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, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number--000-14961
PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 E. COLUMBIA STREET, TUCSON, AZ 85714
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(520) 512-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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On May 10, 2004, there were 22,375,144 shares of the Registrant's common stock
outstanding.
PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 2004
and June 30, 2003 3
Consolidated Statements of Operations for the three
and nine months ended March 31, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity for
the nine months ended March 31, 2004 7
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2004 and 2003 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 36
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND JUNE 30, 2003
- --------------------------------------------------------------------------------
MARCH 31, JUNE 30,
ASSETS 2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 186,505 $ 489,911
Accounts receivable--net of allowance for doubtful accounts
of approximately $221,000 and $214,000, respectively 6,074,286 6,111,062
Inventories--net 7,276,237 7,517,965
Income taxes receivable 132,973 67,800
Prepaid expenses and other current assets 158,575 172,397
----------- -----------
Total current assets 13,828,576 14,359,135
PROPERTY AND EQUIPMENT--Net 861,860 996,358
INTANGIBLE ASSETS--Net of accumulated amortization
of approximately $242,000 and $236,000, respectively 111,674 118,290
GOODWILL--Net 15,956,883 15,956,883
OTHER ASSETS--Net of accumulated amortization of
approximately $0 and $782,000, respectively 117,548 233,874
----------- -----------
TOTAL $30,876,541 $31,664,540
=========== ===========
(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND JUNE 30, 2003
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LIABILITIES AND STOCKHOLDERS' EQUITY March 31, June 30,
2004 2003
CURRENT LIABILITIES:
Accounts payable $ 4,911,460 $ 5,636,333
Accrued expenses 1,707,189 2,240,770
Accrued restructuring costs 182,443 690,968
Customer deposits 172,908 72,895
Lines of credit 6,112,704 5,926,021
Current portion of long-term debt 75,727 559,877
Current portion of capital lease obligations 22,127 25,425
------------ ------------
Total current liabilities 13,184,558 15,152,289
CAPITAL LEASE OBLIGATIONS--Net of current portion 27,706 21,433
LONG-TERM DEBT--Net of current portion 93,311 105,696
SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK--
No par value--authorized 230,000 shares; issued and outstanding,
222,501 shares; aggregate liquidation preference of $15,116,953 7,996,921
------------ ------------
TOTAL LIABILITIES 21,302,496 15,279,418
------------ ------------
SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK--
No par value--authorized 230,000 shares; issued and outstanding,
222,500 shares; aggregate liquidation preference of $14,687,737 5,699,121
------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--authorized 75,000,000 shares; issued and
outstanding, 22,375,144 and 22,375,094 shares, respectively 223,751 223,750
Additional paid-in capital 19,295,451 21,347,451
Accumulated deficit (9,945,157) (10,885,200)
------------ ------------
Net stockholders' equity 9,574,045 10,686,001
------------ ------------
TOTAL $ 30,876,541 $ 31,664,540
============ ============
See notes to condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
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Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
NET SALES $ 12,253,415 $ 11,126,955 $ 36,956,476 $ 34,504,333
COST OF SALES 7,956,448 6,885,200 23,475,343 21,691,156
------------ ------------ ------------ ------------
GROSS PROFIT 4,296,967 4,241,755 13,481,133 12,813,177
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling expenses 1,994,911 1,892,575 6,039,609 5,503,238
General and administrative expenses 1,641,348 1,914,879 5,052,873 5,256,514
Depreciation and amortization expenses 81,487 255,585 411,738 664,074
------------ ------------ ------------ ------------
Total operating expenses 3,717,746 4,063,039 11,504,220 11,423,826
------------ ------------ ------------ ------------
OPERATING INCOME 579,221 178,716 1,976,913 1,389,351
INTEREST EXPENSE (306,937) (240,365) (1,038,969) (805,257)
OTHER INCOME (EXPENSE) 109 49,730 (126,685) 231,955
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION 272,393 (11,919) 811,259 816,049
INCOME TAX PROVISION (13,600) (30,000) (64,600) (30,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 258,793 (41,919) 746,659 786,049
DISCONTINUED OPERATIONS-
INCOME FROM DISCONTINUED OPERATIONS 38,900 111,287
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE- GOODWILL
IMPAIRMENT (4,454,656)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 258,793 (3,019) 746,659 (3,557,320)
DIVIDENDS AND ACCRETION ON PREFERRED
STOCK (367,162) (774,485)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS $ 258,793 $ (370,181) $ 746,659 $ 7,477,936
============ ============ ============ ============
(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
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Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
INCOME (LOSS) PER SHARE BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.01 $ (0.02) $ 0.03 $ 0.58
========== ========== ========== ==========
Diluted $ 0.01 $ (0.02) $ 0.03 $ 0.25
========== ========== ========== ==========
INCOME PER SHARE FROM DISCONTINUED
OPERATIONS:
Basic $ $ $ $
========== ========== ========== ==========
Diluted $ $ $ $
========== ========== ========== ==========
LOSS PER SHARE FROM CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE-
GOODWILL IMPAIRMENT:
Basic $ - $ - $ - $ (0.22)
========== ========== ========== ==========
Diluted $ - $ - $ - $ (0.09)
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE AVAILABLE FOR
COMMON STOCKHOLDERS:
Basic $ 0.01 $ (0.02) $ 0.03 $ 0.36
========== ========== ========== ==========
Diluted $ 0.01 $ (0.02) $ 0.03 $ 0.16
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF INCOME (LOSS) PER SHARE
Basic 22,375,144 22,379,345 22,375,125 20,636,171
========== ========== ========== ==========
Diluted 22,375,144 58,774,413 22,375,125 51,100,603
========== ========== ========== ==========
See notes to condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2004
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ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
---------------------------- CAPITAL DEFICIT EQUITY
SHARES AMOUNT
BALANCE, JULY 1, 2003 22,375,094 $ 223,750 $ 21,347,451 $ (10,885,200) $ 10,686,001
Reclassification of Series G Convertible,
Redeemable Preferred Stock to liability (2,062,000) 193,384 (1,868,616)
Issuance of compensatory stock options 10,000 10,000
Exercise of stock option 50 1 1
Net income 746,659 746,659
---------- --------- ------------ ------------ ------------
BALANCE, MARCH 31, 2004 22,375,144 $ 223,751 $ 19,295,451 $ (9,945,157) $ 9,574,045
========== ========= ============ ============ ============
See notes to condensed consolidated financial statements.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
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Nine months ended
March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 746,659 $ (3,557,320)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 411,738 668,727
Goodwill impairment 4,454,656
Loss on disposal of property and equipment and intangibles 39,669 2,806
Issuance of compensatory stock options 10,000 80,000
Debt forgiveness (150,000)
Compensation expense on restricted common stock 4,250
Gain on legal settlement (42,548)
Change in operating assets and liabilities:
Accounts receivable 36,776 131,667
Inventories 241,728 (438,994)
Income taxes receivable (65,173) 95,305
Prepaid expenses and other current assets 13,822 42,633
Other assets (91,650) (98,889)
Accounts payable (724,873) 209,489
Accrued expenses (520,109) (645,013)
Accrued restructuring costs (508,525) (630,290)
Customer deposits 100,013 (141,531)
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Net cash (used in) provided by operating activities (459,925) 134,948
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (82,854) (215,972)
Proceeds from the sale of property and equipment 5,233 132
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Net cash used in investing activities (77,621) (215,840)
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(Continued)
-8-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
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Nine months ended
March 31,
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 27,538,405 12,037,115
Repayments on lines of credit (27,351,722) (13,185,283)
Repayments of long-term debt (358,767) (1,671,535)
Repayments on capital leases (22,960) (27,127)
Accrued unpaid dividends on Series G redeemable preferred stock 429,152
Proceeds from issuance of common and preferred stock-net of costs 32 2,795,879
----------- -----------
Net cash provided by (used in) financing activities 234,140 (50,951)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (303,406) (131,843)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 489,911 285,735
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 186,505 $ 153,892
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -Cash paid during the period for:
Interest $ 412,527 $ 527,413
=========== ===========
Taxes $ 78,080 $ 50,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Issuance of note payable for debt refinancing costs $ 250,000
===========
Discount on issuance of note payable for legal services $ (12,232) $ (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 $ 10,000 $ 80,000
========== ===========
Equipment acquired under capital lease $ 25,304
==========
Reclassification of stockholders' equity to Series G Stock (Note 10) $1,868,616
==========
See notes to condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
PrimeSource Healthcare, Inc. ("PrimeSource Healthcare") and its
subsidiaries (collectively, "PrimeSource" or the "Company"). The Company's
wholly owned operating subsidiaries include PrimeSource Surgical, Inc.
