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 March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number--0-14961B
PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2741310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 E. Columbia Street, Tucson, AZ 85714
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(520) 512-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
On May 9, 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
------- -------
-1-
PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
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) 7
Unaudited Consolidated Statements of Cash Flow 8
Notes to Unaudited Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 3. Quantitative or Qualitative Disclosure About Market Risk 36
Item 4. Controls and Procedures 37
PART II OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 6. Exhibits and Reports 38
SIGNATURES 41
-2-
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, June 30,
ASSETS 2003 2002
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 153,892 $ 285,735
Accounts receivable--net of allowance for doubtful accounts
of approximately $334,000 and $400,000, respectively 6,216,867 6,348,534
Inventories--net 7,935,102 7,496,108
Income tax receivable 14,695 110,000
Prepaid expenses and other current assets 100,791 207,765
------------- ------------
Total current assets 14,421,347 14,448,142
PROPERTY, PLANT, AND EQUIPMENT--Net 1,054,036 1,139,935
INTANGIBLE ASSETS--Net of accumulated amortization
of approximately $250,000 and $267,000, respectively 130,566 143,272
GOODWILL--Net of accumulated amortization of
approximately $3,862,000 and $3,862,000, respectively 17,045,300 21,499,956
OTHER ASSETS--Net of accumulated amortization of
approximately $685,000 and $345,000, respectively 363,949 355,463
------------- ------------
TOTAL $ 33,015,198 $ 37,586,768
============= ============
(Continued)
-3-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, June 30,
(CAPITAL DEFICIENCY) 2003 2002
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 5,797,375 $ 5,587,886
Accrued expenses 2,679,719 3,307,581
Accrued restructuring costs 480,843 1,111,133
Customer deposits 79,370 220,901
Lines of credit 6,382,707 7,530,875
Current portion of long-term debt 1,548,281 1,855,481
Current portion of capital lease obligations 35,066 36,923
------------- ------------
Total current liabilities 17,003,361 19,650,780
------------- ------------
CAPITAL LEASE OBLIGATIONS--Net of current portion 25,641 47,789
------------- ------------
LONG-TERM DEBT--Net of current portion 126,383 1,244,307
------------- ------------
SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK--
$1.00 par value--authorized, 334,864 shares; issued and outstanding,
0 and 334,864 shares, respectively; aggregate liquidation preference
of $0 and $18,983,193, respectively 16,313,946
------------
SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK--
No par value--authorized, 1,000,000 shares; issued and outstanding,
0 and 325,000 shares, respectively; aggregate liquidation preference
of $0 and $10,009,288, respectively 2,029,864
------------
SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK--
No par value--authorized 5,221,248 shares; issued and outstanding,
0 and 5,221,248 shares, respectively; aggregate liquidation preference
of $0 and $5,402,061, respectively 3,649,145
------------
SERIES G REDEEMABLE, CONVERTIBLE PREFERRED STOCK--
No par value--authorized 230,000 shares; issued and outstanding,
204,688 and 0 shares, respectively; aggregate liquidation preference
of $13,417,096 and $0, respectively 4,758,364
-------------
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 21,318,768 12,490,202
Accumulated deficit (10,441,112) (17,919,048)
------------- ------------
Net stockholder's equity (capital deficiency) 11,101,449 (5,349,063)
------------- ------------
TOTAL $ 33,015,198 $ 37,586,768
============= ============
See notes to unaudited condensed consolidated financial statements. (Concluded)
-4-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
NET SALES $ 12,609,876 $ 14,585,144 $ 38,865,799 $ 45,618,563
COST OF SALES 8,005,178 9,688,552 25,005,199 30,731,767
------------ ------------ ------------- ------------
GROSS PROFIT 4,604,698 4,896,592 13,860,600 14,886,796
------------ ------------ ------------- ------------
OPERATING EXPENSES:
Selling expense 2,100,710 2,200,521 6,104,777 7,200,805
General and administrative expense 2,012,952 2,004,471 5,547,522 7,373,624
Depreciation and amortization expense 257,136 629,271 668,727 1,827,689
Restructuring expense 340,941 3,461,469
------------ ------------ ------------- ------------
Total operating expenses 4,370,798 5,175,204 12,321,026 19,863,587
------------ ------------ ------------- ------------
OPERATING INCOME (LOSS) 233,900 (278,612) 1,539,574 (4,976,791)
INTEREST EXPENSE (256,649) (182,726) (844,193) (576,374)
OTHER INCOME (EXPENSE) 49,730 (15,288) 231,955 (4,665)
------------ ------------ ------------- ------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 26,981 (476,626) 927,336 (5,557,830)
INCOME TAX PROVISION (30,000) (63,600) (30,000) (279,300)
------------ ------------ ------------- ------------
NET INCOME (LOSS) BEFORE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (3,019) (540,226) 897,336 (5,837,130)
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE: GOODWILL IMPAIRMENT (4,454,656)
------------ ------------ ------------- ------------
NET LOSS (3,019) (540,226) (3,557,320) (5,837,130)
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK (367,162) (432,387) (774,485) (1,902,272)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
------------ ------------ ------------- ------------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS $ (370,181) $ (972,613) $ 7,477,936 $ (7,739,402)
============ ============ ============= ============
(Continued)
-5-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
INCOME (LOSS) PER SHARE BEFORE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE:
Basic $ (0.02) $ (0.12) $ 0.58 $ (0.98)
================= ==================== ================ ===================
Diluted $ (0.02) $ (0.12) $ 0.25 $ (0.98)
================= ==================== ================ ===================
LOSS PER SHARE FROM GOODWILL
IMPAIRMENT:
Basic $ - $ - $ (0.22) -
================= ==================== ================ ===================
Diluted $ - $ - $ (0.09) -
================= ==================== ================ ===================
INCOME (LOSS) PER SHARE:
Basic $ (0.02) $ (0.12) $ 0.36 $ (0.98)
================= ==================== ================ ===================
Diluted $ (0.02) $ (0.12) $ 0.16 $ (0.98)
================= ==================== ================ ===================
See notes to unaudited condensed consolidated financial statements. (Concluded)
-6-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
MARCH 31, 2003 AND JUNE 30, 2002
- --------------------------------------------------------------------------------
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 (457,389) (457,389)
Preferred stock dividends (317,096) (317,096)
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 80,000 80,000
Restricted common stock vesting 4,250 4,250
Net income (loss) (3,557,320) (3,557,320)
----------- ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 2003 22,379,345 $ 223,793 $ 21,318,768 $(10,441,112) $ 11,101,449
=========== ========== ============= ============== =============
See notes to unaudited condensed consolidated financial statements.
