Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-14961
PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3708 EAST COLUMBIA STREET - TUCSON, ARIZONA - 85714
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(520) 512-1100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
------ -----
The estimated aggregate market value of the voting common stock held by
non-affiliates of the registrant was $61,841 as of December 31, 2003. Because
PrimeSource's common stock is not listed or quoted on an exchange, this
computation is based on an estimated market value of $.01 per share of common
stock as of September 1, 2004.
As of September 1, 2004, 22,375,144 shares of common stock, $.01 par value, were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:
Portions of the registrant's definitive proxy statement for its 2004 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
2
TABLE OF CONTENTS
Part I
Item 1. Business....................................................................4
Item 2. Properties..................................................................17
Item 3. Legal Proceedings...........................................................18
Item 4. Submission of Matters to a Vote of Security Holders.........................18
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......18
Item 6. Selected Financial Data.....................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................34
Item 8. Financial Statements and Supplementary Data.................................35
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. .64
Item 9A Controls and Procedures.....................................................64
Part III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownerships of Certain Beneficial Owners and Mangement 64
Item 13. Certain Relationships and Related Transactions 65
Item 14. Principal Accountant Fees and Service 65
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... ..66
Signatures 73
Index to
Exhibits ......................................................................79
3
PART I
When we refer to "we," "us", "our," or "PrimeSource," we mean PrimeSource
Healthcare, Inc., a Massachusetts corporation, formerly known as Luxtec
Corporation, and its consolidated subsidiaries.
This document includes various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent our expectations or
beliefs concerning future events. Statements containing expressions such as
"believes," anticipates" or "expects", which might be used in our press releases
and periodic reports on Forms 10-K and 10-Q filed with the Securities and
Exchange Commission are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Although we believe
our expectations are based upon reasonable assumptions within the bounds of our
knowledge and operations, there can be no assurances that actual results will
not materially differ from expected results. We caution that these and similar
statements included in this report and in previously filed periodic reports,
including reports filed on Forms 10-K and 10-Q are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, those listed under Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," under the subheading "Risk
Factors."
We caution readers not to place undue reliance on forward-looking statements,
which speak only as of the date thereof. We undertake no obligation to publicly
release any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof.
ITEM 1. BUSINESS
GENERAL
We are a leading specialty medical products sales, marketing, manufacturing and
service company. We sell a broad portfolio of high quality, differentiated
specialty medical products, some of which we manufacture, to hospitals and
surgery centers nationwide through a dedicated organization of sales and
marketing professionals. We believe that we are continuing to build a valuable
niche franchise in the estimated $5 billion specialty medical marketplace,
selling technologically innovative products that command premium pricing.
Today, we have two primary businesses: Specialty Medical Distribution and the
Manufactured Products Division or Manufactured Products. Information on our
business segments can be found in Note 13 to the accompanying consolidated
financial statements. The Company was incorporated on November 11, 1981. As of
June 30, 2004, we had 132 employees and generated total revenue of $48.8 million
for the fiscal year ending June 30, 2004.
On March 2, 2001, we completed a merger with PrimeSource Surgical, Inc., or
PrimeSource Surgical, resulting in PrimeSource Surgical becoming our wholly
owned subsidiary. Subsequent to the merger with PrimeSource Surgical, we changed
our name from "Luxtec Corporation," to "PrimeSource Healthcare, Inc."
("PrimeSource" or the "Company").
4
During the year ended June 30, 2002, we commenced a restructuring plan which
involved narrowing the focus of our operations, consolidation of certain
under-performing sales regions, reduction of corporate overhead through
workforce reductions and facility consolidation, restructuring of our balance
sheet through the recapitalization of equity and refinancing of our senior bank
debt and reduction of debt levels through cost reductions and improved
efficiency of operations.
On September 20, 2002, Ruby Merger Sub, Inc., the Company's indirect wholly
owned subsidiary ("Ruby"), sold all of the assets of the former Professional
Equipment Co., Inc. ("PEC") line of business in exchange for the cancellation of
previously issued stock to the founder of PEC and the assumption of certain
liabilities with respect to the PEC line of business.
On June 30, 2003, PrimeSource Surgical sold all of the issued and outstanding
capital stock of 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. Cash proceeds
from the Ruby sale were partly used to pay off the PrimeSource Surgical Amended
and Restated Term Note (the "PrimeSource Surgical Term Loan") and to reduce the
revolving line of credit with Citizens Bank of Massachusetts ("Citizens"). The
loss on the disposal of the operation of $73,830, net of income tax, was
included as discontinued operations in the fourth quarter of 2003, and the
related results of operations for the operation were re-classified as
discontinued operations.
In December 2003, we consolidated our senior debt facilities. Our senior debt
financing is now provided under a revolving $7,500,000 demand note from Wells
Fargo Business Credit, Inc. ("Wells Fargo"). As of June 30, 2004, the Company
had $5,204,139 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, Inc. ("Bimeco") and Wells Fargo (the "Credit and
Security Agreement") as further discussed in Note 7 to the accompanying
consolidated financial statements.
