 $ 26,255,923 $ 31,033,419
COST OF SALES 8,481,660 10,855,506 17,000,021 21,043,215
--------------- --------------- --------------- ---------------
GROSS PROFIT 4,629,004 4,152,238 9,255,902 9,990,204
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Selling expense 2,028,185 2,398,328 4,004,067 5,000,284
General and administrative expense 1,837,460 3,472,014 3,534,570 6,026,929
Depreciation and amortization expense 210,998 614,630 411,591 1,198,418
Restructuring expense 2,462,752 2,462,752
--------------- --------------- --------------- ---------------
Total operating expenses 4,076,643 8,947,724 7,950,228 14,688,383
--------------- --------------- --------------- ---------------
OPERATING INCOME (LOSS) 552,361 (4,795,486) 1,305,674 (4,698,179)
INTEREST EXPENSE (253,531) (188,403) (587,544) (393,648)
OTHER INCOME 117,295 8,440 182,225 10,623
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 416,125 (4,975,449) 900,355 (5,081,204)
INCOME TAX PROVISION (64,500) (215,700)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) 416,125 (5,039,949) 900,355 (5,296,904)
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK (301,204) (736,010) (407,323) (1,474,885)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS $ 114,921 $ (5,775,959) $ 12,302,773 $ (6,771,789)
=============== =============== =============== ===============
INCOME (LOSS) PER SHARE:
Basic $ 0.01 $ (0.73) $ 0.62 $ (0.86)
=============== =============== =============== ===============
Diluted $ 0.01 $ (0.72) $ 0.28 $ (0.85)
=============== =============== =============== ===============
See notes to unaudited condensed consolidated financial statements.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
DECEMBER 31, 2002 AND JUNE 30, 2002
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Total
Stockholders'
Additional Equity
Common Stock Paid-in Accumulated (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 2,062,000 2,062,000
Accretion of discount on Series G
preferred stock (218,287) (218,287)
Preferred stock dividends (189,036) (189,036)
Cancellation of shares in sale of PEC
assets (201,067) (2,011) (62,330) (64,341)
Cancellation of shares in legal settlement (132,963) (1,330) (41,218) (42,548)
Issuance of compensatory stock options 50,000 50,000
Restricted common stock vesting 4,250 4,250
Net income 900,355 900,355
----------- ---------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 2002 22,379,345 $ 223,793 $ 21,288,768 $ (5,616,275) $ 15,896,286
=========== ========== ============= ============== =============
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
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SIX MONTHS ENDED
DECEMBER 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 900,355 $(5,296,904)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 411,591 1,198,148
Loss on disposal of property, plant and equipment 2,428 7,850
Issuance of compensatory stock options 50,000
Gain on legal settlement (42,548)
Impairment write down of subsidiary held for sale 657,776
Compensation expense on common stock 4,069 118,709
Change in operating assets and liabilities:
Accounts receivable 444,029 985,717
Inventories 1,254,495 2,457,341
Income tax receivable and payable 88,931 95,605
Prepaid expenses and other current assets 25,714 (78,801)
Other assets (102,218) (154,044)
Accounts payable (883,855) (3,474,625)
Accrued expenses (746,570) (171,359)
Accrued restructuring costs (431,910) 1,797,500
Customer deposits (116,240) (369,211)
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Net cash provided by (used in) operating activities 858,271 (2,226,298)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (125,603) (58,739)
Proceeds from the sale of property, plant, and equipment 90 4,000
Acquisition of other assets (700) (59,282)
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Net cash used in investment activities (126,213) (114,021)
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(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
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SIX MONTHS ENDED
DECEMBER 31,
2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit $ 7,129,717 $12,276,697
Repayments on lines of credit (8,653,709) 12,298,939)
Repayments of long-term debt (1,305,086) (562,080)
Repayments on capital leases (17,841) (19,634)
Proceeds from issuance of preferred stock--net of costs 2,450,000 3,169,559
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Net cash (used in) provided by financing activities (396,919) 2,565,603
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NET INCREASE IN CASH AND CASH EQUIVALENTS 335,139 225,284
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 285,735 622,623
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 620,874 $ 847,907
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --Cash paid during the period
for:
Interest $ 353,779 $ 440,597
========== =========
Income Taxes $ 215,101
=========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Issuance of note payable for debt refinancing costs $ 250,000
=========
Discount on issuance of note payable for legal services $ (29,350)
=========
Fair value of common stock cancelled in sale of assets $ 64,160
=========
Fair value of common stock cancelled in legal settlement $ 42,548
=========
Issuance of compensatory stock options $ 50,000
=========
Equipment acquired under capital leases $ 30,482
=========
Common stock issued for services $ 25,000
=========
See notes to unaudited condensed consolidated financial statements. (Concluded)
-8-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
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1. BASIS OF PRESENTATION OF UNAUDITED 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 six months ended December 31, 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
$1,038,823 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 of Financial Accounting Standards ("SFAS") 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.