-7-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
Nine months ended
March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,557,320) $ (5,837,130)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 668,727 1,849,139
Goodwill impairment 4,454,656
Loss on disposal of property, plant and equipment 2,806 32,223
Issuance of compensatory stock options 80,000
Gain on legal settlement (42,548)
Impairment write down of subsidiary held for sale 657,776
Compensation expense on common stock 4,250 118,709
Change in operating assets and liabilities:
Accounts receivable 131,667 1,375,690
Inventories (438,994) 2,202,002
Income tax receivable 95,305 89,258
Prepaid expenses and other current assets 42,633 (35,530)
Other assets (98,889) (177,405)
Accounts payable 209,489 (3,335,954)
Accrued expenses (645,013) 501,381
Accrued restructuring costs (630,290) 1,535,215
Customer deposits (141,531) (213,964)
---------- ---------
Net cash provided by (used in) operating activities 134,948 (1,238,590)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (215,972) (72,962)
Proceeds from the sale of property, plant, and equipment 132 4,000
Acquisition of other assets (96,027)
---------- ---------
Net cash used in investing activities (215,840) (164,989)
---------- ---------
(Continued)
-8-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
Nine months ended
March 31,
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit $ 12,037,115 $ 15,671,023
Repayments on lines of credit (13,185,283) (15,830,562)
Repayments of long-term debt (1,671,535) (732,760)
Repayments on capital leases (27,127) (30,363)
Proceeds from issuance of preferred stock--net of costs 2,795,879 3,167,150
------------ ------------
Net cash (used in) provided by financing activities (50,951) 2,244,488
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (131,843) 840,909
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 285,735 622,623
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 153,892 $ 1,463,532
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --Cash paid during the period
for:
Interest $ 527,413 $ 571,300
============ ============
Income Taxes $ 30,000 $ 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 $ (20,274)
============
Fair value of common stock cancelled in sale of assets $ 64,341
============
Fair value of common stock cancelled in legal settlement $ 42,548
============
Issuance of compensatory stock options $ 80,000
============
Equipment acquired under capital leases $ 30,482
============
Common stock issued for services $ 25,000
============
See notes to unaudited condensed consolidated financial statements. (Concluded)
-9-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PrimeSource
Healthcare, Inc. ("PrimeSource Healthcare") and its subsidiaries
("PrimeSource" or the "Company"). The Company's wholly owned operating
subsidiaries include PrimeSource Surgical, Inc. ("PrimeSource Surgical"),
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 nine months ended March 31, 2003 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.
-10-
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.
In accordance with SFAS No. 142, the Company completed the test for
impairment in March 2003 and concluded that consolidated goodwill in the
amount of $4,454,656 was impaired. The Company recorded a non-cash charge
of $4,454,656 to reduce the carrying value of its goodwill. This charge is
non-operational in nature and is reflected as a cumulative effect of a
change in accounting principle, effective July 1, 2002, in the
accompanying unaudited Consolidated Statements of Operations. No income
tax effect was recognized as the Company is in a loss position and any
expense recorded would be offset by a reduction in the corresponding
valuation allowance.
The total impairment amount of $4,454,656 is attributable to the Company's
manufacturing reporting segment and represents a portion of the previously
unamortized goodwill resulting from the Company's reverse merger with
PrimeSource Surgical on March 2, 2001. In calculating the impairment
charge, the consolidated goodwill was allocated to each reporting segment
based upon the estimated fair value of each reporting unit. The fair value
of the each reporting unit was estimated using a weighted average of the
income methodology approach, the market methodology approach and the asset
based approach.
The following table sets forth, for all periods presented, a
reconciliation of net income to conform to the requirements of SFAS No.
142.