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 increase 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 Luxtec division continues to lead the surgical headlamp business and focuses
its research and development efforts on new and innovative products which can be
sold through our distribution segment.
5
We believe we are well positioned to continue our growth within the specialty
medical products industry. We expect to experience sales growth in the specialty
medical products industry as a result of:
o favorable industry demographics;
o sustaining or increasing our market share;
o the acquisition of other specialty medical products manufacturers;
o expanding margin opportunities in our manufactured products business;
o further penetration of existing customer accounts due to our
introduction of new products and services; and o entrance into new
specialty domestic markets and expansion into international markets.
INDUSTRY
The medical products industry has grown in recent years due to the aging of the
population and the development of new medical products and technologies that
create new product opportunities for manufacturers and suppliers. Healthcare
industry analysts estimate that the overall market for medical products and
supplies in the United States is in excess of $45 billion. An estimated $15
billion is distributed by the larger medical and surgical, or med-surg,
distributors, such as Owens & Minor, Inc., Cardinal Health, Inc. and McKesson
Corporation. These distributors primarily market commodity products and supplies
to group purchasing organizations ("GPOs") and integrated delivery networks
("IDNs"). It is estimated that an additional $25 billion in medical product
sales is sold directly by medical device manufacturers to end customers. Local
and regional distributors account for an estimated $5 billion of specialty
medical products sold to hospitals, clinics and physicians. PrimeSource competes
within this segment of the medical products and supplies market.
Historically, the specialty medical products industry has been highly
fragmented. During the past decade, healthcare providers have consolidated into
larger IDNs in an effort to reduce costs. In addition, in order to gain
purchasing power, buyers of medical products and supplies have consolidated
their purchases through large, national GPOs. In addition to our traditional
customer base, composed primarily of hospitals and surgery centers, we also
market (on a limited basis) to IDNs and GPOs. IDNs and GPOs purchase a
significant percentage of medical products and supplies for hospitals. GPO
contractors typically require purchasing volume of at least $10 million when
structuring purchasing contracts with distributors. By aggregating specialty
products, we have created an opportunity for GPOs to reduce their overall
purchasing costs. We do this by eliminating multiple specialty products vendor
relationships in favor of one - PrimeSource. Our ability to access IDNs and GPOs
has created an advantage for smaller product manufacturers (who cannot easily
access the IDN and GPO customer base) with whom we do business over their
competitors who might be unable to satisfy IDN and GPO minimum volume purchasing
requirements.
6
We believe that we are well positioned within our industry because we:
o provide a consultative, specialty-focused sales approach through a
network of highly trained sales professionals;
o operate in a complementary niche outside the volume-driven model of
large, national med-surg distributors;
o offer a broader range of products, services, and solutions exceeding
those of any single specialty medical product manufacturer's direct
sales force; and
o reach a national customer base of GPOs and IDNs that is beyond the
scope of local and regional specialty medical products distributors.
We believe that customers seek to consolidate their purchases of products and
services in the highly fragmented specialty medical products and services market
in order to reduce their procurement costs. We help customers reduce the number
of vendors that they work with, thereby reducing the overall costs of products
and services.
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:
o Cardio Vascular;
o Endoscopy;
o General Surgery; and
o Gynecology.
Within the Critical Care segment, the primary specialties are:
o Neonatal Intensive Care; and
o Maternal and Child Care.
7
Our products and services are primarily used in hospital operating rooms and
intensive care units, outpatient surgery centers and, to a lesser degree,
doctors' offices. Most of our products are technologically innovative medical
products, or specialty products, that require hands-on training of clinicians
and medical personnel. We continue to expand our product base to include
additional instruments and equipment, thereby allowing customers to use us as a
source for a greater percentage of their specialty products needs.
The sale of specialty disposable products and capital equipment accounts 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.
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. A summary
of the Luxtec division's specific product offerings is as follows:
HEADLIGHT SYSTEMS: Luxtec designs and manufactures a proprietary line of fiber
optic headlight systems that assist surgeons by brightly illuminating the
surgical site. Designed to provide maximum performance and comfort, Luxtec's
patented headlight systems are lightweight and provide the surgeon with a
virtually unobstructed view of the surgical area.
LIGHT SOURCES: Luxtec manufactures a product line of high quality, solid state
xenon and halogen fiber optic light sources. Luxtec's light sources offer a wide
range of light intensities in order to serve the varying requirements in
illuminating surgical and diagnostic procedures. The lamps illuminate the end
surface of the fiber optic cable through which the light is transmitted, without
transmitting heat. Luxtec's light sources are designed and manufactured to
8
comply with Underwriters Laboratories 544 medical safety standards and are
listed domestically with ETL Laboratories. Internationally, Luxtec strives to
achieve compliance with all applicable international standards to compete
effectively on a worldwide basis (including the CE mark, which has been attained
on the present product line).
FIBER OPTIC CABLES: Luxtec designs and manufactures a complete range of fiber
optic cables and holds patents on certain fiber optic cable assemblies. See
"Patents and Trademarks." Luxtec offers surgeons a range of fiber bundle
diameters in order to optimize the use of surgical instruments. Luxtec employs a
proprietary technology that enables the fiber optic interface to withstand
significantly higher temperatures and permits the use of higher output light
sources. In addition, all of Luxtec's fiber optic cables are adaptable to light
sources made by other manufacturers.