Certain reclassifications have been made to the fiscal 2002 consolidated
financial statements to conform to the current presentation.
-9-
2. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
In 2001, the FASB issued SFAS No. 141, ACCOUNTING FOR BUSINESS
COMBINATIONS, and SFAS 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 SFAS 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.
At September 30, the Company completed the transitional impairment test
for certain intangible assets with indefinite lives and found that no
impairment exists. In addition, the Company has completed the first step
of its transitional goodwill impairment test and anticipates a potential
goodwill impairment of approximately $4,500,000 in the manufacturing
reporting segment upon completion of step two of the implementation of
SFAS No. 142 during the quarter ending March 31, 2003. The potential
impairment charge will be recorded as a cumulative effect of a change in
accounting principle as of July 1, 2002.
The following table sets forth, for the periods presented, pro-forma net
income (loss) as if the Company had adopted SFAS No. 142 during the six
months ended December 31, 2001:
SIX MONTHS ENDED
DECEMBER 31,
2002 2001
Net income (loss)--as reported $ 900,355 $ (5,296,904)
Add back goodwill amortization--net of taxes 869,363
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Adjusted net income (loss) $ 900,355 $ (4,427,541)
========== =============
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 was 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 Standard is effective for
disposal activities that are initiated after December 31, 2002. The
Company does not expect this Standard to have a material effect on its
financial position or results of operations.
-10-
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSITION AND
DISCLOSURE -- AN AMENDMENT OF FASB STATEMENT NO. 123. SFAS 148 AMENDS SFAS
NO. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect on the method used on reported results. The disclosure
requirements apply to all companies for fiscal quarters beginning after
December 15, 2002. We will adopt the disclosure requirements for SFAS 148
for the quarter ending March 31, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 addresses
the disclosure requirements of a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that
it has issued. FIN 45 also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45
are effective for the Company in its quarter ended December 31, 2002. The
liability recognition requirements will be applicable prospectively to all
guarantees issued or modified after December 31, 2002. The Company had no
guarantees requiring disclosure at December 31, 2002.
3. INVENTORIES
At December 31, 2002 and June 30, 2002, inventories consisted of the
following:
December 31, June 30,
2002 2002
Raw materials $ 1,002,450 $ 1,162,080
Work-in-process 71,850 29,168
Finished goods 6,605,082 7,903,032
Reserve for obsolescence (1,437,769) (1,598,172)
------------ -----------
Inventories--net $ 6,241,613 $ 7,496,108
============ ===========
4. GOODWILL, INTANGIBLE AND OTHER ASSETS
At both December 31, 2002 and June 30, 2002, the Company had $21,499,956
of recorded goodwill that, in accordance with SFAS No. 142 is not subject
to amortization.
In addition, included in intangible assets at December 31, 2002 and June
30, 2002, the Company had intangible assets, with useful lives of 4 to 20
years, primarily consisting of trademarks and patents with a total cost of
$332,707 and $360,844, respectively, and accumulated amortization of
$271,935 and $266,755, respectively.
The Company also had other intangible assets included in other assets on
the balance sheet consisting primarily of deferred financing costs with a
total cost of $922,068 and $565,853, respectively and accumulated
amortization of $539,178 and $345,046, at December 31, 2002 and June 30,
2002, respectively. These costs are being amortized over the life of the
related debt.
-11-
Intangible and other asset amortization expense for the three and six
months ended December 31, 2002 was approximately $109,572 and $199,312,
respectively. Estimated amortization expense remaining for the five
succeeding fiscal years and thereafter is as follows:
2003 $ 214,000
2004 162,000
2005 10,000
2006 10,000
2007 10,000
Thereafter 38,000
---------
Total $ 444,000
=========
5. LINES OF CREDIT AND LONG-TERM DEBT
At December 31, 2002 and June 30, 2002, lines of credit and long-term debt
consisted of the following:
December 31, June 30,
2002 2002
Term loan payable to bank--PrimeSource Surgical $ 1,214,274 $ 2,258,307
Term note payable to bank--Luxtec 150,000
Other notes payable 815,378 691,481
------------ ------------
Total debt 2,029,652 3,099,788
Less current portion (1,809,425) (1,855,481)
------------ ------------
Total long-term debt $ 220,227 $ 1,244,307
============ ============
December 31, June 30,
2002 2002
Line of credit--PrimeSource Surgical $ 4,731,892 $ 6,255,573
Line of credit--Luxtec 1,274,991 1,275,302
------------ ------------
Total lines of credit $ 6,006,883 $ 7,530,875
============ ============
On March 2, 2001, the Company entered into an Amended and Restated
Security and Loan Agreement (the "Luxtec Credit Agreement") for a
$2,500,000 line of credit (the "Luxtec Line of Credit") with ARK CLO
2000-1 LIMITED ("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 December 31, 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
-12-
receivable and inventory, as defined ($1,275,000 at December 31, 2002). As
of December 31, 2002, borrowings bore interest at ARK's prime rate plus
3.0% (7.25% at December 31, 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 December
31, 2002, there was no availability for additional borrowings 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 (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 December 31, 2002.