("PrimeSource Surgical") and Bimeco, Inc. ("Bimeco"). All intercompany
balances and transactions are eliminated in consolidation.
In December 2003, the Company consolidated its senior debt facilities. The
Company's senior debt financing is now provided under a revolving demand
note from Wells Fargo Business Credit, Inc. ("Wells Fargo"). As of March
31, 2004, the Company had $6,112,704 of outstanding borrowings under the
PrimeSource Healthcare Credit and Security Agreement, dated as of December
10, 2003, by and among the Company, PrimeSource Surgical, Bimeco and Wells
Fargo (the "Credit and Security Agreement") as further discussed in Note
5. The Credit and Security Agreement includes certain financial covenants,
with which the Company was in compliance at March 31, 2004.
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America ("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 statement presentation. In the opinion of management,
all adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three and nine months ended March 31,
2004 are not necessarily indicative of the results that may be expected
for the entire year.
PrimeSource Healthcare, 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 June 30, 2003, PrimeSource Surgical sold all of the issued and
outstanding capital stock of Ruby Merger Sub, Inc., the Company's indirect
wholly owned subsidiary ("Ruby"), for cash proceeds of $1,000,000 to New
England Medical Specialties, Inc., a newly formed entity ("NMSI"). Peter
Miller, a stockholder of NMSI, was the Regional Manager of Ruby prior to
the disposition of the capital stock of Ruby. In connection with the sale
of the capital stock of Ruby, Mr. Miller concluded his employment
relationship with PrimeSource. The cash proceeds were used to pay off the
PrimeSource Term Note and reduce the revolving line of credit with
Citizens Bank of Massachusetts. The loss on the disposal of the operation
of $73,830 was included as discontinued operations in the fourth quarter
of fiscal year 2003, and the related results of operations for the
operation were reclassified as discontinued operations.
Certain reclassifications have been made to the fiscal 2003 consolidated
financial statements to conform to the current presentation. As a result
-10-
of the Company's disposal of Ruby in 2003, the Company's previously
reported consolidated financial statements for 2003 have been restated to
present the discontinued Ruby operations separate from continuing
operations.
2. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No.
150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in the fair value or the redemption
amount, as applicable, in earnings. SFAS No. 150 was effective for the
Company as of July 1, 2003. The Company adopted SFAS No. 150 in the
quarter ended September 30, 2003 and, as a result, reclassified its Series
G Convertible Redeemable, Preferred Stock ("Series G Stock") from equity
to a liability. Further effects of this adoption are discussed in Note 10.
3. INVENTORIES
At March 31, 2004 and June 30, 2003, inventories consisted of the
following:
MARCH 31, JUNE 30,
2004 2003
Raw materials $ 955,302 $ 775,583
Work-in-process 97,478 885
Finished goods 7,373,723 7,847,729
Reserve for obsolescence (1,150,266) (1,106,232)
------------ -------------
Inventories--net $ 7,276,237 $ 7,517,965
============ =============
4. GOODWILL, INTANGIBLE AND OTHER ASSETS
At March 31, 2004 and June 30, 2003, the Company had $15,956,883 of
recorded goodwill. In accordance with FASB Statement 142, GOODWILL AND
OTHER INTANGIBLE ASSETS ("SFAS No. 142"), beginning July 1, 2002 the
Company's goodwill is not subject to amortization.
In accordance with SFAS No. 142, upon implementation the Company completed
the test for impairment as of July 1, 2002, and concluded that
consolidated goodwill was impaired. The Company recorded a non-cash charge
of $4,454,656 to reduce the carrying value of its goodwill. This charge
was non-operational in nature and was reflected as a cumulative effect of
a change in accounting principle, effective July 1, 2002, in the
accompanying consolidated statements of operations. No income tax effect
was recognized as some of the goodwill write-off is deductible for income
tax purposes.
The total impairment amount of $4,454,656 was 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 the
reporting segment based upon the estimated fair value of each reporting
unit. The fair value of each reporting unit was estimated using a weighted
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average of the income methodology approach, the market methodology
approach and the asset based approach.
In accordance with SFAS No. 142, the Company has performed its annual
impairment test in July 2003 and found no further impairment in its
existing goodwill balances.
Included in intangible assets at March 31, 2004 and June 30, 2003, the
Company had intangible assets not subject to amortization totaling
$49,196. The Company's intangible assets subject to amortization had
useful lives of 4 to 20 years, primarily consisting of trademarks and
patents with a total cost of $304,838 and accumulated amortization of
$242,360 and $235,744, at March 31, 2004 and June 30, 2003, 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 accumulated amortization of $781,705, at June
30, 2003. The intangible assets related to the two previous banking
facilities were written off in December 2003 in connection with the
Company's consolidation of their debt facility.
Intangible and other asset amortization expense for the three and nine
months ended March 31, 2004 was approximately $2,000 and $175,000,
respectively. Estimated, approximate amortization expense remaining for
the five succeeding fiscal years ending June 30 and thereafter is as
follows:
2004 $ 2,200
2005 8,800
2006 8,800
2007 8,400
2008 8,400
Thereafter 25,800
----------
Total $ 62,400
==========
5. LONG-TERM DEBT AND LINES OF CREDIT
At March 31, 2004 and June 30, 2003, lines of credit consisted of the
following:
MARCH 31, JUNE 30,
2004 2003
Line of credit--PrimeSource Healthcare $ 6,112,704
Line of credit--PrimeSource Surgical $ 4,654,436
Line of credit--Luxtec 1,271,585
Total lines of credit $ 6,112,704 $ 5,926,021
============= ============
In December 2003, the Company refinanced its senior debt facilities. The
Company paid off its revolving note under the Amended and Restated
Security and Loan Agreement with ARK CLO 2000-1 LIMITED for $1,271,585.
Simultaneously, the Company paid off its revolving line of credit (the
-12-
"PrimeSource Surgical Line of Credit") with Citizens Bank of Massachusetts
("Citizens") under the Amended and Restated Credit Agreement (the
"PrimeSource Surgical Credit Agreement") for $4,793,944.
In connection with the refinancing of its senior debt, the Company used
proceeds from the refinancing with Wells Fargo to pay Citizens an $180,000
term loan facility fee described below. PrimeSource Surgical accrued a
$75,000 fee on August 6, 2002, in connection with the amendment to the
PrimeSource Surgical Credit Agreement. PrimeSource Surgical was obligated
to pay an additional $75,000 fee under the Amended and Restated Term Note,
executed on June 14, 1999 as part of the PrimeSource Surgical Credit
Agreement (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 were $300,000 on June 30, 2003, but were reduced by 40% because on
June 30, 2003, the Company paid off the entire outstanding balance of the
PrimeSource Surgical Term Loan in connection with the sale of Ruby and the
most recent offering of Series G Stock.