FIBER OPTIC HEADLIGHT AND VIDEO CAMERA SYSTEMS: Luxtec manufactures and markets
a series of video products that are currently being used in the United States
and in over 25 countries around the world. Luxtec's Microlux headlight camera
systems are designed to televise surgical procedures. The system is a very
small, lightweight, solid state television camera mounted at the front of a
headband, manufactured by Luxtec, and integrated with fiber optic illumination.
SALES AND MARKETING
We sell our products and services to hospitals, IDNs, surgery centers and
physician offices. In fiscal year ended June 30, 2004, within the Specialty
Medical Distribution business, we sold specialty medical products to over 3,000
customers, primarily in the United States. We are not dependent on any single
customer or geographic group of customers. Our largest customer accounted for
2.3% of our gross profit during our fiscal year ended June 30, 2004.
We maintain an extensive sales organization that is highly experienced and
skilled in representing clinical products and services. Our sales
representatives serve as a service and educational resource to the marketplace.
They assist clinicians in selecting and purchasing products, help customers
better manage inventories of specialty medical products and direct the
appropriate utilization of our clinically focused products. Each sales
representative works within an assigned sales territory under the supervision of
a dedicated regional sales manager. Our sales representatives are primarily
compensated on a commission basis.
Within the surgical illumination industry, Luxtec is the domestic market leader
in surgical headlight systems with over 50,000 surgeons using their products on
a worldwide basis. Within the United States, the Luxtec fiber optic and
illumination products are primarily distributed through our Surgical segment's
sales force, supported by Luxtec field specialists and a customer support team
now located at our Birmingham, Alabama facility. Luxtec also distributes
domestically through a number of other regional specialty medical distributors.
Internationally, Luxtec distributes through a network of local distributors.
Our external sales, based upon the customer's country of origin by geographic
area for the year ended June 30, 2004, 2003 and 2002, totaled $46,065,000,
$44,015,000 and $51,688,000, respectively, for sales in the United States and
$2,698,000, $2,345,000 and $2,008,000, respectively, for sales to foreign
customers.
9
DISTRIBUTION
We believe that responsive delivery of quality specialty medical products and
supplies is a key element to providing complete customer satisfaction. Our
customers place orders for medical products and supplies by telephone, facsimile
or via EDI. All orders are routed through our centralized computer ordering,
shipping and inventory management system, which is linked to our distribution
centers. Rapid and accurate order fulfillment is a principal component of our
value-added approach.
In order to assure the availability of our broad product lines for prompt
delivery to customers, we must maintain sufficient inventories at our
distribution centers. Our inventory levels are centralized with and managed by a
purchasing department using an integrated inventory control system. Our
inventory consists primarily of medical products and supplies.
MANUFACTURING AND SUPPLIERS
Manufacturer relationships are an integral part of our businesses. Our Specialty
Medical Distribution business represents more than 125 manufacturers with over
90% of our sales concentrated among products purchased from approximately 30 of
these manufacturers. A majority of the business is comprised of stocking
relationships whereby we stock the vendor's products and provide substantially
all fulfillment services (i.e., customer service, shipping, returns, etc.). The
remainder of the revenue is received on an "agency" basis whereby we do not
stock the vendor's products and do not provide fulfillment services. In the case
of an agency sale, the manufacturer provides substantially all fulfillment
services for customers and we provide sales and marketing support to facilitate
the sale of the vendor's product. For providing the sales and marketing support,
we are paid a sales commission on each sale of the vendor's products.
Within the Manufactured Products business, Luxtec purchases components and
materials from more than 200 vendors and believes it can purchase substantially
all of its product requirements from other competing vendors under similar
terms. Luxtec has no long-term contract with any supplier but does maintain
long-standing relationships with certain vendors.
Our Specialty Medical Distribution business aggressively pursues the opportunity
to market and sell medical equipment and supplies on an exclusive basis.
Manufacturers of specialty medical products and supplies typically offer
distribution rights only to a select group of distributors and are increasingly
seeking to reduce the number of distributors selling their products to end users
in an effort to reduce the overall costs associated with selling and marketing
their products. We have been successful in assisting manufacturers in their
development and marketing plans and in obtaining the exclusive rights to sell
certain products. We believe that our ability to capture and retain such
distribution rights represents a barrier to the entry of competitors.
Within the Specialty Medical Distribution business, our network of manufacturers
is continually seeking representation or market introduction for their products,
resulting in a growth pipeline of attractive, innovative products accretive to
our portfolio of distributed products. Moreover, we have been able to enter into
contractual relationships with certain manufacturers that are typically
exclusive in nature, extend for several years in duration, and include a right
of first refusal on new product introductions.
10
INFORMATION SYSTEMS
Our Specialty Medical Distribution business employs a single, centralized,
enterprise management information system utilized across all business units via
a wide-area data network. This approach yields significant benefits including:
o increased inventory utilization;
o greater visibility as to sales performance; and
o the coordination necessary to address the needs and requirements of an
increasing number of IDNs and GPOs whose members are geographically
dispersed.