On June 14, 1999, the Company's wholly owned subsidiary, PrimeSource
Surgical Inc. ("PrimeSource Surgical") entered into an Amended and
Restated Credit Agreement (the "PrimeSource Surgical Credit Agreement")
with Citizens Bank of Massachusetts ("Citizens") for a line of credit (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 December 31, 2002,
-13-
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 ($5,201,370 at December 31, 2002). As of
December 31, 2002, borrowings bore a variable step interest rate at
Citizens' prime rate plus 3.50% (7.75% at December 31, 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 of the
assets directly held by PrimeSource Surgical. At December 31, 2002, there
was $469,478 of availability under the PrimeSource Surgical Line of
Credit. 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 (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. In
connection with the August 6, 2002 amendment to the PrimeSource Surgical
Credit Agreement, 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 were
changed to $50,000 between August 2002 and January 2003, $75,000 between
February 2003 and July 2003 and $100,000 between August 2003 and November
2003, with the remainder ($316,658) due on December 2003. As of December
31, 2002, the PrimeSource Surgical Term Loan bore interest at Citizens'
prime rate plus 3.50% (7.75% at December 31, 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 would have been reduced by 100% if Citizens received payment of the
PrimeSource Surgical Term Loan in full by the last banking day of December
2002; and may be reduced by 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, fifty
percent (50%) of excess cash flow (as defined in the PrimeSource Credit
Agreement) generated during the three-month period is applied to the
principal amount of the PrimeSource Surgical Term Loan. At December 31,
2002 the additional repayment obligation totaled $10,451 to be paid in
January 2003.
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 December 31, 2002.
Other notes payable include a $100,000 note payable for tenant
improvements to Luxtec's leased premises in West Boylston, Massachusetts,
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 December 31, 2002 and June 30, 2002, Luxtec had outstanding
borrowing of $84,728 and $91,481, respectively, 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 December 31, 2002 and June 30, 2002,
PrimeSource Surgical had outstanding borrowing of $480,650 (net of
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unamortized discount of $29,350) and $600,000, respectively, on this note
payable to legal counsel. 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 December 31, 2002 and June 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 29 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 related to accrued restructuring costs for the
six-month period ended December 31, 2002 consisted of the following:
EMPLOYEE OTHER
RELATED CONTRACTS TOTAL
Balance, June 30, 2002 $ 653,000 $ 458,133 $ 1,111,133
Cash payments (334,137) (83,160) (417,297)
Other adjustments (14,613) (14,613)
---------- --------- ---------
Balance, December 31, 2002 $ 318,863 $ 360,360 $ 679,223
========== ========== =========
7. INCOME TAXES
At December 31, 2002 and June 30, 2002, the Company had deferred tax
assets resulting from federal net operating loss carryforwards of
approximately $5,706,000 and $6,075,000, respectively. A full valuation
allowance has been provided against these deferred tax assets as of
December 31, 2002 as it is more likely than not that sufficient taxable
income will not be generated to realize these temporary differences.
During the three and six months ended December 31, 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 $171,000 and $369,000,
respectively. However, the Company may be subject to income taxes in 2003
based on limitations on the use of its net operating loss carryforwards.
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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. The primary specialty
areas include gynecology, cardiovascular, endoscopy, and general surgery.
These products and services are primarily used in hospital operating rooms
and in outpatient surgery centers. This segment does business as
PrimeSource Surgical.
SPECIALTY DISTRIBUTION SERVICES--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, 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 $1,284,411 and $2,667,269 for the three and six-month
periods ended December 31, 2002, respectively, and approximately
$1,282,622 and $2,432,892 for the same periods in 2001. 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.