-11-
Three months ended Nine months ended
March 31, March 31,
2003 2002 2003 2002
Reported net loss $ (3,019) $ (540,226) $ (3,557,320) $ (5,837,130)
Add back:
Goodwill amortization 426,446 1,295,810
------------- ------------- ------------- -------------
Adjusted net loss $ (3,019) $ (113,780) $ (3,557,320) $ (4,541,320)
============= ============= ============= =============
Basic earnings per share:
Reported net income (loss) $ (0.02) $ (0.12) $ 0.36 $ (0.98)
Goodwill adjustments 0.05 0.17
------------- ------------- ------------- -------------
Adjusted net income (loss) $ (0.02) $ (0.07) $ 0.36 $ (0.81)
============= ============= ============= =============
Diluted earnings per share:
Reported net income (loss) $ (0.02) $ (0.12) $ 0.16 $ (0.98)
Goodwill adjustments 0.05 0.17
------------- ------------- ------------- -------------
Adjusted net income (loss) $ (0.02) $ (0.07) $ 0.16 $ (0.81)
============= ============= ============= =============
Had the impairment loss been recorded upon initial adoption of SFAS No.
142 during the first fiscal quarter ended September 30, 2002, the net
income would have been restated as follows:
Three Months Ended
September 30, 2002
Net income, as reported $ 484,230
Cumulative effect of change in accounting principle (4,454,656)
-----------
Net loss, as restated $(3,970,426)
=============
Earnings per share, as reported
Basic $ 0.71
=============
Diluted $ 0.34
=============
Cumulative effect of change in accounting principle
Basic $ (0.26)
=============
Diluted $ (0.12)
=============
Earning per share, as restated
Basic $ 0.45
=============
Diluted $ 0.22
=============
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.
-12-
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.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION -- TRANSITION AND DISCLOSURE -- AN AMENDMENT OF FASB
STATEMENT NO. 123. SFAS No. 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 No. 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.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but
does not require, companies to record compensation cost based on the fair
value of employee stock option and warrant grants. The Company has chosen
to continue to account for employee option and warrant grants using
intrinsic value under APB Opinion No. 25. However, compensation expense in
the amount of $30,000 and $80,000 for the three and nine-month period,
respectively, has been recognized for certain employee stock option
granted below market value. No compensation expense has been recognized
for the remaining employee stock option grants and warrant grants. Had
compensation expense for these employee stock option grants been
determined based on the fair value at the grant dates, consistent with
SFAS No. 123, the Company's net income (loss) for the three and nine
months ended March 31, 2003 and 2002 would have been the pro forma amounts
indicated below:
-13-
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
Net income (loss) available to common
stockholders, as reported $ (370,181) $ (972,613) $ 7,477,936 $ (7,739,402)
Stock-based employee compensation
expense determined under fair-value (88,123) (29,791) (269,009) (91,035)
method ------------ -------------- ------------ -------------
Pro forma net income (loss) $ (458,304) $ (1,002,404) $ 7,208,927 $ (7,830,437)
============ ============== ============ =============
Earnings Per Share:
Basic- as reported (0.02) (0.12) 0.58 (0.98)
Basic- pro forma (0.02) (0.13) 0.35 (0.98)
Diluted- as reported (0.02) (0.12) 0.25 (0.98)
Diluted- pro forma (0.02) (0.13) 0.16 (0.98)
Black-Scholes Assumptions
Risk-free interest rate 3.45% 5.45% 3.21% 5.13%
Expected volatility 50% 50% 50% 50%
Expected lives- in years 7 7 6 7
Expected dividend yield 0% 0% 0% 0%
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 No. 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 No. 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 No. 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.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. Under FIN 46, companies are
required to consolidate variable interest entities for which they are
deemed to be the primary beneficiary, and disclose information about those
in which they have a significant variable interest.
-14-
3. INVENTORIES
At March 31, 2003 and June 30, 2002, inventories consisted of the
following:
March 31, June 30,
2003 2002
Raw materials $ 1,041,171 $ 1,162,080
Work-in-process 74,456 29,168
Finished goods 8,242,178 7,903,032
Reserve for obsolescence (1,422,703) (1,598,172)
------------ -----------
Inventories--net $ 7,935,102 $ 7,496,108
============ ===========
4. GOODWILL, INTANGIBLE AND OTHER ASSETS
At March 31, 2003 and June 30, 2002, the Company had $17,045,300 and
$21,499,956, respectively, of recorded goodwill. In accordance with SFAS
No. 142, beginning July 1, 2002 the Company's goodwill is not subject to
amortization.
In addition, included in intangible assets at March 31, 2003 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
$331,005 and $360,844, respectively, and accumulated amortization of
$249,635 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 $685,449 and $345,046, at March 31, 2003 and June 30,
2002, respectively. These costs are being amortized over the life of the
related debt.
Intangible and other asset amortization expense for the three and nine
months ended March 31, 2003 was approximately $153,799 and $353,112,
respectively. Estimated amortization expense remaining for the five
succeeding fiscal years ending June 30 and thereafter is as follows:
2003 $ 99,000
2004 151,000
2005 10,000
2006 10,000
2007 10,000
Thereafter 38,000
---------
Total $ 318,000
=========
5. LINES OF CREDIT AND LONG-TERM DEBT
At March 31, 2003 and June 30, 2002, long-term debt consisted of the
following:
-15-
March 31, June 30,
2003 2002
Term loan payable to bank--PrimeSource Surgical $ 1,006,207 $ 2,258,307
Term note payable to bank--Luxtec 150,000
Other notes payable 668,457 691,481
------------ ------------
Total debt 1,674,664 3,099,788
Less current portion (1,548,281) (1,855,481)
------------ ------------
Total long-term debt $ 126,383 $ 1,244,307
============ ============
At March 31, 2003 and June 30, 2002, lines of credit consisted of the
following:
March 31, June 30,
2003 2002
Line of credit--PrimeSource Surgical $ 5,143,188 $ 6,255,573
Line of credit--Luxtec 1,239,519 1,275,302
------------ ------------
Total lines of credit $ 6,382,707 $ 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 March 31, 2003, 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 March 31, 2003). As of March 31,
2003, borrowings bore interest at ARK's prime rate plus 3.0% (7.25% at
March 31, 2003). 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 March 31, 2003, there was $35,481
of 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.