We continue to offer our web-based Surg-E-Track (TM) system to our direct sales
force as well as select manufacturer partners. Surg-E-Track provides sales
personnel and manufacturer partners with comprehensive customer purchasing data
in a variety of formats. We are able to enhance sales representative
productivity, customer service levels and assist our manufacturer partners to
more effectively manage their businesses through the Surg-E Track system.
COMPETITION
We compete with a variety of companies including manufacturers who utilize
direct sales forces, national specialty distributors and a number of
significantly smaller local and regional specialty distributors. We compete to a
lesser degree with national med-surg distribution companies, such as Cardinal
Health, Inc., McKesson Corporation and Owens & Minor, Inc. A brief overview of
the Company's competition follows:
o PRODUCT MANUFACTURERS' DIRECT SALES FORCES. Product manufacturers'
direct, internal sales forces offer manufacturers direct access to
healthcare providers. Manufacturers, however, periodically outsource
the sales and marketing of some of their products to specialty sales
and marketing organizations such as PrimeSource.
o NATIONAL SPECIALTY DISTRIBUTORS. Several companies serve the national
specialty medical products market. These national specialty
distributors tend to focus and specialize within a particular segment
of the specialty medical products market.
o REGIONAL SPECIALTY DISTRIBUTORS. Regional specialty distributors
represent our primary competition in the specialty medical products
market.
o NATIONAL MED-SURG DISTRIBUTORS. In most respects, we complement,
rather than compete, with national med-surg distributors. These larger
supply companies, such as McKesson Corporation, Owens & Minor, Inc.,
and Cardinal Health, Inc., have historically focused on distributing a
broad array of lower-margin, later-stage products, aiming to give
healthcare providers aggressive pricing and the convenience of
one-stop shopping. As a result, their core expertise does not reside
in creating a market for complex specialty products, which often
require important services such as on-site training and product
support. In addition, these suppliers are generally not viewed by
their customers as experts within specific specialty areas. As a
result, specialty product manufacturers tend to outsource sales and
marketing services to specialists rather than national med-surg
distributors.
11
Within the Manufactured Products business, Luxtec competes with a number of
manufacturers of proprietary light source systems. Competitors within the United
States include the Cogent division of Welch Allyn and Sunoptic Technologies
(formerly Cuda FiberOptics) and Illumination Industrial Isolux, SA. Some of
Luxtec's competitors have historically relied on metal halide technology rather
than the state-of-the-art xenon technology offered by Luxtec. The xenon
technology is more widely accepted and provides a broader color spectrum than
metal halide technology. Foreign competitors include Richard Wolf GMBH, Scholly
GMBH and those companies previously mentioned above.
PATENTS AND TRADEMARKS
We maintain a policy of seeking patent and trademark protection in connection
with certain elements of our technology and brand names. We own the following
U.S. Patents and Trademarks:
Patents
-------
o Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
o Patent No. 5295052 for a light source assembly issued March 15 1994.
o Patent No. D345368 for surgical telescopes issued March 22, 1994.
o Patent No. D349123 for spectacles having integral illumination issued
July 26, 1994.
o Patent No. D350760 for an eyeglass frame temple issued September 20,
1994.
o Patent No. D415285 for Pinhole Headlamp Video Camera for Medical and
Surgical Applications issued October 12, 1999.
o Patent No. D398403 for Headband for Surgeons with Removable Headboard
Hanger issued September 15, 1998.
o Patent No. 6258037 for blood pressure monitoring in noisy environments
issued July 10, 2001.
o Patent No. 4998713 for needle connector issued March 12, 1991.
o Patent No. 5893635 for headlamp with enhanced light gathering
condenser issued April 13, 1999.
Trademarks
----------
o LUXTEC, U.S. federal trademark registration number 1,453,098,
registered August 18, 1987.
o LUXTEC (and design), U.S. federal trademark registration number
1,476,726, registered February 16, 1988.
o LUXTEC (stylized), U.S. federal trademark registration number
1,758,176, registered March 16, 1993.
o LUXTEC, U.S. federal trademark registration number 1,956,027,
registered February 13, 1996.
o Luxtec is also the owner of the following foreign trademark
registrations for its LUXTEC trademark: (i) Chile, registration number
452.314, registered October 31, 1995; and (ii) Peru, registration
number 016214, registered June 14, 1995.
12
o BIMECO, U.S. federal trademark registration number 1,190,584,
registered February, 23 1981
o MegaTech Medical, U.S. federal trademark registration number
1,930,021, registered October 24, 1995
o TMC
o Clearfield
o ValueFlex
Luxtec relies on its development and manufacturing efforts, rather than patent
protection, to establish and maintain its industry position. In general, we
treat our design, technical, customer, vendor and other Company data as
confidential and rely on nondisclosure agreements, trade secrets laws and
non-competition agreements to protect our proprietary position; however, we
cannot assure that these measures will adequately protect our proprietary
technologies.