In conjunction with the Credit and Security Agreement with Wells Fargo,
the Company entered into $7,500,000 revolving demand note (the
"PrimeSource Healthcare Line of Credit"). Pursuant to the Credit and
Security Agreement, the maximum amount available to borrow under the
PrimeSource Healthcare Line of Credit is limited to the lesser of
$7,500,000 or a certain percentage of accounts receivable and inventory,
as defined by the Credit and Security Agreement ($7,500,000 at March 31,
2004). As of March 31, 2004, borrowings bore interest at Wells Fargo's
prime rate plus 3.0% (7.00% at March 31, 2004). Borrowings are secured by
substantially all assets held by PrimeSource Healthcare and its
subsidiaries. At March 31, 2004, there was $1,387,296 of availability
under the PrimeSource Healthcare Line of Credit.
The Credit and Security Agreement contains covenants that require the
maintenance of defined income levels and capital expenditures. The Company
was in compliance with these financial covenants as of March 31, 2004.
Other notes payable include:
MARCH 31, JUNE 30,
2004 2003
Luxtec tenant note $ 66,383 $ 77,650
PrimeSource legal counsel note,
net of unamortizeddiscount of
$595 and $12,827, respectively 59,405 357,173
PrimeSource Citizens Bank note 187,500
Other long-term note 43,250 43,250
--------- ---------
Total other notes payable 169,038 665,573
Less current portion (75,727) (559,877)
--------- ---------
Total long-term debt $ 93,311 $ 105,696
========= =========
The Luxtec tenant note is a $100,000 note payable for tenant improvements
to the lessor of Luxtec's leased premises in West Boylston, Massachusetts,
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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 due on September 19,
2005.
The PrimeSource legal counsel note is a non-interest bearing demand note
payable with an original balance of $559,977 (net of original unamortized
discount of $40,023 based on an imputed interest rate of 8%) to its
special legal counsel in payment of prior accounts payable. This note
matures on May 30, 2004. Special legal counsel reduced the balance of this
note by $150,000 in November 2003. Monthly principal payments are $30,000
commencing on March 20, 2004.
The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens
due for the bank refinancing amendment fee. This note was paid off in
December 2003 simultaneous with the refinancing described above.
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' fees,
$500,000 related to a remaining lease liability for a facility to be
closed, $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, 2004 consisted of the following:
EMPLOYEE OTHER
RELATED CONTRACTS TOTAL
Balance, July 1, 2003 $ 263,768 $ 427,200 $ 690,968
Cash payments (263,768) (169,757) (433,525)
Other Adjustments (75,000)
---------- --------- ---------
Balance, March 31, 2004 $ 0 $ 182,443 $ 182,443
========== ========== ==========
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Activity related to accrued restructuring costs for the nine-month period
ended March 31, 2003 consisted of the following:
Employee Other
Related Contracts Total
Balance, July 1, 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, 2004 and June 30, 2003, the Company had deferred tax assets
resulting from federal net operating loss carryforwards of approximately
$6,466,700 and $6,763,700, respectively. A full valuation allowance has
been provided against these deferred tax assets as of March 31, 2004 as it
is more likely than not that sufficient taxable income will not be
generated to realize these carryforwards.
The Company generated net income of $258,793 and $746,659 for the three
and nine-month periods ending March 31, 2004. However, these amounts are
expected to be offset by net operating losses in the Company's income tax
return for the year ended June 30, 2004, and were therefore used to reduce
the net operating loss and offsetting valuation allowance. The Company
recognized income tax expense of $13,600 and $64,600 for the three and
nine-month periods ending March 31, 2004 relating to state income taxes,
and federal income tax amounts expected to be due as result of potential
limitations on the use of net operating loss carryforwards.
The Company generated net losses of $3,019 and $3,557,320 for the three
and nine-month periods ending March 31, 2003. The tax benefits of the
losses were reduced by offsetting valuation allowance. However, the
Company recorded federal tax expense of $30,000 in the quarter ended March
31, 2003 related to federal income tax amounts expected to be due as
result of potential limitations on the use of net operating loss
carryforwards.
8. SEGMENT REPORTING
The Company is organized into three operating segments based on
management's 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 is as follows:
SPECIALTY MEDICAL PRODUCTS MANUFACTURING--This segment includes the Luxtec
division acquired in March 2001, which designs and manufactures fiber
optic headlight and video camera systems, light sources, cables,
retractors, and custom-made and other surgical equipment for the medical
and dental industries.
SPECIALTY DISTRIBUTION SERVICES--SURGICAL--The surgical segment is a
regional sales and marketing organization that markets and sells surgical
-15-
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. This segment
does business as Bimeco.
Operations that are not included in any of the segments are included in
the category "Other" and consist primarily of corporate staff operations,
including unallocated corporate general and administrative expenses.
Operating income for each segment consists of net revenues less cost of
products sold, operating expense, depreciation and amortization, and the
segment's selling, general, and administrative expenses. The sales between
segments are made at market prices 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 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 and equipment, intangibles and
other assets.
Total sales between the manufacturing and surgical segments totaled
approximately $1,132,165 and $4,106,813 for the three and nine-month
period ended March 31, 2004, and approximately $1,247,647 and $3,918,573,
respectively, for the same periods in 2003.
The Company charges a management fee allocation to each segment based on
estimates of each segment's corporate resource usage and reclassifies a
portion of the corporate expense to the operating segments.
-16-
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below for the three
months ending March 31 and total assets as of the end of each period:
Distribution - Distribution -
PrimeSource PrimeSource Corporate/
Surgical Critical Care Manufacturing Other/Elimination Total
Net sales
2004 $ 6,718,898 $ 3,429,844 $ 3,236,838 $ (1,132,165) $ 12,253,415
2003 6,523,047 2,627,749 3,223,806 (1,247,647) 11,126,955
Net income (loss)
2004 $ 185,735 $ (17,930) $ 256,730 $ (165,742) $ 258,793
2003 (53,845) 8,850 292,570 (250,594) (3,019)
Depreciation and amortization
2004 $ 33,783 $ 294 $ 45,205 $ 2,205 $ 81,487
2003 41,256 17,765 41,384 155,180 255,585
Interest expense
2004 $ 48,479 $ 57,942 $ 37,141 $ 163,375 $ 306,937
2003 70,066 25,057 25,028 120,214 240,365
Total assets
March 31, 2004 $24,266,168 $ 3,471,180 $ 2,820,673 $ 318,520 $ 30,876,541
March 31, 2003 25,165,836 4,003,352 3,646,132 199,874 33,015,198
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below for the nine
months ending March 31 and total assets as of the end of each period:
Distribution - Distribution -
PrimeSource PrimeSource Corporate/
Surgical Critical Care Manufacturing Other/Elimination Total
Net sales
2004 $21,433,580 $ 9,604,373 $10,025,336 $(4,106,813) $ 36,956,476
2003 19,514,392 8,987,163 9,921,351 (3,918,573) 34,504,333
Net income (loss)
2004 $ 680,357 $ 122,518 $ 910,678 $ (966,894) $ 746,659
2003 59,581 295,628 (3,343,440) (569,089) (3,557,320)
Depreciation and amortization
2004 $ 99,622 $ 764 $ 136,215 $ 175,137 $ 411,738
2003 158,388 23,869 113,025 368,792 664,074
Interest expense
2004 $ 174,323 $ 111,698 $ 88,600 $ 664,348 $ 1,038,969
2003 205,793 100,905 86,145 412,414 805,257
Total assets
March 31, 2004 $24,266,168 $ 3,471,180 $ 2,820,673 $ 318,520 $ 30,876,541
March 31, 2003 25,165,836 4,003,356 3,646,132 199,874 33,015,198
-17-
9. NET INCOME PER SHARE
Net income per share amounts are calculated using net income 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,
2004 2003 2004 2003
Numerator:
Net income (loss) before discontinued
operations and cumulative effect of
change in accounting principle $ 258,793 $ (41,919) $ 746,659 $ 786,049
Discontinued operations 38,900 111,287
Cumulative effect of change in accounting
principle- Goodwill impairment (4,454,656)
Preferred dividends and accretion (367,162) (774,485)
Effect of equity recapitalization 11,809,741
---------- ---------- ---------- ----------
Net income available to common
stockholders $ 258,793 $ (370,181) $ 746,659 $ 7,477,936
========== ========== ========== ==========
Denominator:
Basic weighted average common shares
outstanding 22,375,144 22,379,345 22,375,125 20,636,171
Dilutive effect of:
Warrants 16,118,676 13,951,609
Assumed conversion of Series G Stock 20,276,392 16,512,823
---------- ---------- ---------- ----------
Weighted average common shares for
the purpose of calculating diluted
earnings per share 22,375,144 58,774,413 22,375,125 51,100,603
========== ========== ========== ==========
For the three and nine months ended March 31, 2004, options and warrants
to purchase common stock totaling 26,619,321 were not included in weighted
average common shares outstanding for the purpose of calculating diluted
earnings per share since the result would be antidilutive because the
exercise price exceeded the average market price. For the three and nine
months ended March 31, 2003, options and warrants to purchase common stock
totaling 9,271,921 were not included in weighted average common shares
outstanding for the purpose of calculating diluted earnings per share
since the result would be antidilutive because the exercise price exceeded
the average market price. Upon implementation of SFAS No. 150, the
Company's Series G Convertible Redeemable Preferred Stock, no par value,
is no longer considered a dilutive equity security and therefore there was
no effect given to the potential dilutive effect of these shares in the
calculation of weighted average common shares outstanding for the three
and nine months ended March 31, 2004. Put warrants outstanding totaling
282,022 during the year ended June 30, 2003 were not included in weighted
average common shares for the purpose of calculating diluted earnings per
share because the result would be antidilutive because the put exercise
price exceeded the average market price.