-16-
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 March 31, 2003.
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 March 31, 2003, 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
($5,638,392 at March 31, 2003). As of March 31, 2003, borrowings bore a
variable step interest rate at Citizens' prime rate plus 4.00% (8.25% at
March 31, 2003). 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
March 31, 2003, there was $495,204 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 March 31,
2003, the PrimeSource Surgical Term Loan bore interest at Citizens' prime
rate plus 4.00% (8.25% at March 31, 2003). 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 an additional $75,000
fee 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 (i) would have been reduced by 60% if Citizens had received payment
in full of the PrimeSource Surgical Term Loan by the last banking day of
March 2003, may be reduced by 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.
-17-
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 March 31, 2003
there was no additional repayment obligation.
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 March 31, 2003.
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 March 31, 2003 and June 30, 2002, Luxtec had outstanding
borrowings of $81,231 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 March 31, 2003 and June 30, 2002,
PrimeSource Surgical had outstanding borrowings of $399,726 (net of
unamortized discount of $20,274) 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 March 31, 2003 and June 30, 2002, PrimeSource
Surgical had outstanding borrowings of $187,500 and $250,000,
respectively, under 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 resignation of 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 nine-month period ended March 31, 2003 consisted of the following:
-18-
Employee Other
Related Contracts Total
Balance, June 30, 2002 $ 653,000 $ 458,133 $1,111,133
Cash payments (490,937) (124,740) (615,677)
Other adjustments (14,613) (14,613)
---------- ---------- ---------
Balance, March 31, 2003 $ 162,063 $ 318,780 $ 480,843
========== ========== =========
7. INCOME TAXES
At March 31, 2003 and June 30, 2002, the Company had deferred tax assets
resulting from federal net operating loss carryforwards of approximately
$5,707,000 and $6,075,000, respectively. A full valuation allowance has
been provided against these deferred tax assets as of March 31, 2003 as it
is more likely than not that sufficient taxable income will not be
generated to realize these temporary differences. However, since the
Company may be subject to income taxes in 2003 based on limitations on the
use of the net operating loss carryforward, the Company recorded federal
tax expense of $30,000 in the quarter ended March 31, 2003.
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,
-19-
operating expense, depreciation and amortization, and the segment's
selling, general, and administrative expenses. The sales between segments
are made at market prices and are eliminated in consolidation. 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 $1,247,647 and $3,918,573 for the three and nine-month
periods ended March 31, 2003, respectively, and approximately $1,205,922
and $3,638,814 for the same periods in 2002. Effective for the quarter
ending September 30, 2002, the Company implemented a management fee
allocation for financial statement purposes. This allocation reclassifies
a portion of the corporate expense to the operating segments.
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below.
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------------------
DISTRIBUTION-- DISTRIBUTION-- CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 6,523,047 $ 4,110,670 $ 1,976,159 $ 12,609,876
============= ============ ============ ============
Net income (loss) $ (53,845) $ 8,850 $ 292,570 $ (250,594) $ (3,019)
============= ============ ============ ========== ============
Total assets $25,165,836 $ 4,003,356 $ 3,646,132 $ 199,874 $ 33,015,198
============= ============ ============ ========== ============
Depreciation and
amortization $ 41,256 $ 19,316 $ 41,384 $ 155,180 $ 257,136
============= ============ ============ ========== ============
Interest expense $ 70,066 $ 41,341 $ 25,028 $ 120,214 $ 256,649
============= ============ ============ ========== ============
-20-
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------------------
DISTRIBUTION-- DISTRIBUTION-- CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 6,726,939 $ 5,790,836 $ 2,067,369 $ 14,585,144
============= ============ ============ ============
Net income (loss) $ 336,604 $ 344,803 $ 225,710 $(1,447,343) $ (540,226)
============= ============ ============ =========== ============
Total assets $19,158,470 $ 7,586,232 $ 13,183,796 $ 675,391 $ 40,603,889
============= ============ ============ ========== ============
Restructuring expense $ 340,941 $ 340,941
========== ============
Depreciation and
amortization $ 42,048 $ 34,814 $ 255,902 $ 296,507 $ 629,271
============= ============ ============ ========== ============
Interest expense $ 83,965 $ 43,656 $ 46,997 $ 8,108 $ 182,726
============= ============ ============ ========== ============
NINE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------------------
DISTRIBUTION-- DISTRIBUTION-- CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $19,514,392 $ 13,348,629 $ 6,002,778 $ 38,865,799
============= ============ ============ ============
Net income (loss) $ 59,581 $ 295,628 $ 1,111,216 $ (569,089) $ 897,336
============= ============ ============ ========== ============
Effect in change in
Accounting Principal $ (4,454,656) $ (4,454,656)
============ ============
Total assets $25,165,836 $ 4,003,356 $ 3,646,132 $ 199,874 $ 33,015,198
============= ============ ============ ========== ============
Depreciation and
amortization $ 158,388 $ 28,522 $ 113,025 $ 368,792 $ 668,727
============= ============ ============ ========== ============
Interest expense $ 205,793 $ 139,841 $ 86,145 $ 412,414 $ 844,193
============= ============ ============ ========== ============
-21-
NINE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------------------