GOVERNMENT REGULATION
The manufacturing, marketing, distribution and sale of specialty medical
products sold by us are subject to government regulation in the United States
and other countries. Among the federal laws which impact us are the Federal
Food, Drug and Cosmetic Act, which regulates the advertising, record keeping,
labeling, handling, storage and distribution of drugs and medical devices, and
which requires us to be registered with the United States Food and Drug
Administration ("FDA"), and the Safe Medical Devices Act of 1990, which imposes
certain reporting requirements on distributors in the event of an incident
involving serious illness, injury or death caused by a medical device. In
addition, in order to clinically test, produce and market products for human
diagnostic or therapeutic use, we must comply with mandatory procedures and
safety standards established by the FDA and comparable state and foreign
regulatory agencies. Typically, products must meet regulatory standards as safe
and effective for their intended use prior to being marketed for human
applications. The clearance process is expensive and time consuming, and no
assurance can be given that any agency will grant clearance for the sale of our
products or that the length of time the process will require will not be
extensive. We believe that we are in substantial compliance with all of the
foregoing laws and that we possess all licenses required in the conduct of our
business.
EMPLOYEES
As of September 1, 2004, we had 136 employees, of which 41 are engaged in the
Surgical segment, 19 in the Critical Care segment, 56 in the Manufactured
Products business and 20 in corporate and shared services. We believe that our
continued success depends on our ability to attract and retain highly qualified
personnel. None of our employees are covered by a collective bargaining
agreement.
13
EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNEL
Following are the names and ages, as of September 1, 2004, of our executive
officers and key management personnel, their positions and summaries of their
backgrounds and business experience.
Name Age Position
---- --- --------
Joseph H. Potenza 57 President and Chief Executive Officer
Shaun D. McMeans 42 Chief Operating Officer and Chief Financial Officer
Samuel M. Stein 64 Vice President & General Manager, Manufacturing Division
Mark A. Jungers 52 Regional Vice President, Distribution Division
Bruce R. Hoadley 45 Regional Vice President, Distribution Division
Scott F. Billman 48 Regional Vice President, Distribution Division
JOSEPH H. POTENZA, PRESIDENT AND CHIEF EXECUTIVE OFFICER: Prior to joining
PrimeSource in February 2001, Mr. Potenza held senior management positions with
McKesson Corporation as Vice President of the Corporate Program and with the
former Medibuy where he was responsible for the National Accounts and Corporate
Program. From 1977 to 1997, Mr. Potenza developed his career with American
Hospital Supply Corporation/Baxter Healthcare Corporation, culminating as
Eastern Region President, where he was responsible for a $750 million
distribution business with 650 employees and seven distribution facilities. He
received a Bachelor of Arts degree in English from Norwich University and a
Master of Arts degree in Management from Central Michigan University.
SHAUN D. MCMEANS, CHIEF OPERATING OFFICER & Chief Financial Officer: Mr. McMeans
has over 20 years of experience in manufacturing and distribution businesses,
specializing in operations, accounting and financial management. Prior to
becoming the Company's Chief Financial Officer, he served as Vice President of
Operations and Corporate Controller. Prior to joining the Company in April 2000,
Mr. McMeans held operational and financial management positions with Burnham
Corporation, a leading domestic manufacturer and distributor of residential and
commercial boilers. Mr. McMeans earned a Bachelor of Science degree in
Accounting from Pennsylvania State University and is a certified public
accountant. He began his career in public accounting with the former Peat,
Marwick, Mitchell and Company.
SAMUEL M. STEIN, VICE PRESIDENT & General Manager, Manufacturing Division: Mr.
Stein's career has focused on high growth technology companies. Prior to
becoming General Manager of the Company's Luxtec Division, Mr. Stein served as
Luxtec's Chief Financial Officer. Prior to joining Luxtec in 1993, Mr. Stein
served as Chief Operating and Chief Financial Officer of Mitrol, Inc. of which
he was also co-founder. He has served as Chief Financial Officer with companies
ranging from start-ups to subsidiaries of Fortune 500 corporations. Mr. Stein
earned a Bachelor of Science degree in Business Administration from the
University of Toledo and a Master of Science degree from Rensselaer Polytechnic
Institute.
MARK A. JUNGERS, REGIONAL VICE PRESIDENT, DISTRIBUTION DIVISION: Mr. Jungers has
an extensive background in med-surg and critical care product sales and
management. Mr. Jungers joined PrimeSource through its 1999 acquisition of
Bimeco, a leading distributor of specialty medical products to the critical care
14
market in the southeastern United States, where he served as a Sales Manager.
Prior to joining Bimeco in 1979, he held sales and marketing positions with the
Extracorporeal Medical Division of Johnson & Johnson. Mr. Jungers earned a
Bachelor of Science degree in Business Administration from Marquette University.