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"). The Series G Stock has 230,000 authorized shares. Each share of
Series G Stock is convertible into 100 shares of common stock, subject to
-18-
adjustment, at the option of the holder. Each share of Series G Stock has
one vote for each share of common stock 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. Accordingly, accrued dividends of $142,011 and $396,575 for the
three and nine-month periods ended March 31, 2004, respectively, are
included in interest expense.
Upon adoption of SFAS No. 150, the Series G Stock has been reclassified in
the consolidated balance sheet as of July 1, 2003 from equity presentation
to the liability section. Upon original issuance of the Series G Stock,
$2,062,000 relating to warrants issued was recorded to additional paid-in
capital. These amounts were reversed out of additional paid-in capital and
the book value of the Series G Stock was increased to the redemption
amount of $7,711,308 upon adoption of SFAS No. 150.
On October 15, 2003, one option for the purchase of Series G Stock was
exercised for $16.
11. STOCK OPTIONS AND WARRANTS
OPTIONS - At March 31, 2004, the Company had three stock-based employee
compensation plans, which are described more fully in Note 9 to the
Company's Annual Report on Form 10-K as filed on October 14, 2003. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
WARRANTS - At March 31, 2004, the Company had warrants outstanding, which
are described more fully in Note 9 to the Company's Annual Report on Form
10-K as filed on October 14, 2003.
-19-
Changes in shares under options and warrants, in common stock equivalents,
for the period ended March 31, 2004 are as follows:
OPTIONS WARRANTS
------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Balance, July 1, 2003 8,602,264 $ 0.53 16,838,554 $ 0.02
Grants 1,300,000 0.32
Exercised (50) 0.32
Canceled (57,661) 1.27 (63,786) 1.18
--------- ----------
Balance, March 31, 2004 9,844,553 $ 0.50 16,774,768 $ 0.02
========= ==========
Vested and exercisable, June 30, 2003 1,474,960 16,838,554
========= ==========
Vested and exercisable, March 31, 2004 6,291,480 16,774,768
========= ==========
The weighted-average fair value of option grants per share for options
granted during the three and nine months ended March 31, 2004 was
approximately $0.11 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 amounts of $30,000 for the three-month period ended March 31, 2003,
and $10,000 and $80,000, respectively, for the nine-month periods ended
March 31, 2004 and 2003, has been recognized for certain employee stock
options 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 for the three and nine months
ended March 31, 2004 and 2003 would have been the pro forma amounts
indicated below:
-20-
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
Net income (loss) available to common
stockholders, as reported $ 258,793 $ (370,181) $ 746,659 $7,477,936
Stock-based employee compensation expense
determined under fair-value method (101,856) (134,529) (480,671) (314,683)
---------- ---------- --------- ----------
Pro forma net income (loss) $ 156,937 $ (504,710) $ 265,988 $7,163,253
========== =========== ========== ==========
Earnings (loss) per share:
Basic- as reported 0.01 (0.02) 0.03 0.36
Basic- pro forma 0.01 (0.02) 0.01 0.34
Diluted- as reported 0.01 (0.02) 0.03 0.16
Diluted- pro forma 0.01 (0.02) 0.01 0.15
Black-Scholes Assumptions
Risk-free interest rate 2.32% 3.31% 2.32% 3.10%
Expected volatility 50% 50% 50% 50%
Expected lives- in years 3 7 3 6
Expected dividend yield 0% 0% 0% 0%
12. COMMITMENTS AND CONTINGENCIES
LITIGATION--On September 5, 2002, John F. Rooney and Michael K. Bayley,
each former executive officers and directors of PrimeSource, filed a
complaint against the Company in Arizona Superior Court, County of Pima.
The complaint alleged a breach by the Company of the severance agreements
with each of Messrs. Rooney and Bayley. The complaint was settled in
November 2003. The terms of settlement included cash payments totaling
$125,000 to Messrs. Rooney and Bayley over a period of four months, ending
in February 2004.
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 financial position,
results of operations or liquidity.
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. In
September 2003, the Company entered into a severance agreement with the
executive pursuant to which he resigned as the Company's President, Chief
Executive Officer and a member of the Board of Directors. Amounts due
under the severance agreement have been paid as of March 2004.
* * * * * *
-21-
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, 2004
- --------------------------------------------------------------------------------
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 is
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of America. During
preparation of these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, goodwill and other intangible assets and income taxes. We base our
estimates on historical experience and various other assumptions that we believe
are reasonable under the circumstances. The results form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following critical accounting policies require us to make significant
judgments and estimates used in the preparation of our financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine the
adequacy of this allowance by regularly evaluating individual customer
receivables and considering a customer's financial condition, credit history,
and current economic conditions. If the financial condition of our customers
were to deteriorate, additional allowances may be required. Our accounts
receivable are written off once an account is deemed uncollectible. This
typically occurs once we have exhausted all efforts to collect the account,
which includes collection attempts by company employees and outside collection
agencies.
-22-
INVENTORY RESERVES FOR OBSOLESCENCE
We write down our inventory for estimated obsolescence or unmarketable inventory
in an amount equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions prove to be less favorable than those
projected by management, additional inventory write-downs may be required.
GOODWILL AND OTHER INTANGIBLE ASSETS
We evaluate goodwill and other intangible assets with indefinite lives for
impairment at least annually, in accordance with Statement of Financial
Accounting Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). 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
recognized impairment losses in the year ended June 30, 2002 upon the
disposition of a subsidiary and an impairment loss effective July 1, 2002 upon
completion of SFAS No. 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 Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and elected the
disclosure-only alternative under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Common stock of the Company has been delisted since November 17,
2000 and does not trade on any exchange and is not quoted on any quotation
system. Fair value of the Company's common stock is determined by the Company's
Board of Directors based upon the most recent significant capital stock
transaction adjusted by current major events affecting the Company's financial
condition. 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 consolidated financial statements and will
disclose the required information in quarterly unaudited consolidated financial
statements.