DISTRIBUTION-- DISTRIBUTION-- CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales $ 22,793,657 $ 17,011,412 $ 5,813,494 $ 45,618,563
============= ============= ============ ============
Net income (loss) $ 393,213 $ (220,233) $ 256,172 $ (6,266,282) $ (5,837,130)
============= ============= ============ ============= ============
Total assets $ 19,158,470 $ 7,586,232 $ 13,183,796 $ 675,391 $ 40,603,889
============= ============= ============ ============= ============
Restructuring expense $ 657,776 $ 2,803,693 $ 3,461,469
============= ============= ============
Depreciation and
amortization $ 188,992 $ 134,545 $ 976,378 $ 549,224 $ 1,849,139
============= ============= ============ ============= ============
Interest expense $ 298,827 $ 150,964 $ 110,444 $ 16,139 $ 576,374
============= ============= ============ ============= ============
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 nine
months ended March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
Numerator:
Net income (loss) before effect of a change
in accounting principle $ (3,019) $ (540,226) $ 897,336 $ (5,837,130)
Effect of change in accounting principle:
Goodwill impairment (4,454,656)
Preferred dividends and accretion (367,162) (432,387) (774,485) (1,902,272)
Effect of equity recapitalization 11,809,741
=========== ========== =========== =========
Net income (loss) available to common
stockholders $ (370,181) $ (972,613) $ 7,477,936 $ (7,739,402)
=========== ========== =========== =========
Denominator:
Basic weighted average common shares
outstanding 22,379,345 7,925,554 20,636,171 7,964,179
Dilutive effect of:
Warrants 13,951,609
Assumed conversion of Series G Stock 16,512,823
----------- ---------- ----------- ---------
Weighted average common shares for the
purpose of caculating diluted earning per
share 22,379,345 7,925,554 51,100,603 7,964,179
=========== ========== =========== =========
For the three and nine months ended March 31, 2003 and 2002, options and
warrants to purchase common stock totaling 9,271,921 and 5,624,011,
respectively were not included in weighted average common shares for the
purpose of calculating diluted earnings per share because the result would
-22-
be antidilutive. For the three months ended March 31, 2003 and 2002, and
the nine months ended March 31, 2002, shares to be issued upon 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 March
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.
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
$115,694. 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
-23-
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
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.
11. STOCK OPTIONS AND WARRANTS
Options - In January 1997, PrimeSource Surgical adopted a stock option
plan (the "1997 Plan") for the grant of stock options and other awards to
certain officers, key employees, or other persons affiliated with the
Company. The maximum number of shares of common stock that may be issued
pursuant to the 1997 Plan is 10,000,000. The 1997 Plan also provides for
various vesting schedules, as determined by the compensation committee of
the Board of Directors, and have terms not to exceed 10 years. The vested
options may be exercised at any time and generally expire 10 years from
the date of grant.
The Company issued equity-based options to certain employees during fiscal
year 2003. The exercise price was at the deemed fair market value of the
stock at the date of grant.
During fiscal year 2003, the Company also issued equity-based options to a
certain employee as required under the executed employment agreement with
the Company. The exercise price was below the deemed fair market value of
the stock at the date of grant. In accordance with the requirements of
Accounting Principles Board ("APB") Opinion No. 25, the Company has
recorded deferred equity-based compensation for the difference between the
exercise price of the stock and the deemed fair market value of the
-24-
Company's stock at the date of grant. The deferred equity-based
compensation is amortized to expense on a straight line basis, over the
one year period during which the options become vested. As of March 31,
2003 the Company had recorded cumulative deferred equity-based
compensation related to these options in the amount of $80,000.
In addition to the 1997 Plan, the Company has adopted several stock option
plans sponsored by Luxtec. The 1992 stock plan (the "1992 Plan") provides
for the grant of incentive stock options, nonqualified stock options,
stock awards, and direct sales of stock. Under the 1992 Plan, incentive
stock options may be granted at an exercise price not less than the fair
market value of the Company's common stock on the date of grant. The Board
of Directors at its discretion may grant nonqualified options. The 1992
Plan also provides for various vesting schedules, as determined by the
compensation committee of the Board of Directors, and have terms not to
exceed 10 years. Under the 1992 Plan, 500,000 total shares are authorized
for issuance.
The 1992 Plan, previously sponsored by Luxtec, is available to issue up to
an aggregate of 25,000 shares of common stock in semiannual offerings.
Stock is sold at 5 percent of fair market value, as defined. No shares
were subscribed to or issued under the 1992 Plan in the period from March
2, 2001 through March 31, 2003.
The 1995 directors' plan (the "1995 Director Plan") was adopted for
non-employee directors and provides that an aggregate of up to 200,000
nonqualified options may be granted to non-employee directors, as
determined by the compensation committee of the Board of Directors. Under
the terms of the 1995 Director Plan, options are granted at not less than
the fair market value of the Company's common stock on the date of grant.
The 1995 Director Plan also provides that the options are exercisable at
varying dates, as determined by the compensation committee, and that they
have terms not to exceed 10 years. At March 31, 2003 and June 30, 2002
there were 64,000, and 68,000 shares respectively, available for future
grants under the 1995 Director Plan.
Warrants - In connection with the issuance of a new series of its
preferred stock, Series G Stock in August 2002, the Company granted
warrants to purchase 3,300,000 shares of common stock at $.01 per share.