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THREE MONTHS ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------------
Distribution-- Distribution-- Corporate/
Surgical Critical Care Manufacturing Other Total
Net sales $ 6,678,255 $ 4,318,937 $ 2,113,472 $13,110,664
============ ============ =========== ============
Net income (loss) $ 49,386 $ 146,552 $ 298,135 $ (77,948) $ 416,125
============ ============ =========== ============ ============
Total assets $ 19,345,551 $ 3,024,222 $13,331,316 $ 422,201 $36,123,290
============ ============ =========== ============ ============
Depreciation and
amortization $ 52,276 $ 4,662 $ 36,856 $ 117,204 $ 210,998
============ ============ =========== ============ ============
Interest expense $ 51,702 $ 33,220 $ 27,248 $ 141,361 $ 253,531
============ ============ =========== ============ ============
THREE MONTHS ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------------------
Distribution-- Distribution-- Corporate/
Surgical Critical Care Manufacturing Other Total
Net sales $ 7,575,568 $ 5,640,869 $ 1,791,307 $15,007,744
============ ============ =========== ============
Net income (loss) $ (314,037) $(1,161,943) $ 40,402 $(3,604,371) $(5,039,949)
============ ============ =========== ============ ============
Total assets $20,130,288 $ 7,012,546 $12,947,197 $ 643,369 $40,733,400
============ ============ =========== ============ ============
Restructuring expense $ 2,462,752 $ 2,462,752
============ ============
Depreciation and
amortization $ 113,335 $ 41,913 $ 254,552 $ 204,830 $ 614,630
============ ============ =========== ============ ============
Interest expense $ 95,883 $ 51,852 $ 32,637 $ 8,031 $ 188,403
============ ============ =========== ============ ============
SIX MONTHS ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------------
Distribution-- Distribution-- Corporate/
Surgical Critical Care Manufacturing Other Total
Net sales $12,991,345 $ 9,237,959 $ 4,026,619 $26,255,923
============ ============ =========== ============
Net income (loss) $ 113,426 $ 286,778 $ 818,646 $ (318,495) $ 900,355
============ ============ =========== ============ ============
Total assets $19,345,551 $ 3,024,222 $13,331,316 $ 422,201 $36,123,290
============ ============ =========== ============ ============
Depreciation and
amortization $ 117,132 $ 9,206 $ 71,641 $ 213,612 $ 411,591
============ ============ =========== ============ ============
Interest expense $ 135,727 $ 98,500 $ 61,117 $ 292,200 $ 587,544
============ ============ =========== ============ ============
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SIX MONTHS ENDED DECEMBER 31, 2001
----------------------------------------------------------------------------------------
Distribution-- Distribution-- Corporate/
Surgical Critical Care Manufacturing Other Total
Net sales $16,066,718 $11,220,576 $ 3,746,125 $31,033,419
============ ============ =========== ============
Net income (loss) $ 56,609 $ (565,036) $ 30,462 $(4,818,939) $(5,296,904)
============ ============ =========== ============ ============
Total assets $20,130,288 $ 7,012,546 $12,947,197 $ 643,369 $40,733,400
============ ============ =========== ============ ============
Restructuring expense $ 2,462,752 $ 2,462,752
============ ============
Depreciation and
amortization $ 617,687 $ 65,111 $ 284,353 $ 231,267 $ 1,198,418
============ ============ =========== ============ ============
Interest expense $ 214,862 $ 107,308 $ 63,447 $ 8,031 $ 393,648
============ ============ =========== ============ ============
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 and six months
ended December 31:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
Numerator:
Net income (loss) $ 416,125 $ (5,039,949) $ 900,355 $ (5,296,904)
Preferred dividends and accretion (301,204) (736,010) (407,323) (1,474,885)
Effect of equity recapitalization 11,809,741
-------------- -------------- -------------- --------------
Net income (loss) available to common
stockholders $ 114,921 $ (5,775,959) $ 12,302,773 $ (6,771,789)
============== ============== ============== ==============
Denominator:
Basic weighted average common shares
outstanding 22,379,345 7,927,327 19,863,495 7,906,241
Restricted common stock 50,982 65,866
Dilutive effect of:
Warrants 12,712,104 10,239,339
Assumed conversion of Series G Stock 18,839,638 14,772,139
-------------- -------------- -------------- --------------
Weighted average common shares for the
purpose of caculating diluted earning per
share 53,931,087 7,978,309 44,874,973 7,972,107
============== ============== ============== ==============
Options and warrants to purchase common stock totaling 5,689,822 at
December 31, 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 3,680,033 at December 31, 2001, and shares to be issued upon
-18-
conversion of preferred stock were not included in weighted average common
shares for the purpose of calculating diluted earnings per share because
the result would be antidilutive. Put warrants outstanding totaling
282,022 at December 31, 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 $1,866,037, net of costs of $388,429. 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 became exercisable on December 31, 2002 and expire on August 6,
2012. In addition, on September 15, 2002, November 15, 2002, and January
15, 2003, the Company issued and sold an additional aggregate 32,673
shares of Series G Stock for proceeds of $932,502, net of costs of
$113,034. Each share of Series G Stock is convertible into 100 shares of
common stock, subject to adjustment, at the option of the holder. 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 on August 6, 2002 in connection with the sale
of the Series G Stock. The resultant beneficial conversion feature of
$1,031,000 was recorded directly to additional paid-in capital in December
2002 when the Series G Stock became convertible.