-23-
SALES RECOGNITION POLICY
The company's policy is to recognize revenues from product sales and services
when earned, as defined by accounting principles generally accepted in the
United States of America. Specifically, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred (or services have been
rendered), the price is fixed or determinable, and collectibility is reasonably
assured.
Revenues earned under agency agreements are recognized when the customer has
received the product.
Provisions for discounts, rebates to customers, and returns are provided for at
the time the related sales are recorded, and are reflected as a reduction of
sales. These estimates are reviewed periodically and, if necessary, revised,
with any revisions recognized immediately as adjustments to sales. The company
periodically and systematically evaluates the collectibility of accounts
receivable and determines the appropriate reserve for doubtful accounts. In
determining the amount of the reserve, management considers historical credit
losses, the past due status of receivables, payment history and other
customer-specific information, and any other relevant factors or considerations.
BUSINESS OVERVIEW
GENERAL
We are a specialty medical products sales, marketing, manufacturing and service
company. We sell a broad portfolio of specialty medical products, some of which
we manufacture, to hospitals and surgery centers nationwide through a dedicated
organization of sales and marketing professionals. We have expanded rapidly
through the acquisition and integration of a number of leading regional
specialty sales and marketing organizations and select specialty medical
products manufacturing companies. Today, we have two primary businesses:
Specialty Medical Distribution and the Manufactured Products Division or
Manufactured Products. As of March 31, 2004, we had 123 employees and generated
total revenue of $36.9 million.
BUSINESS STRATEGY
Our goal is to be one of the nation's leading suppliers of specialty medical
products to hospitals and surgery centers. We intend to continue to grow by:
o hiring experienced territory sales representatives;
o securing additional specialty product lines to our product offerings;
and
o selectively acquiring specialty medical products manufacturers. We
expect to benefit from the acquisition of select specialty medical
products manufacturers by increasing sales of acquired product lines
through use of our direct specialty medical products sales force.
Our Manufactured Products Division continues to lead the surgical headlamp
illumination industry and focuses its research and development budget on new,
innovative products.
-24-
PRODUCTS AND SERVICES
SPECIALTY MEDICAL DISTRIBUTION
Within the Specialty Medical Distribution business, we divide our business into
PrimeSource Surgical, or Surgical, and PrimeSource Critical Care, or Critical
Care. The Surgical segment is a regional sales and marketing organization that
markets and sells a large number of surgical products primarily to hospitals and
surgery centers in the midwestern, mid-atlantic and southeastern United States.
The Critical Care segment is a regional sales and marketing organization that
sells a large number of products primarily to hospitals and surgery centers in
the southeastern and northeastern United States.
Within the Surgical segment, the primary specialties are Cardio Vascular,
Endoscopy, General Surgery and Gynecology.
Within the Critical Care segment, the primary specialties are Neonatal Intensive
Care and Maternal and Child Care.
The sale of specialty disposable products and capital equipment account for the
majority of our revenues. Our capital equipment products are typically complex
and require significant consultative selling and training of medical staff
personnel. Our specialty disposable products are often sold to support the
growing base of installed capital equipment products and offer a recurring and
stable source of revenue.
THE MANUFACTURED PRODUCTS DIVISION
We operate the Manufactured Products business through our Luxtec division, which
designs, manufactures and markets fiber optic headlight and video camera
systems, light sources, cables, retractors and surgical and other custom-made
equipment for the medical and dental industries. Luxtec has developed a
proprietary, fiber optic drawing system designed to manufacture optical glass to
a specified diameter. The fibers are utilized in fiber optic cables, which are
incorporated with Luxtec's surgical headlight systems and video camera systems,
as well as into an array of fiber optic transilluminators utilized with Luxtec's
surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs,
and light sources for use with other manufacturers' products, including various
endoscopic systems used in minimally invasive surgical procedures.
Fiber optics allow for the transmission of a light or image from one place to
another through a flexible conduit of optical glass rods and tubes. The flexible
conduit provides for an improved ability to bend and transmit light and images
to and from places with limited or difficult access.
The technology used by Luxtec to provide illumination directly to the surgical
site is facilitated by fiber optic cables transmitting light to an adjustable
headlight composed of a series of lenses and mirrors mounted on a headband.
These lenses then focus the light directly on the surgical site when worn by the
surgeon. This provides a lightweight, low temperature illumination source to
enhance visualization for microsurgical and deep cavity illumination
-25-
RESULTS OF OPERATIONS
NET SALES--Net sales increased $1,126,460, or 10.1%, and $2,452,143, or 7.1%, in
the three and nine-month periods ended March 31, 2004, respectively, relative to
the comparable periods in 2003 primarily due to higher sales volume from
existing product lines and the addition of a new selling territory for our
proprietary products provided by the Luxtec division. In March 2004, we ended a
key vendor relationship in the Surgical division, which contributed
approximately 10% of Surgical divisions sales for the nine months ended March
31, 2004. This vendor made a decision to sell their product directly to its
customers, ending all of their independent distributor contracts. Although we
are in the process of replacing this line with another in the impacted
territories, we do anticipate our Surgical division sales trends to underperform
our operating plan for the fourth quarter. Any decrease in sales due to the loss
of this vendor will have a corresponding impact on cost of sales, gross profit,
selling expense and net income, after the date the relationship terminated;
however, the impact is not expected to be significant in relation to our
projected 2004 financial results.
COST OF SALES--Cost of sales increased to 64.9% and 63.5% of net sales, for the
three and nine months ended March 31, 2004, respectively, compared to 61.9% and
62.9% of net sales, for the same periods in 2003. The increase of $1,071,248, or
15.6%, and $1,784,187, or 8.2%, in the three and nine-month periods ended March
31, 2004 relative to the comparable periods in 2003 was primarily the result of
the corresponding increase in net sales, as discussed above. The change in cost
of sales as a percentage of net sales in the three and nine-month periods ended
March 31, 2004 compared to the same periods in 2003 is due to the effects of a
large, lower margin, Critical Care division capital equipment sale of $775,000
to a single customer in March 2004 offset by a difference in product mix between
stocking sales and agency sales. A majority of our business is comprised of
stocking relationships whereby we stock the vendor's products and provide
substantially all fulfillment services such as customer service and warehouse
logistics. The remainder of our revenue is received on an agency basis where we
do not stock the vendor's products and do not provide fulfillment services, but
instead receive revenue in the form of an agency commission from the vendor in
return for arranging the sale of a vendor's products. In the past nine months,
our product mix between stocking and agency based sales has shifted slightly to
a higher agency component. Agency sales are recorded in an amount equal to the
commission received, and as a result have no direct cost of sales. As a result,
an increase in agency sales will decrease cost of sales as a percentage of net
sales as net sales have increased with no associated increase in cost of sales.
GROSS PROFIT--Gross profit was 35.1% and 36.5% of net sales for the three and
nine months ended March 31, 2004, respectively, and 38.1% and 37.1% of net sales
for the same periods in 2003. The increase of $55,212, or 1.3%, and $667,956, or
5.2%, in the three and nine-month periods ended March 31, 2004 relative to the
comparable periods in 2003 is primarily due to higher sales volume from existing
product lines and the addition of a new selling territory for our proprietary
products provided by the Luxtec division. The decrease in gross profit margins,
as a percentage of net sales in the three and nine-month periods ended March 31,
2004 compared to the same periods in 2003, is due to the effects of a large,
lower margin, Critical Care division capital equipment sale as discussed in cost
of sales offset by a difference in product mix sold as discussed above. Gross
profit from our agency business for the nine-month period ended March 31, 2004
was approximately $571,000 more than in the same period in 2003.