The warrants became exercisable on December 31, 2002 and expire in August
2012.
Prior to the issuance and sale of Series G Stock in August 2002, the
Company converted outstanding shares of Series C Stock into shares of
Company common stock. In connection with the conversion of the Series C
Stock, the Company granted former holders of Series C Stock warrants to
purchase 7,390,613 shares of common stock with an exercise price of $.01
per share. The warrants became exercisable on December 31, 2002 and expire
in August 2012. Additionally, exercise prices on warrants to purchase
140,330 shares of common stock previously issued to certain preferred
stockholders were repriced from $1.68 per share to $.01 per share.
Simultaneously with the conversion of Series C Stock in August 2002, each
outstanding share of Series F Stock was converted into shares of common
stock. In connection with the conversion, the Company granted the former
holders of Series F Stock warrants to purchase 1,614,560 shares of common
stock with an exercise price of $.01 per share. The warrants became
exercisable on December 31, 2002 and expire in August 2012. Additionally,
the exercise price on previously issued warrants to purchase 1,751,130
shares of common stock was adjusted form $1.00 per share to $.01 per
share. The warrants vested immediately and expire in December 2010.
Subsequent to the conversion of the Series C Stock and Series F Stock,
each outstanding share of the Company's Series E Stock was exchanged for
shares of Series G Stock. In connection with the exchange of the Series E
Stock, the Company granted former holders of Series E Stock warrants to
purchase 817,000 shares of our common stock with an exercise price of $.01
per share. The warrants became exercisable on December 31, 2002 and expire
-25-
in August 2012. Additionally, the exercise price on 1,625,000 warrants to
purchase common stock previously issued to certain Series E Stock
stockholders were repriced from $1.00 per share to $.01 per share. The
warrants vested immediately and expire in July 2011.
An additional 118,605 warrants were issued to certain other stockholders
related to prior year grants with expiration dates of June 2011, and
exercise prices of $1.00 and $2.35.
Prior to the merger with PrimeSource Surgical, Luxtec issued warrants to
certain lenders and other purchasers of Luxtec's Stock. Total warrants
issued entitled the holders to purchase 438,171 shares of the Company's
common stock, at exercise prices of $3.00 to $6.00 per share. The warrants
expired December 31, 2001.
Related to a private placement of its preferred stock in September 2000,
the Company granted warrants to purchase 157,860 shares of the Company's
common stock at $1.68 per share. These warrants vested immediately and
expire in September 2011.
During the year ended June 30, 1999, the Company granted two employees
warrants to purchase 63,787 shares of the Company's common stock at $1.17
per share, which the Board of Directors deemed to be the fair value of the
stock at the date of grant. The warrants vested immediately and expire in
February 2004.
During the year ended June 30, 1998, the Company issued detachable
warrants to purchase 282,022 shares of its common stock at $1.01 per
share. The warrants vested immediately and expired in February 2003.
Additionally during the year ended June 30, 1998, the Company granted two
employees warrants to purchase 74,418 shares of the Company's common stock
at $1.01 per share, which the Board of Directors deemed to be the fair
value of the stock at the date of grant. The warrants vested immediately
and expired in February 2003.
Changes in shares under options and warrants, in common stock equivalents,
for the periods ended June 30, 2001, June 30, 2002 and March 31, 2003 are
as follows:
OPTIONS WARRANTS
--------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE
Balance, June 30, 2002 1,640,476 $ 1.85 4,072,866 $ 1.04
Grants 7,487,000 0.32 13,122,128 0.01
Canceled (55,476) 2.05 (356,440) 1.01
---------- -----------
Balance, March 31, 2003 9,072,000 $ 0.59 16,838,554 $ 0.02
========== ===========
Vested and exercisable, March 31, 2003 1,195,410 16,838,554
========== ===========
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The weighted-average fair value of option grants per share for options
granted during the nine months ended March 31, 2003 was approximately
$0.26 per share.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but
does not require, companies to record compensation cost based on the fair
value of employee stock option and warrant grants. The Company has chosen
to continue to account for employee option and warrant grants using
intrinsic value under APB Opinion No. 25. However, compensation expense in
the amount of $30,000 and $80,000 for the three and nine-month period,
respectively, has been recognized for certain employee stock option
granted below market value. No compensation expense has been recognized
for the remaining employee stock option grants and warrant grants. Had
compensation expense for these employee stock option grants been
determined based on the fair value at the grant dates, consistent with
SFAS No. 123, the Company's net income (loss) for the three and nine
months ended March 31, 2003 and 2002 would have been the pro forma amounts
indicated below:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
Net income (loss) available to common
stockholders, as reported $ (370,181) $ (972,613) $ 7,477,936 $ (7,739,402)
Stock-based employee compensation expense
determined under fair value
method (88,123) (29,791) (269,009) (91,035)
------------- -------------- ------------ --------------
Pro forma net income (loss) $ (458,304) $(1,002,404) $ 7,208,927 $ (7,830,437)
============= ============== ============ =============
Earnings Per Share:
Basic- as reported (0.02) (0.12) 0.58 (0.98)
Basic- pro forma (0.02) (0.13) 0.35 (0.98)
Diluted- as reported (0.02) (0.12) 0.25 (0.98)
Diluted- pro forma (0.02) (0.13) 0.16 (0.98)
Black-Scholes Assumptions
Risk-free interest rate 3.45% 5.45% 3.21% 5.13%
Expected dividend yield 50% 50% 50% 50%
Expected lives- in years 7 7 6 7
Expected volatility 0% 0% 0% 0%
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
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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.