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 Convertible Preferred Stock, par value $1.00 per share
(the "Series C Stock"), was converted into 27.5871 shares of the Company's
common stock. In connection with the conversion of the Series C 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 became
exercisable on December 31, 2002 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 former
holders of the Series C Stock 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 Convertible Redeemable Preferred Stock, no par value
(the "Series F Stock"), was converted into one share of common stock. In
-19-
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 Company common stock with an exercise price of $.01
per share and a 10-year life. The warrants became exercisable on December
31, 2002 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 Convertible
Preferred Stock, no par value (the "Series E Stock"), was exchanged for
.3125 shares of Series G Stock. In connection with the exchange of the
Series E Stock, the Company issued the former holders of the Series E
Stock warrants to purchase an aggregate of 817,000 shares of Company
common stock with an exercise price of $.01 per share. These warrants
became exercisable on December 31, 2002 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 seven 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 $11,809,741 has been credited
to retained earnings.
12. 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 it has meritorious defenses and intends to defend its
position with respect to this complaint. The outcome of this action cannot
be determined at the present time and no assurance can be given as to the
occurrence of any particular outcome.
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 in the amount of $168,099, net
of costs of $71,901, and returned for cancellation 132,963 shares of
Company 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.
* * * * * *
-20-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS THREE AND SIX MONTHS ENDED DECEMBER 31, 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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of America. During
preparation of these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, goodwill and other intangible assets and income taxes. We base our
estimates on historical experience and various other assumptions that we believe
are reasonable under the circumstances. The results form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following critical accounting policies require us to make significant
judgments and estimates used in the preparation of our financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine the
adequacy of this allowance by regularly evaluating individual customer
receivables and considering a customer's financial condition, credit history,
and current economic conditions. If the financial condition of our customers
were to deteriorate, additional allowances may be required. Our accounts
receivable are written off once an account is deemed uncollectible. This
typically occurs once we have exhausted all efforts to collect the account,
which includes collection attempts by company employees and outside collection
agencies.
-22-
INVENTORY RESERVES FOR OBSOLESCENCE
We write down our inventory for estimated obsolescence or unmarketable inventory
in an amount equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions prove to be less favorable than those
projected by management, additional inventory write-downs may be required.
GOODWILL AND OTHER INTANGIBLE ASSETS
We evaluate goodwill and other intangible assets for impairment at least
annually, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
For goodwill, we first compare the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds the fair value of a reporting unit, additional tests would be used to
measure the amount of impairment loss, if any. We use a present value technique
to measure reporting unit fair value. If the carrying amount of any other
intangible asset exceeds its fair value, we would recognize an impairment loss
for the difference between fair value and the carrying amount. We have
recognized impairment losses in the prior year upon the disposition of PEC and
expect to record an impairment loss upon completion of step two of SFAS 142
implementation during the quarter ending March 31, 2003. If other events occur
and circumstances change, causing the fair value of a reporting unit to fall
below its carrying amount, impairment losses may be recognized in the future.
DEFERRED TAX ASSETS
We estimate our actual current tax exposure obligations together with the
temporary differences that have resulted from the differing treatment of items
dictated by generally accepted accounting principles versus U.S. tax laws. These
temporary differences result in deferred tax assets and liabilities. On an
on-going basis, we then assess the likelihood that our deferred tax assets will
be recovered from future taxable income. If we believe the recovery to be less
than likely, we establish a valuation allowance against the deferred tax asset
and charge the amount as an income tax expense in the period in which such a
determination is made.
RESULTS OF OPERATIONS
NET SALES--Net sales decreased to $13,110,664 and $26,255,923 for the three and
six months ended December 31, 2002, respectively, compared to $15,007,744 and
$31,033,419 for the same periods in 2001. The net sales decrease of $1,897,080,
or 12.6%, and $4,777,496, or 15.4%, in the three and six-month periods ended
December 31, 2002 relative to the comparable periods in 2001 was primarily due
to lower sales due to the closure of the western sales territory as a result of
the Company's restructuring plan initiated in November 2001 and the result of
lost product lines. The western sales territory closure resulted in
approximately $986,000 and $2,542,000 of the decrease in the three and six-month
periods ended December 31, 2002, respectively. Remaining decreases are due to
market conditions and other effects of restructuring.