SELLING EXPENSES--Selling expenses increased $102,336 and $536,371,
respectively, for the three and nine months ended March 31, 2004 compared to the
same periods in 2003. The increase is primarily due to higher sales volume and
the increase related to the three months ended March 31, 2004 is attributable to
a sales representative commission program to sell through any remaining Surgical
division inventory for the key vendor discussed in net sales above. As a result
of this program, we liquidated the inventory and created an additional incentive
for the sales representatives most impacted by the loss of the vendor. Selling
commissions are paid on agency sales at approximately the same percentage as
-26-
stocking sales, and as a result, sales commissions as a percent of net sales
revenue fluctuate when the product mix of agency and stocking sales varies.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses were
13.4% and 13.7% of net sales, for the three and nine months ended March 31,
2004, respectively, compared to 17.2% and 15.2%, for the same periods in 2003.
The decrease of $273,531, or 14.3%, and $203,641, or 3.9%, for the three and
nine-month period is a result of lower legal fees, primarily related to the
settled legal complaint with the Company's former officers as mentioned in Note
12 to the notes to the condensed consolidated financial statements.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased to 0.7% and 1.1% of net sales for the three and nine months ended
March 31, 2004, respectively, compared to 2.3% and 1.9% of net sales, for the
same periods in 2003. The decrease of $174,098, or 68.1%, and $252,336, or
38.0%, in depreciation and amortization expenses is primarily the result of
certain assets and intangible assets becoming fully depreciated prior to the
quarter ended March 31, 2004.
INTEREST EXPENSE--The increase in interest expense of $66,572, or 27.7%, and
$233,712, or 29.0%, for the three and nine months ended March 31, 2004 is the
result of the financing costs relating to the refinancing of the Company's
senior debt in the quarter ended December 31, 2003. The increase also relates to
the implementation of SFAS 150, which requires all dividends accrued on
preferred stock to be recorded as interest expense effective July 1, 2003. These
increases are offset by decreases relating to lower interest rates and fees on
the Company's senior debt as a result of the payoff of the Citizens term loan in
June 2003. Interest expense on the Company's senior debt actually decreased by
$93,182 or 18.7% during the nine-month period ended March 31, 2004 over the same
period in 2003.
INCOME TAX PROVISION--The Company recorded an income tax expense of $13,600 and
$64,600 for the three and nine-month periods ended March 31, 2004, and $30,000
income tax expense for the same periods in 2003. Although the majority of the
Company's current year taxable income for federal and certain states can be
eliminated due to the use of net operating loss carryforwards to offset federal
and state income tax liabilities, the Company is still subject to income taxes
in certain jurisdictions in 2004 based on limitations on the use of its net
operating loss carryforwards.
NET INCOME (LOSS)--Net income increased for the three and nine months ended
March 31, 2004, compared to a net loss for the same periods in 2003. The
increase of $261,812 and $4,303,979 for the three and nine-month period resulted
primarily from the goodwill impairment charge of $4,454,656 recorded in July
2002 as a result of SFAS No. 142 implementation. This increase is offset by the
write off of deferred financing fees of approximately $190,000 related to our
banking facilities during December 2003.
LIQUIDITY AND CAPITAL RESOURCES
Year to date performance through March 2004 has increased our cash and
availability to its highest mark since the refinancing. Our cash and
availability remains relatively stable due to the consistent sales in the third
quarter and working capital management. We expect our cash position to remain
stable based on projected fourth quarter net sales, reductions in non-operating
cash outflows and containment or further reductions in operating expenses.
At March 31, 2004, we had a working capital of $644,018 compared to a deficit of
$793,154 at June 30, 2003. The increase in our working capital was primarily the
result of decreased accounts payable, accrued expenses and current obligations
for long-term debt, offset by decreased receivable and inventory balances and
increase in lines of credit. Accounts payable, accrued expenses and obligations
-27-
for long-term debt were paid with the cash generated from operations and the
increased availability of the line of credit, as discussed below.
In December 2003, the Company refinanced its senior debt facilities with Wells
Fargo Business Credit, Inc. ("Wells Fargo") pursuant to the PrimeSource
Healthcare Credit and Security Agreement dated December 3, 2003 by and among the
Company, PrimeSource Surgical, Bimeco and Wells Fargo (the "Credit and Security
Agreement"). The proceeds of the refinancing were used to pay off its revolving
under the Amended and Restated Security and Loan Agreement with ARK CLO 2000-1
LIMITED for $1,271,585 and its revolving line of credit (the "PrimeSource
Surgical Line of Credit") with Citizens Bank of Massachusetts ("Citizens") under
the Amended and Restated Credit Agreement (the "PrimeSource Surgical Credit
Agreement") with Citizens for $4,793,944.
In connection with the refinancing of its senior debt, the Company used proceeds
from the refinancing with Wells Fargo to pay Citizens an $180,000 term loan
facility fee described below. PrimeSource Surgical accrued a $75,000 fee on
August 6, 2002, in connection with the amendment to the PrimeSource Surgical
Credit Agreement. PrimeSource Surgical was obligated to pay an additional
$75,000 fee under the Amended and Restated Term Note, executed on June 14, 1999
as part of the PrimeSource Surgical Credit Agreement (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 were $300,000 on June 30, 2003, but were reduced by 40% because on
June 30, 2003, the Company paid off the entire outstanding balance of the
PrimeSource Surgical Term Loan in connection with the sale of Ruby and the most
recent offering of Series G Stock.
In conjunction with the Credit and Security Agreement, the Company entered into
$7,500,000 revolving demand note (the "PrimeSource Healthcare Line of Credit").
Pursuant to the Credit and Security Agreement, the maximum amount available to
borrow under the PrimeSource Healthcare Line of Credit is limited to the lesser
of $7,500,000 or a certain percentage of accounts receivable and inventory, as
defined by the Credit and Security Agreement ($7,500,000 at March 31, 2004). As
of March 31, 2004, borrowings bore interest at Wells Fargo's prime rate plus
3.0% (7.00% at March 31, 2004). Borrowings are secured by substantially all
assets held by PrimeSource Healthcare and its subsidiaries. At March 31, 2004,
there was $1,387,296 of availability under the PrimeSource Healthcare Line of
Credit.
The Credit and Security Agreement contains covenants that require the
maintenance of defined income levels and capital expenditures. The Company was
in compliance with these financial covenants as of March 31, 2004.
-28-
Other notes payable include:
MARCH 31, JUNE 30,
2004 2003
Luxtec tenant note $ 66,383 $ 77,650
PrimeSource legal counsel note, net of unamortized
discount of $595 and $12,827, respectively 59,405 357,173
PrimeSource Citizens Bank note 187,500
Other long-term note 43,250 43,250
----------- ----------
Total other notes payable 169,038 665,573
Less current portion (75,727) (559,877)
----------- ----------
Total long-term debt $ 93,311 $ 105,696
=========== ==========
The Luxtec tenant note is a $100,000 note payable for tenant improvements to the
lessor of 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 beginning November 2000, with remaining payments calculated
on a 7-year amortization table with a balloon payment due on September 19, 2005.
The PrimeSource legal counsel note is a non-interest bearing demand note payable
with an original balance of $559,977 (net of unamortized discount of $40,023
based on an imputed interest rate of 8%) to its special legal counsel in payment
of prior accounts payable. This note matures on May 30, 2004. Special legal
counsel reduced the balance of this note by $150,000 in November 2003. Monthly
principal payments are $30,000 commencing on March 20, 2004.
The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens due
for the bank refinancing amendment fee. Equal principal payments on the note of
$62,500 were due quarterly and the balance of the note was due December 31,
2003. This note was paid off in December 2003 simultaneous with the refinancing
described above.
As of March 31, 2004, we had $186,505 of cash and cash equivalents. In addition,
the principal source of our short-term borrowing is the PrimeSource Healthcare
Line of Credit. As of March 31, 2004, we had $1,387,296 available under the
PrimeSource Healthcare Line of Credit. In addition, we may attempt to raise
additional equity or debt capital in the future.