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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.
* * * * * *
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2003
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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.
PRINCIPLES OF CONSOLIDATION
The consolidated financials statements include the accounts of the Company and
its subsidiaries: PrimeSource Surgical; Ruby Merger Sub (dba NEMS and PEC); and
Bimeco, Inc. All intercompany accounts and transactions have been eliminated.
The results of operations of companies acquired in purchase business
transactions are included in the accompanying consolidated financial statements
from the dates of acquisition.
-30-
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.
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
an impairment loss in quarter ended March 31, 2003 upon completion of SFAS 142
implementation. 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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic-value method in accordance with APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and elected the disclosure-only alternative under
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Certain equity-based
compensation cost is included in net income (loss), as certain options granted
during periods presented had an exercise price below the market value of the
stock on the date of grant. In accordance with SFAS No. 148, ACCOUNTING FOR
STOCK BASED COMPENSATION- TRANSITION AND DISCLOSURE, the Company will continue
to disclose the required pro-forma information in the notes to the unaudited
consolidated financial statements.
-31-
SALES RECOGNITION POLICY
Sales are recorded upon shipment of products to customers. Accounts receivable
have been reduced by estimated amounts for allowances related to further charges
for uncollected accounts.
RESULTS OF OPERATIONS
NET SALES--Net sales decreased to $12,609,876 and $38,865,799 for the three and
nine months ended March 31, 2003, respectively, compared to $14,585,144 and
$45,618,563 for the same periods in 2002. The net sales decrease of $1,975,268,
or 13.5%, and $6,752,764, or 14.8%, in the three and nine-month periods ended
March 31, 2003 relative to the comparable periods in 2002 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. Remaining decreases are due to market conditions and other
effects of restructuring. The western sales territory closure resulted in
approximately $2,542,000 of the decrease in the nine-month period ended March
31, 2003.
COST OF SALES--Cost of sales decreased to $8,005,178, or 63.5% of net sales, and
$25,005,199, or 64.3% of net sales, for the three and nine months ended March
31, 2003, respectively, compared to $9,688,552, or 66.4% of net sales, and
$30,731,767, or 67.4% of net sales, for the same periods in 2002. The decrease
of $1,683,374, or 17.4%, and $5,726,568, or 18.6%, in the three and nine-month
periods ended March 31, 2003 relative to the comparable periods in 2002 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
inventory. The remaining deceases are due to market conditions and other effects
of restructuring. The western sales territory closure resulted in approximately
$1,810,000 of the decrease for the nine-month period ended March 31, 2003. The
prior year reserve adjustments, which did not recur in the current year,
contributed approximately $705,000 of the decrease in cost of goods sold for the
nine-month period ended March 31, 2003. The decrease in cost of sales as a
percentage of net sales in the three and six-month periods ended March 31, 2003
compared to the same periods in 2002 is due to the difference in product mix
sold and the non-recurring prior year inventory reserve adjustments.
GROSS PROFIT--Gross profit was $4,604,698, or 36.5% of net sales, and
$13,860,600, or 35.7% of net sales, for the three and nine months ended March
31, 2003, respectively, compared to $4,896,592, or 33.6% of net sales, and
$14,886,796, or 32.6% of net sales, for the same periods in 2002. The decrease
of $291,894, or 6.0%, and $1,026,196, or 6.9%, in the three and nine-month
periods ended March 31, 2003 relative to the comparable period in 2002 is
primarily due to 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 for the nine-month period ended March
31, 2003. The increase in gross profit margins in the three and nine-month
periods ended March 31, 2003 compared to the same periods in 2002 is 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 $2,100,710, or 16.7% of net sales,
and $6,104,777, or 15.7% of net sales, for the three and nine months ended March
31, 2003, respectively, compared to $2,200,521, or 15.1% of net sales, and
$7,200,805, or 15.8% of net sales, for the same periods in 2002. The decreases
of $99,811, or 4.5%, and $1,096,028, or 15.2%, 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
$502,353 of the decrease for the nine-month period. The remaining decrease is
primarily the result of lost product lines.
-32-
GENERAL AND ADMINISTRATIVE EXPENSE--General and administrative expense increased
to $2,012,952, or 16.0% of net sales, and decreased to $5,547,522, or 14.3% of
net sales, for the three and nine months ended March 31, 2003, respectively,
compared to $2,004,471, or 13.7% of net sales, and $7,373,624, or 16.2% of net
sales, for the same periods in 2002. The increase of $8,481, or 0.4%, for the
three-month period is primarily a result of increased legal fees due to the
complaint filed by the Company's two former executives. The decrease of
$1,826,102, or 24.8%, for the nine-month period 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 $257,136, or 2.0% of net sales, and $668,727, or 1.7% of net sales,
for the three and nine months ended March 31, 2003, respectively, compared to
$629,271, or 4.3% of net sales, and $1,827,689, or 4.0% of net sales, for the
same periods in 2002. The decrease of $372,135, or 59.1%, and $1,158,962, or
63.4%, 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 $426,000 and $1,296,000 of this decrease for
the three and nine-month periods ended March 31, 2003, respectively.
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 of $340,941 and $3,461,469
were recorded in the three and nine months ended March 31, 2002.