BRUCE R. HOADLEY, REGIONAL VICE PRESIDENT, DISTRIBUTION DIVISION: Mr. Hoadley
has worked for over 20 years in the sales and management of specialty surgical
products. He was the Sales Manager for Futuretech, a leading distributor of
specialty medical products to the surgical market in the southeastern United
States, from 1991 until its acquisition by PrimeSource in 1999. Prior to joining
Futuretech, Mr. Hoadley held sales management positions with Kendall Healthcare
and Devon. He earned a Bachelor of Arts degree in Marketing from the University
of Alabama.
SCOTT F. BILLMAN, REGIONAL VICE PRESIDENT, DISTRIBUTION DIVISION: Mr. Billman
has spent his entire career in sales, marketing, and operations management. He
has worked for over 20 years in the healthcare industry, holding several
management positions primarily focused on the sales and marketing of surgical
products. He most recently served as Senior Vice President of Product Marketing
for the former Medibuy. Mr. Billman earned a Bachelor of Science degree in
Business Administration and an MBA from Bowling Green State University.
RISK FACTORS
OUR BUSINESS WILL SUFFER IF WE FAIL TO ATTRACT AND RETAIN EXPERIENCED SALES
REPRESENTATIVES. The success and growth of our business depends on our ability
to attract and retain qualified and experienced sales representatives. There is
significant competition for experienced specialty medical products sales
representatives. It is uncertain whether we can continue to attract and retain
qualified personnel. If we cannot attract, retain and motivate qualified sales
personnel, we will not be able to expand our business and our ability to perform
under our existing contracts will be impaired, which would negatively affect our
results of operations.
OUR BUSINESS WOULD SUFFER IF WE LOST KEY SUPPLIERS. Our success is partly
dependent on our ability to successfully predict and adjust production capacity
to meet demands, which is partly dependent upon the ability of external
suppliers to deliver components at reasonable prices and in a timely manner.
Capacity or supply constraints, as well as purchase commitments, could adversely
affect our future operating results. We cannot assure that we will be able to
maintain our existing supplier relationships or secure additional suppliers as
needed.
IF SUPPLIERS TERMINATE THEIR AGREEMENTS WITH US, OUR PRODUCT OFFERINGS MAY
SUFFER. Following an initial one-year term, many of our standard supplier
agreements may be terminated by either party on 90 days' notice or upon a change
in control of PrimeSource. After expiration of the initial term, such suppliers
may terminate or seek to renegotiate their agreements. If a significant number
of suppliers terminate their agreements with us, the range of products we will
be able to offer would be adversely affected. The ability of suppliers to
terminate their agreements may result in new agreement terms that are less
favorable to us, which could have a material adverse effect on our earnings.
PRIMESOURCE SURGICAL HAS A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT
TO PREDICT ITS FUTURE PERFORMANCE. PrimeSource Surgical, which is our material
subsidiary, commenced operations in 1996, and grew rapidly through the
acquisition of a number of specialty medical products sales and marketing
organizations. Accordingly, PrimeSource Surgical has only a limited operating
15
history from which to evaluate and forecast its business. As a result of
PrimeSource Surgical's limited operating history, we may be unable to accurately
forecast financial results going forward. Moreover, failure to meet our revenue
targets and financial projections may have an immediate and negative impact on
our total results of operations.
IF WE ARE UNABLE TO ACHIEVE OUR BUSINESS OBJECTIVES AND COMPLY WITH THE
COVENANTS IN OUR CREDIT FACILITIES WE MAY HAVE TO SUSPEND OR CEASE OPERATIONS.
We had net income of $1,606,049 for our fiscal year ended June 30, 2004. If we
are unable to generate sufficient positive cash flow and/or raise additional
equity or debt capital, we may have insufficient funds to continue our
operations. In addition, if we are unable to comply with the covenants of our
credit facilities, our creditors may accelerate repayment of the borrowings
under our credit facility.
THE INDUSTRY IN WHICH WE PARTICIPATE IS INCREASINGLY COMPETITIVE WHICH COULD
MAKE IT MORE DIFFICULT FOR US TO IMPROVE OUR FINANCIAL PERFORMANCE. The changing
health-care environment in recent years has led to increasingly inte nse
competition among health-care suppliers. Competition is focused on price,
service and product performance. Pressure in these areas is expected to
continue. Increased competition may lead to price and other forms of competition
that could have a material adverse effect on our market share, business and
results of operations. Also, we may face increased competition for acquisition
opportunities, which may inhibit our ability to consummate suitable acquisitions
on favorable terms. Many of our competitors are, or are affiliated with, major
companies. These competitors have substantially greater financial and marketing
resources and greater name recognition and more established relationships with a
large base of current and potential customers than we do. Accordingly, it may be
more difficult to compete against these large competitors.
SALES TO LARGER CUSTOMERS MAY INCREASE THE LENGTH OF OUR SALES CYCLE AND
DECREASE OUR PROFIT MARGINS. Increasing sales to larger buyers may be an
important element of a future business strategy. As we sell to larger
organizations, it is expected that the time from initial contact to final
approval will increase. During this sales cycle, we may expend substantial funds
and management resources without any corresponding revenue. If approval of
contracts is delayed or does not occur, our financial condition and operating
results for a particular period may be adversely affected. Approval of contracts
may be subject to delays for reasons over which we will have little or no
control, including:
o potential customers' internal approval processes;
o customers' concerns about implementing a new method of doing business;
and
o seasonal and other timing effects.