-29-
PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the Company's credit facilities at March 31, 2004 is $6,112,704, all
of which is subject to interest rate fluctuations. A hypothetical 10% change in
interest rates applied to the fair value of debt would not have a material
impact on earnings or cash flows of the Company.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
(a) Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of March 31, 2004. Based on such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that, as of
March 31, 2004, the Company's disclosure controls and procedures are effective
(b) Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 the
Company in Arizona Superior Court, County of Pima. The complaint alleged a
breach by the Company of the severance agreements with each of Messrs. Rooney
and Bayley. The complaint was settled in November 2003. The terms of settlement
included cash payments totaling $125,000 to Messrs. Rooney and Bayley over a
period of four months, ending February 2004.
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
- --------------------------------------------------------------------------------
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger, dated November 27, 2000, by and
between Luxtec Corporation, Laser Merger Sub, Inc. and
PrimeSource Surgical, Inc. (Incorporated by reference to Form
8-K, File No. 0-14961, filed on November 30, 2000).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated
February 8, 2001, by and between Luxtec Corporation, Laser
Merger Sub, Inc. and PrimeSource Surgical, Inc. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March 16,
2001).
3.1 Articles of Organization. (Incorporated by reference to Form
S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.6 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.7 Amendment, dated September 16, 1996, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.8 Certificate of Vote of Directors Establishing a Series of a
Class of Stock dated September 16, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal
year ended October 31, 1996).
3.9 Certificate of Correction dated October 4, 1996. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.11 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series B Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
-31-
3.12 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
3.13 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series D Exchangeable
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
3.14 Certificate of Correction dated March 2, 2001 (Series C
Convertible Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.15 Certificate of Correction dated March 2, 2001. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March 16,
2001).
3.16 Articles of Amendment to Articles of Organization, dated as of
June 27, 2001. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on July 11, 2001).
3.17 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated June 28, 2001 (Series E Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on July 11, 2001).
3.18 Certificate of Correction dated July 13, 2001. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed October 15,
2001).
3.19 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated January 23, 2002 (Series F Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 10-Q, File No. 0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated August 6, 2002 (Series G Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on August 8, 2002).
3.21 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 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).
-32-
4.4 Amended and Restated Co-Sale Agreement, dated June 28, 2001,
by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed October 15, 2001).
4.5 Co-Sale Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. and the persons listed as
Stockholders on the signature pages thereto. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed August 8,
2002).
10.1 Employment Agreement, entered into between PrimeSource
Healthcare, Inc. and Bradford C. Walker, effective upon the
Initial Closing (as defined in the Purchase Agreement dated as
of August 6, 2002). (Incorporated by reference to Form 10-K,
File No. 0-14961, filed September 30, 2002).
10.2 Employment Agreement entered into between James L. Hersma and
Luxtec Corporation, a Massachusetts corporation, dated as of
May 4, 2001. (Incorporated by reference to Form 10-Q, File No.
0-14961, filed May 21, 2001).
10.3 Amended and Restated Credit Agreement, dated as of June 14,
1999, by and among PrimeSource Surgical, Inc, a Delaware
corporation, Bimeco, Inc., a Florida corporation ("Bimeco"),
Medical Companies Alliance, Inc., a Utah corporation, Douglas
Medical, Inc., a Florida corporation and Citizens Bank of
Massachusetts. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed September 30, 2002).
10.4 First Amendment to Amended and Restated Credit Agreement,
dated as of August 22, 2000, by and among PrimeSource
Surgical, Inc, a Delaware corporation, Bimeco, Inc., a Florida
corporation, and Citizens Bank of Massachusetts. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed September
30, 2002).
10.5 Second Amendment to Amended and Restated Credit Agreement,
dated as of December 15, 2000, by and among PrimeSource
Surgical, Inc., Bimeco, Inc. Ruby Merger Sub, Inc. and
Citizens Bank of Massachusetts. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed September 30, 2002).
10.6 Third Amendment to Amended and Restated Credit Agreement,
dated as of March 2, 2001, by and among PrimeSource Surgical,
Inc, a Delaware corporation, Bimeco, Inc., a Florida
corporation, Ruby Merger Sub, Inc., a Delaware corporation,
Luxtec Corporation, a Massachusetts corporation and Citizens
Bank of Massachusetts. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2001).
10.7 Fourth Amendment to Amended and Restated Credit Agreement,
dated as of August 6, 2002, among PrimeSource Surgical, Inc.,
Bimeco, Inc., Ruby Merger Sub, Inc., PrimeSource Healthcare,
Inc. and Citizens Bank of Massachusetts. (Incorporated by
reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.8 Amended and Restated Loan and Security Agreement, dated March
2, 2001, by and among Luxtec Corporation, Fiber Imaging
Technologies, Inc., Cathtec Incorporated, CardioDyne, Inc. and
ARK CLO 2000-1, Limited. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2001).
-33-
10.9 First Amendment to Amended and Restated Loan and Security
Agreement, dated as of August 31, 2001, by and among
PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber
Imaging Technologies, Inc., Cathtec Incorporated, and
Cardiodyne, Inc., and ARK CLO 2000-1, Limited. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed September
30, 2002).
10.10 Second Amendment and Waiver to the Amended and Restated Loan
and Security Agreement, dated as of August 6, 2002, by and
among PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation),
Fiber Imaging Technologies, Inc., Cathtec Incorporated, and
Cardiodyne, Inc., and ARK CLO 2000-1, Limited. (Incorporated
by reference to Form 8-K, File No 0-14961, filed August 8,
2002).
10.11 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed January 28,
1994).
10.12 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.13 Tucson Medical Corporation 1997 Stock Option / Stock Issuance
Plan, as amended. (Incorporated by reference to Schedule 14A,
File No. 0-14961, filed June 1, 2001).
10.14 Unit Purchase Agreement among PrimeSource Healthcare, Inc. and
the Purchasers named in Schedule I thereto, dated as of June
28, 2001. (Incorporated by reference to Form 8-K, File No.
0-14961, filed July 11, 2001).
10.15 Form of Warrant. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed July 11, 2001).
10.16 Conversion and Exchange Agreement, dated as of August 6, 2002,
by and among PrimeSource Healthcare, Inc. and the persons
listed in the signature pages thereto. (Incorporated by
reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.17 Purchase Agreement, dated as of August 6, 2002, among
PrimeSource Healthcare, Inc. and the Initial Purchasers named
in Schedule I thereto. (Incorporated by reference to Form 8-K,
File No 0-14961, filed August 8, 2002).
10.18 Lease Agreement, dated as of March 1, 2000, by and between
Holualoa Butterfield Industrial, L.L.C. and PrimeSource
Surgical, Inc. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed on October 15, 2001).
10.19 Stock Purchase Agreement, dated June 30, 2003, by and among
PrimeSource Surgical, Inc., Peter Miller, Peter Eule and New
England Medical Specialties, Inc. (Incorporated by reference
to Form 8-K, File No. 0-14961, filed July 2, 2003).
10.20 Waiver Agreement, dated June 30, 2003, by and among
PrimeSource Healthcare, Inc. and the Purchasers named therein.
(Incorporated by reference to Form 8-K, File No. 0-14961,
filed July 2, 2003).
-34-
10.21 Severance Agreement, dated September 5, 2003, by and between
PrimeSource Healthcare, Inc. and Bradford C. Walker.
(Incorporated by reference to Form 8-K, File No. 0-14961,
filed September 8, 2003).
10.22 Credit and Security Agreement, dated as of December 10, 2003,
by and among PrimeSource Healthcare, Inc., PrimeSource
Surgical, Inc., Bimeco, Inc. and Wells Fargo Business Credit,
Inc. (Incorporated by reference to Form 8-K, File No. 0-14961,
filed December 17, 2003).