INTEREST EXPENSE--Interest expense increased to $256,649 and $844,193 for the
three and nine months ended March 31, 2003, respectively, compared to $182,726
and $576,374 for the same periods in 2002. The increase of $73,923, or 40.5%,
and $267,819, or 46.5%, 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--Income tax expense decreased to $30,000 for the three and
nine-month periods ended March 31, 2003 compared to $63,600 and $279,300 for the
same periods in 2002. 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. Although 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, the Company may be subject to income taxes in
2003 based on limitations on the use of its net operating loss carryforwards. As
a result, the Company has recorded an estimate federal tax expense of $30,000 in
the quarter ended March 31, 2003.
NET INCOME (LOSS)--Net loss decreased to ($3,019) and ($3,557,320) for the three
and nine months ended March 31, 2003, respectively, compared to a net loss of
($540,226) and ($5,837,130) for the same periods in 2002. The decrease of
$537,207, or 99.4%, and $2,279,810, or 39.1%, resulted primarily from expense
reductions related to our fiscal 2002 restructuring and decreased amortization
expense related to SFAS No. 142 implementation offset by the goodwill impairment
expense of $4,454,656 recorded in the current year.
-33-
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had a working capital deficit of $2,582,014 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 March 31, 2003, 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 March 31, 2003). As of March 31, 2003, borrowings bore
interest at ARK's prime rate plus 3.0% (7.25% at March 31, 2003). 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
March 31, 2003, there was $35,481 of 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 March 31, 2003.
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 March 31, 2003 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 ($5,638,392 at March 31, 2003). As of
March 31, 2003, borrowings bore a variable step interest rate at Citizens' prime
rate plus 4.00% (8.25% at March 31, 2003). 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 March 31, 2003, there was $495,204 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.
-34-
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 March 31, 2003, the PrimeSource Surgical Term Loan bore
interest at Citizens' prime rate plus 4.00% (8.25% at March 31, 2003). The
PrimeSource Surgical Term Loan matures on December 31, 2003. At March 31, 2003,
PrimeSource Surgical had outstanding borrowings of $1,006,207 under the
PrimeSource Surgical Term Loan.
The PrimeSource Surgical Term Loan is also subject to a term loan facility fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
is obligated to pay additional $75,000 fees under the PrimeSource Surgical Term
Loan on the last day of each calendar quarter, beginning on September 30, 2002
and for every quarter thereafter until the earlier of payment in full of the
PrimeSource Surgical Term Loan or December 31, 2003. The accrued term loan
facility fees (i) would have been reduced by 60% if Citizens had received
payment in full of the PrimeSource Surgical Term Loan by the last banking day of
March 2003, may be reduced by 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. At March 31, 2003 there was no additional repayment obligation.
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 March 31, 2003.
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 March 31, 2003 and June 30,
2002, Luxtec had outstanding borrowing of $81,231 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 March 31, 2003 and June 30, 2002, PrimeSource Surgical had
-35-
outstanding borrowing of $399,726 (net of unamortized discount of $20,274) 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 March 31, 2003 and June 30, 2002, PrimeSource
Surgical had outstanding borrowings of $187,500 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 capital
through the issuance and sale of the Series G Stock and the warrants to purchase
common stock. In addition, on September 15, 2002, November 15, 2002 and January
15, 2003, we raised an additional $1,045,536, before cost and in aggregate, in
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.
As of March 31, 2003, we had $153,892 of cash and cash equivalents. In addition,
the principal source of our short-term borrowing is the PrimeSource Surgical
Line of Credit. As of March 31, 2003, we had approximately $495,204 available
under the PrimeSource Surgical Line of Credit. In addition, we may attempt to
raise additional equity or debt capital in the future.
ITEM 3. QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the Company's credit facilities at March 31, 2003 is $7,576,414, 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.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
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 January 15, 2003, the Company issued and sold 10,871 shares of Series G
Convertible Redeemable Preferred Stock, no par value (the Series G Stock"), for
gross aggregate proceeds of $348,512. As of April 30, 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.
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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).
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).
-38-
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). (Incorporated by reference to Form 10-Q, file No.
0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a Class of
Stock dated August 6, 2002 (Series G Convertible Redeemable Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961,
filed on August 8, 2002).
3.21 Articles of Amendment to Articles of Organization, dated as of
December 17, 2002. (Incorporated by reference to Form 10-Q, File No.
0-14961, filed on February 14, 2003).
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.
-39-
(b) Reports on Form 8-K--The Company filed the following current reports
on Form 8-K during the three-month period ended March 31, 2003:
(1) 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)
May 14, 2003 /s/ SHAUN MCMEANS
- ------------ --------------------
Date Shaun McMeans
Chief Financial Officer
(Principal Accounting Officer
and Duly Authorized Executive Officer)
-41-
I, Bradford C. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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.
May 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 10-Q 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.
May 14, 2003 /s/ SHAUN MCMEANS
- ------------ --------------------
Date: Name: Shaun McMeans
Title: Chief Financial Officer and
Sr. Vice President of Corp. Development
-43-
INDEX TO 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).
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).
-44-
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). (Incorporated by reference to Form 10-Q, File No. 0-14961, filed
on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a Class of
Stock dated August 6, 2002 (Series G Convertible Redeemable Preferred
Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed
on August 8, 2002).
3.21 Articles of Amendment to Articles of Organization, dated as of December
17, 2002. (Incorporated by reference to Form 10-Q, File No. 0-14961,
filed on February 14, 2003).
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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