Increased sales to larger accounts may result in lower profit margins as larger
customers typically have greater leverage in negotiating the price and other
terms of business relationships. If we do not generate sufficient transaction
volume to offset any lower margins, our operating results may be materially and
adversely affected.
GOVERNMENTAL OR PRIVATE INITIATIVES TO REDUCE HEALTHCARE COSTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE SPECIALTY MEDICAL PRODUCTS INDUSTRY. The primary
trend in the United States healthcare industry is toward cost containment.
Comprehensive government healthcare reform intended to reduce healthcare costs,
the growth of total healthcare expenditures and expanded healthcare coverage for
the uninsured have been proposed in the past and may be considered again in the
16
near future. Implementation of government healthcare reform may adversely affect
specialty medical products companies, which could decrease the business
opportunities available to us. In addition, the increasing use of managed care,
centralized purchasing decisions and consolidations among, and integration of,
healthcare providers are continuing to affect purchasing and usage patterns in
the healthcare system. Decisions regarding the use of specialty medical products
are increasingly being consolidated into group purchasing organizations,
regional integrated delivery systems and similar organizations and are becoming
more economically focused, with decision makers taking into account the cost of
the product and whether a product reduces the cost of treatment. Significant
cost containment initiatives adopted by government or private entities could
have a material adverse effect on our business.
OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR PREVENT A
CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE MANAGEMENT AND/OR
OUR BUSINESS. As a result of its ownership of Series G Preferred Stock and
common stock, GE Capital Equity Investments, Inc., is able to exercise
substantial control over the election of our directors and many corporate
actions requiring the approval of such stockholders.
OUR COMMON STOCK IS NOT LISTED ON AN EXCHANGE WHICH MAKES IT DIFFICULT FOR OUR
STOCKHOLDERS TO SELL THEIR STOCK. Although we are a public reporting company and
incur the costs and regulatory burden associated with our reporting obligations,
our shares of capital stock are not listed on any stock exchange or quoted on
any quotation system. We cannot assure that holders of our capital stock will be
able to dispose of their shares. Our ability to use our stock as consideration
in potential acquisition, will be hindered by the limited trading market for our
stock.
ITEM 2. PROPERTIES
PrimeSource's corporate headquarters are located at 99 Hartwell Street, West
Boylston, Massachusetts. All of our facilities are leased and located in the
United States of America. A summary of the Company's facilities and offices, as
of September 1, 2004, is as follows:
CITY, STATE SQUARE LEASE
FEET EXPIRATION DATE
Tucson, Arizona............................. 6,054 7/31/2006
Birmingham, Alabama......................... 18,356 11/30/2006
Atlanta, Georgia............................ 1,200 9/30/2004
Atlanta, Georgia............................ 1,750 9/30/2004
West Boylston, Massachusetts................ 31,689 10/31/2005
------
59,049
======
We believe that all of our facilities are in satisfactory condition and suitable
for the particular purposes for which they were acquired or constructed and are
sufficient for the Company's current operations.
17
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and lawsuits 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on December 12, 2003. At the
meeting, the following items were submitted to a vote of the stockholders:
(1) the election of a Class III director for a three-year term was approved
with the election of Shaun D. McMeans receiving 7,862,958 votes in favor, 0
votes against, 8,217,358 votes withheld and 0 broker non-votes.
(2) an amendment to our 1997 Stock Option/Stock Issuance Plan, as amended,
increasing the number of shares of common stock reserved thereunder from
10,000,000 to 12,000,000 was approved with 14,726,893 votes in favor, 295,691
votes against, 68,005 abstentions and 988,927 broker non-votes;
(3) the appointment by our Board of Directors of Deloitte & Touche LLP, our
independent auditors, was ratified with 16,071,771 votes in favor, 5,230 votes
against, 2,515 abstentions and 0 broker non-votes.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock was listed on the American Stock Exchange (the "AMEX") under
the AMEX symbol "LXU.EC") from April 20, 1994 through November 17, 2000, at
which time it was delisted by the AMEX because it no longer continued to satisfy
the AMEX's listing requirements. On November 16, 2000, the trading day
immediately before our common stock was delisted by the AMEX, the closing price
was $1.00.
Our common stock is not currently listed on any public exchange or market. There
is no established public trading market for our common stock and no assurance
can be given that an established trading market for our common stock will
develop in the future.
As of September 1, 2004, there were approximately 534 registered holders of
record of our common stock. We estimate that there are approximately 800
beneficial holders of our common stock.
We have not paid any cash dividends on our common stock since our inception and
the Board of Directors does not contemplate doing so in the foreseeable future.
The Board of Directors currently intends to retain any future earnings for use
18
in expanding our business. We may not declare or pay any dividend without the
consent of lenders and our preferred stockholders.
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. In connection with the issuance of
the Series G Stock, the Company issued warrants to purchase an aggregate of
3,300,000 shares of common stock at $.01 per share. These warrants became
exercisable on December 31, 2002 and expire on August 6, 2012. Each share of
Series G Stock is convertible into 100 shares of common stock, subject to
adjustment, at the option of the holder. Each share of Series G Stock has one
vote for each share of common 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.