COST OF SALES--Cost of sales decreased to $8,481,660, or 64.7% of net sales, and
$17,000,021, or 64.7% of net sales, for the three and six months ended December
31, 2002, respectively, compared to $10,855,506, or 72.3% of net sales, and
$21,043,215, or 67.8% of net sales, for the same periods in 2001. The decrease
of $2,373,846, or 21.9%, and $4,043,194, or 19.2%, in the three and six-month
periods ended December 31, 2002 relative to the comparable periods in 2001 was
primarily due to lower sales levels related to the closure of the western sales
territory, lost product lines and prior year reserve adjustments related to
-23-
inventory. The western sales territory closure resulted in approximately
$702,000 and $1,810,000 of the decrease for the three and six-month periods
ended December 31, 2002, respectively. The prior year reserve adjustments, which
did not recur in the current year, contributed approximately $705,000 to the
decrease in cost of goods sold for the three and six-month periods ended
December 31, 2002. The decrease in cost of sales as a percentage of net sales in
the three and six-month periods ended December 31, 2002 compared to the same
periods in 2001 is due to the difference in product mix sold and the
non-recurring prior year inventory reserve adjustments.
GROSS PROFIT--Gross profit was $4,629,004, or 35.3% of net sales, and
$9,255,902, or 35.3% of net sales, for the three and six months ended December
31, 2002, respectively, compared to $4,152,238, or 27.7% of net sales, and
$9,990,204, or 32.2% of net sales, for the same periods in 2001. The increase of
$476,766, or 11.5%, in the three-month period ended December 31, 2002 relative
to the comparable period in 2001 is primarily due to reserve adjustments of
approximately $705,000 recorded in December 2001. The decrease of $734,302, or
7.4%, in the six-month period ended December 31, 2002 relative to the comparable
period in 2001 is primarily due to the same reserve adjustments offset by lower
sales levels due to the closure of the western sales territory and lost product
lines. The western sales territory closure resulted in approximately $732,000 of
the decrease. The increase in gross profit margins in the three and six-month
periods ended December 31, 2002 compared to the same periods in 2001is due to
the difference in product mix sold and the non-recurring prior year inventory
reserve adjustments creating higher cost of goods sold.
SELLING EXPENSE--Selling expense decreased to $2,028,185, or 15.5% of net sales,
and $4,004,067, or 15.3% of net sales, for the three and six months ended
December 31, 2002, respectively, compared to $2,398,328, or 16.0% of net sales,
and $5,000,284, or 16.1% of net sales, for the same periods in 2001. The
decreases of $370,143, or 15.4%, and $996,217, or 19.9%, are primarily due to
the closure of the western sales territory as a result of the Company's
restructuring plan initiated in November 2001. Decreased salaries, commissions,
benefits and travel expenses related to the western sales territory account for
approximately $236,246 and $502,353 of the decrease for the three and six-month
periods, respectively. The remaining decrease is primarily the result of lost
product lines.
GENERAL AND ADMINISTRATIVE EXPENSE--General and administrative expense decreased
to $1,837,460, or 14.0% of net sales, and $3,534,570, or 13.5% of net sales, for
the three and six months ended December 31, 2002, respectively, compared to
$3,472,014, or 23.1% of net sales, and $6,026,929, or 19.4% of net sales, for
the same periods in 2001. The decrease of $1,634,554, or 47.1%, and $2,492,359,
or 41.4%, for the three and six-month periods 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. Non-recurring reserve adjustments recorded in December 2001 of
approximately $474,000 also contributed to the decrease.
DEPRECIATION AND AMORTIZATION EXPENSE--Depreciation and amortization expense
decreased to $210,998, or 1.6% of net sales, and $411,591, or 1.6% of net sales,
for the three and six months ended December 31, 2002, respectively, compared to
$614,630, or 4.1% of net sales, and $1,198,418, or 3.9% of net sales, for the
same periods in 2001. The decrease of $403,632, or 65.7%, and $786,827, or
65.7%, in depreciation and amortization expense is primarily the result of the
implementation of Statement of Financial Accounting Standard ("SFAS") No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2002, which requires,
among other things, the discontinuance of goodwill amortization. This accounting
change accounts for approximately $435,000 and $869,000 of this decrease for the
three and six-month periods ended December 31, 2002, respectively.