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - The Company filed the following current reports on
Form 8-K during the three-month period ended December 31, 2003:
(1) On December 17, 2003, the Company filed a current report on
Form 8-K, announcing under Item 5, its entry into a Credit and
Security Agreement, dated as of December 10, 2003, with
PrimeSource Surgical, Inc., Bimeco, Inc. and Wells Fargo
Business Credit, Inc. for a conditional, discretionary,
demand, secured revolving credit line.
-35-
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, 2004 /s/ Shaun D. McMeans
- ------------ --------------------------------------
Date Shaun D. McMeans
Chief Financial Officer
(Principal Accounting Officer and Duly
Authorized Executive Officer)
-36-
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated November 27, 2000, by and
between Luxtec Corporation, Laser Merger Sub, Inc. and
PrimeSource Surgical, Inc. (Incorporated by reference to Form
8-K, File No. 0-14961, filed on November 30, 2000).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated
February 8, 2001, by and between Luxtec Corporation, Laser
Merger Sub, Inc. and PrimeSource Surgical, Inc. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March 16,
2001).
3.1 Articles of Organization. (Incorporated by reference to Form
S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.6 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.7 Amendment, dated September 16, 1996, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.8 Certificate of Vote of Directors Establishing a Series of a
Class of Stock dated September 16, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the fiscal
year ended October 31, 1996).
3.9 Certificate of Correction dated October 4, 1996. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.11 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series B Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
-37-
3.12 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
3.13 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series D Exchangeable
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on March 16, 2001).
3.14 Certificate of Correction dated March 2, 2001 (Series C
Convertible Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.15 Certificate of Correction dated March 2, 2001. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March 16,
2001).
3.16 Articles of Amendment to Articles of Organization, dated as of
June 27, 2001. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on July 11, 2001).
3.17 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated June 28, 2001 (Series E Convertible
Preferred Stock). (Incorporated by reference to Form 8-K, File
No. 0-14961, filed on July 11, 2001).
3.18 Certificate of Correction dated July 13, 2001. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed October 15,
2001).
3.19 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated January 23, 2002 (Series F Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 10-Q, File No. 0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated August 6, 2002 (Series G Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on August 8, 2002).
3.21 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 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).
-38-
4.4 Amended and Restated Co-Sale Agreement, dated June 28, 2001,
by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed October 15, 2001).
4.5 Co-Sale Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. and the persons listed as
Stockholders on the signature pages thereto. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed August 8,
2002).
10.1 Employment Agreement, entered into between PrimeSource
Healthcare, Inc. and Bradford C. Walker, effective upon the
Initial Closing (as defined in the Purchase Agreement dated as
of August 6, 2002). (Incorporated by reference to Form 10-K,
File No. 0-14961, filed September 30, 2002).
10.2 Employment Agreement entered into between James L. Hersma and
Luxtec Corporation, a Massachusetts corporation, dated as of
May 4, 2001. (Incorporated by reference to Form 10-Q, File No.
0-14961, filed May 21, 2001).
10.3 Amended and Restated Credit Agreement, dated as of June 14,
1999, by and among PrimeSource Surgical, Inc, a Delaware
corporation, Bimeco, Inc., a Florida corporation ("Bimeco"),
Medical Companies Alliance, Inc., a Utah corporation, Douglas
Medical, Inc., a Florida corporation and Citizens Bank of
Massachusetts. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed September 30, 2002).
10.4 First Amendment to Amended and Restated Credit Agreement,
dated as of August 22, 2000, by and among PrimeSource
Surgical, Inc, a Delaware corporation, Bimeco, Inc., a Florida
corporation, and Citizens Bank of Massachusetts. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed September
30, 2002).
10.5 Second Amendment to Amended and Restated Credit Agreement,
dated as of December 15, 2000, by and among PrimeSource
Surgical, Inc., Bimeco, Inc. Ruby Merger Sub, Inc. and
Citizens Bank of Massachusetts. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed September 30, 2002).
10.6 Third Amendment to Amended and Restated Credit Agreement,
dated as of March 2, 2001, by and among PrimeSource Surgical,
Inc, a Delaware corporation, Bimeco, Inc., a Florida
corporation, Ruby Merger Sub, Inc., a Delaware corporation,
Luxtec Corporation, a Massachusetts corporation and Citizens
Bank of Massachusetts. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2001).
10.7 Fourth Amendment to Amended and Restated Credit Agreement,
dated as of August 6, 2002, among PrimeSource Surgical, Inc.,
Bimeco, Inc., Ruby Merger Sub, Inc., PrimeSource Healthcare,
Inc. and Citizens Bank of Massachusetts. (Incorporated by
reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.8 Amended and Restated Loan and Security Agreement, dated March
2, 2001, by and among Luxtec Corporation, Fiber Imaging
Technologies, Inc., Cathtec Incorporated, CardioDyne, Inc. and
ARK CLO 2000-1, Limited. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2001).
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10.9 First Amendment to Amended and Restated Loan and Security
Agreement, dated as of August 31, 2001, by and among
PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber
Imaging Technologies, Inc., Cathtec Incorporated, and
Cardiodyne, Inc., and ARK CLO 2000-1, Limited. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed September
30, 2002).
10.10 Second Amendment and Waiver to the Amended and Restated Loan
and Security Agreement, dated as of August 6, 2002, by and
among PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation),
Fiber Imaging Technologies, Inc., Cathtec Incorporated, and
Cardiodyne, Inc., and ARK CLO 2000-1, Limited. (Incorporated
by reference to Form 8-K, File No 0-14961, filed August 8,
2002).
10.11 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed January 28,
1994).
10.12 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.13 Tucson Medical Corporation 1997 Stock Option / Stock Issuance
Plan, as amended. (Incorporated by reference to Schedule 14A,
File No. 0-14961, filed June 1, 2001).
10.14 Unit Purchase Agreement among PrimeSource Healthcare, Inc. and
the Purchasers named in Schedule I thereto, dated as of June
28, 2001. (Incorporated by reference to Form 8-K, File No.
0-14961, filed July 11, 2001).
10.15 Form of Warrant. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed July 11, 2001).
10.16 Conversion and Exchange Agreement, dated as of August 6, 2002,
by and among PrimeSource Healthcare, Inc. and the persons
listed in the signature pages thereto. (Incorporated by
reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.17 Purchase Agreement, dated as of August 6, 2002, among
PrimeSource Healthcare, Inc. and the Initial Purchasers named
in Schedule I thereto. (Incorporated by reference to Form 8-K,
File No 0-14961, filed August 8, 2002).
10.18 Lease Agreement, dated as of March 1, 2000, by and between
Holualoa Butterfield Industrial, L.L.C. and PrimeSource
Surgical, Inc. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed on October 15, 2001).
10.19 Stock Purchase Agreement, dated June 30, 2003, by and among
PrimeSource Surgical, Inc., Peter Miller, Peter Eule and New
England Medical Specialties, Inc. (Incorporated by reference
to Form 8-K, File No. 0-14961, filed July 2, 2003).
10.20 Waiver Agreement, dated June 30, 2003, by and among
PrimeSource Healthcare, Inc. and the Purchasers named therein.
(Incorporated by reference to Form 8-K, File No. 0-14961,
filed July 2, 2003).
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10.21 Severance Agreement, dated September 5, 2003, by and between
PrimeSource Healthcare, Inc. and Bradford C. Walker.
(Incorporated by reference to Form 8-K, File No. 0-14961,
filed September 8, 2003).
10.22 Credit and Security Agreement, dated as of December 10, 2003,
by and among PrimeSource Healthcare, Inc., PrimeSource
Surgical, Inc., Bimeco, Inc. and Wells Fargo Business Credit,
Inc. (Incorporated by reference to Form 8-K, File No. 0-14961,
filed December 17, 2003).
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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