-24-
RESTRUCTURING EXPENSE--In early November 2001, we initiated a restructuring plan
which narrowed the focus of our operations, consolidated certain under
performing sales regions, reduced corporate overhead through workforce
reductions, restructured our balance sheet through a refinancing of the
PrimeSource Healthcare and the PrimeSource Surgical senior bank debt and the
reduced debt levels through projected improved earning and potential asset
sales. As a result of this, restructuring expenses were recorded in the six
months ended December 31, 2001 totaling $2,462,752.
INTEREST EXPENSE--Interest expense increased to $253,531 and $587,544 for the
three and six months ended December 31, 2002, respectively, compared to $188,403
and $393,648 for the same periods in 2001. The increase of $65,128, or 34.6%,
and $193,896, or 49.3%, is the result of increased interest rates and fees
incurred related to the restructuring of the PrimeSource Healthcare and
PrimeSource Surgical debt.
INCOME TAX PROVISION--There was no recorded income tax provision for the three
and six months ended December 31, 2002, compared to a provision of $64,500 and
$215,700 for the same periods 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 generated operating losses. In
addition, in the three and six months ended December 31, 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. However, the Company may be subject to income taxes in 2003
based on limitations on the use of its net operating loss carryforwards.
NET INCOME (LOSS)--Net income increased to $416,125 and $900,355 for the three
and six months ended December 31, 2002, respectively, compared to a net loss of
($5,039,949) and ($5,296,904) for the same periods in 2001. The increase of
$5,456,074, or 108.3%, and $ 6,197,259, or 117.0%, 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 December 31, 2002, we had a working capital deficit of $3,023,508 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 as well as unused proceeds from the issuance of preferred stock.
On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement (the "Luxtec Credit Agreement") for a $2,500,000 line of credit (the
"Luxtec Line of Credit") with ARK CLO 2000-1 LIMITED ("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 December 31, 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 December 31, 2002). As of December 31,
-25-
2002, borrowings bore interest at ARK's prime rate plus 3.0% (7.25% at December
31, 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 December 31, 2002, there was no availability for
additional borrowings 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 (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 December 31, 2002.
On June 14, 1999, the Company's wholly owned subsidiary, PrimeSource Surgical,
entered into an Amended and Restated Credit Agreement (the "PrimeSource Surgical
Credit Agreement") with Citizens Bank of Massachusetts ("Citizens") for a line
of credit (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 December 31, 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 ($5,201,370 at December 31,
2002). As of December 31, 2002, borrowings bore a variable step interest rate at
Citizens' prime rate plus 3.50% (7.75% at December 31, 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 of the assets directly held
by PrimeSource Surgical. At December 31, 2002, there was $469,478 of
availability under the PrimeSource Surgical Line of Credit. 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 (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. In connection with the
August 6, 2002 amendment to the PrimeSource Surgical Credit Agreement,
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 were changed to $50,000 between August 2002
and January 2003, $75,000 between February 2003 and July 2003 and $100,000
between August 2003 and November 2003, with the remainder ($316,658) due on
December 2003. As of December 31, 2002, the PrimeSource Surgical Term Loan bore
interest at Citizens' prime rate plus 3.50% (7.75% at December 31, 2002). The
PrimeSource Surgical Term Loan matures on December 31, 2003. At December 31,
2002, PrimeSource Surgical had outstanding borrowings of $1,214,274 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
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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 would have been reduced by 100% if Citizens received payment of
the PrimeSource Surgical Term Loan in full by the last banking day of December
2002; and may be reduced by 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, fifty percent (50%) of excess cash flow
(as defined in the PrimeSource Credit Agreement) generated during the
three-month period is applied to the principal amount of the PrimeSource
Surgical Term Loan. At December 31, 2002 the additional repayment obligation was
$10,451 to be paid in January 2003.
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 December 31, 2002.
Other notes payable include a $100,000 note payable for tenant improvements to
Luxtec's leased premises in West Boylston, Massachusetts, 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 December 31, 2002 and June 30,
2002, Luxtec had outstanding borrowing of $84,728 and $91,481, respectively,
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 December 31, 2002 and June 30, 2002, PrimeSource Surgical
had outstanding borrowing of $480,650 (net of unamortized discount of $29,350)
and $600,000, respectively, on this note payable to legal counsel. 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 December 31, 2002 and June 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.
On August 6, 2002, we raised $2,254,466, before costs, 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 and on November 15,
2002, we raised an additional $696,997, before cost and in aggregate, 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.
-27-
As of December 31, 2002, we had $620,874 of cash and cash equivalents. In
addition, the principal source of our short-term borrowing is the PrimeSource
Surgical Line of Credit. As of December 31, 2002, we had approximately $469,478
available under the PrimeSource Surgical Line of Credit. We expect that our
current cash and cash equivalents, the availability under our credit facility
and any cash flow from operations will be sufficient to fund our operations for
the next 12 months.
On January 15, 2003, we raised an additional $348,539, before costs and
expenses, in equity capital through the issuance and sale of an additional
10,891 shares of Series G Stock. The proceeds from this offering are being used
for working capital purposes. In addition, we may attempt to raise additional
equity or debt capital in the future.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the Company's credit facilities at December 31, 2002 is $7,471,157,
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.
-28-
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 each of November 15, 2002 and January 15, 2003, the Company issued and sold
an additional 10,871 shares of Series G Convertible Redeemable Preferred Stock,
no par value (the Series G Stock"), for gross aggregate proceeds of $697,024. As
of January 31, 2003, the Company had an aggregate of 204,688 shares of Series G
Stock outstanding. Each share of Series G Stock is convertible into 100 shares
of common stock, subject to adjustment, at the option of the holder. 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 was exempt from registration 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 accounts payable.
On December 31, 2002, the Company amended its Articles of Organization
increasing the authorized number of shares of Company common stock, par value
$.01 per share, from 50,000,000 to 75,000,000. Upon consummation of the
amendment, each of the Company's outstanding shares of Series G Stock became
convertible into 100 shares of common stock, as discussed above. In addition,
warrants to purchase an aggregate of 13,122,173 shares of common stock became
exercisable upon the amendment to the Company's Articles of Organization
increasing the authorized shares of common stock. The additional shares of
authorized common stock are available for issuance by the Company without any
action by the stockholders. If additional shares of common stock are issued,
this would have a dilutive effect on the voting power of existing stockholders.
In addition, the increase in the number of shares of authorized common stock
could have the effect of making a change in control of the Company more
difficult.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on December 17,
2002. At the meeting, the following items were submitted to a vote of the
stockholders:
(1) the election of two Class II directors each for a three-year term was
approved with the election of Larry H. Coleman receiving 16,024,720 votes in
favor, 38,411 votes against, 0 abstentions and 0 broker non-votes, and the
election of Bradford C. Walker receiving 16,024,635 votes in favor, 38,496 votes
against, 0 abstentions and 0 broker non-votes;
(2) an amendment to the Company's Articles of Organization increasing the
authorized number of shares of Company common stock from 50,000,000 to
75,000,000 was approved with 15,681,817 votes in favor, 375,134 votes against,
6,180 abstentions and 0 broker non-votes;
-29-
(3) the amendment to the Company's Tucson Medical Corporation 1997 Stock
Option/Stock Issuance Plan, as amended, was ratified with 14,728,539 votes in
favor, 440,940 votes against, 119,707 abstentions and 773,945 broker non-votes;
and
(4) the appointment by the Company's Board of Directors of Deloitte &
Touche, LLP, the Company's independent auditors, was ratified with 16,017,262
votes in favor, 41,180 votes against, 4,689 abstentions and 0 broker non-votes.
ITEM 5. OTHER INFORMATION
On January 2, 2003, James Berardo resigned from the Company's Board of
Directors. In addition, on January 28, 2003, Nicholas C. Memmo resigned from the
Company's Board of Directors. As of January 29, 2003 and through the date of
this Report, members of the Company's Board of Directors consisted of Larry H.
Coleman and Bradford C. Walker as Class II directors with terms expiring at the
Company's 2005 annual meeting, William H. Lomicka as a Class I director with a
term expiring at the Company's 2004 annual meeting and James W. Hobbs as a Class
III director with a term expiring at the Company's 2003 annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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).
-30-
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).
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 Articles of Amendment to Articles of Organization, dated as of
December 17, 2002.
3.22 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).
-31-
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).
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 November 20, 2002, the Company filed a current report on Form
8-K, announcing under Item 5, the issuance and sell of 10,981 shares
of Company Series G Convertible Redeemable Preferred Stock.
(2) On January 17, 2003, the Company filed a current report on Form 8-K,
announcing under Item 5, the issuance and sell of 10,981 shares of
Company Series G Convertible Redeemable Preferred Stock.
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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)
February 14, 2003 /s/ SHAUN MCMEANS
- ----------------- -------------------
Date Shaun McMeans
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Executive Officer)
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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 report 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.
February 14, 2003 /s/ BRADFORD C. WALKER
- ----------------- -------------------------
Date: Name: Bradford C. Walker
Title: President and
Chief Executive Officer
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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 report 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.
February 14, 2003 /s/ SHAUN MCMEANS
- ----------------- --------------------
Date: Name: Shaun McMeans
Title:Chief Financial Officer and
Sr. Vice President of Corp. Development
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INDEX TO EXHIBITS
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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).
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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 Articles of Amendment to Articles of Organization, dated as of December
17, 2002.
3.22 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).
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.
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