EQUITY COMPENSATION PLAN INFORMATION
-------------------------------------------------------------------------------
JUNE 30, 2004
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
Equity compensation
plans approved by 26,562,698 $0.1930 2,912,070
security holders
Equity compensation
plans not approved
by security holders (1) 7,499 16.0000 0
---------- ------- ---------
Total 26,570,197 $0.1975 2,912,070
========== ======= =========
(1) On August 6, 2002, we granted Bradford C. Walker an option to purchase 7,500
shares of our Series G Convertible Redeemable Preferred Stock at an exercise
price of $16.00 per share. This option became fully vested and exercisable on
the first anniversary of the grant date and expires upon the tenth (10th)
anniversary of the grant date. The stock option agreement provides that if Mr.
Walker is terminated for any reason other than misconduct, the option, to the
extent vested on the termination date, becomes exercisable at any time prior to
the earlier of (i) five (5) years following the date he ceases to provide any
service to PrimeSource or (ii) one (1) year following the registration of the
option shares under the Securities Act of 1933. On October 15, 2003, one option
for the purchase of Series G Stock was exercised for $16.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived from
our historical audited consolidated financial statements of PrimeSource for each
of the five years in the period ended June 30, 2004. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes thereto. Data is in thousands except per share data.
OPERATING DATA: FISCAL YEAR
ENDED JUNE 30
-----------------------------------------------------------------------------
2004(1)(2) 2003(3)(4) 2002(5)(6) 2001(7) 2000(8)(9)
NET SALES $ 48,763 $ 46,360 $ 53,696 $ 48,402 $ 54,411
NET INCOME (LOSS) $ 1,606 $ (3,629) $ (6,191) $ (4,382) $ (1,384)
NET INCOME (LOSS) PER
SHARE - BASIC $ 0.07 $ 0.33 $ (1.11) $ (1.37) $ (0.69)
TOTAL ASSETS $ 29,899 $ 31,665 $ 37,587 $ 45,450 $ 31,297
LONG-TERM OBLIGATIONS $ 8,250 $ 5,826 $ 23,285 $ 20,335 $ 15,968
STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY) $ 10,433 $ 10,686 $ (5,349) $ (562) $ (567)
(1) In December 2003, the Company refinanced its senior debt facilities. The
Company paid off its Luxtec revolving note in the amount of $1,271,585.
Simultaneously, the Company paid off its PrimeSource Surgical revolving line of
credit in the amount of $4,793,944.
(2) Upon adoption of SFAS No. 150 as of July 1, 2003, the Series G Stock was
reclassified in the Consolidated Balance Sheets from presentation in the equity
section 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 upon
adoption of SFAS No. 150.
(3) In accordance with the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142, the Company
completed the transitional test for impairment in March 2003 and concluded that
consolidated goodwill was impaired in the amount of $4,454,656. The Company
recorded a non-cash charge of $4,454,656 to reduce the carrying value of its
goodwill. This charge is non-operational in nature and is reflected as a
cumulative effect of a change in accounting principle, effective July 1, 2002,
in the accompanying Consolidated Statements of Operations.
(4) In the fiscal year ended June 30, 2003, the Company restructured its
outstanding preferred and common stock. The restructuring resulted in preferred
stockholders exchanging preferred stock with a redemption value of approximately
$21,993,000 for preferred stock with a redemption value of $3,250,000, common
20
stock and common stock warrants. As a result of the restructuring, net income
available for common stockholders was increased by $11,809,741 (to $0.33 per
share) due to the effect of the equity recapitalization.
(5) In the fiscal year ended June 30, 2002, PrimeSource approved plans for
restructuring of operations involving narrowing the focus of its operations,
consolidation of certain under performing sales regions, reduction of corporate
overhead through workforce reductions, restructuring of its balance sheet
through the refinancing of PrimeSource Healthcare's and PrimeSource Surgical's
senior bank debt and the reduction of debt levels through cost reductions and
improved efficiency of operations. The related costs of the restructuring,
excluding the $1,038,823 discussed in footnote (6) below, included charges of
$2,915,675.
(6) On September 20, 2002, in connection with the restructuring, Ruby sold all
of the assets of its former PEC line of business in exchange for the
cancellation of stock previously issued to the founder of PEC and the assumption
of certain liabilities with respect to the PEC line of business. The Company
recognized a loss on the transaction totaling $1,038,823 in the fiscal year
ended June 30, 2002, as the assets were held for sale and deemed impaired at
that date.
(7) Effective March 2, 2001, PrimeSource Surgical completed a merger with Luxtec
Corporation with aggregate consideration exchanged of approximately $4,791,000,
where PrimeSource Surgical assumed liabilities, net of assets acquired and costs
of approximately $3,931,000. The acquisition was accounted for using the
purchase method of accounting and the results of operations of Luxtec have been
included in the financial statements of PrimeSource Surgical as of the date of
acquisition. In December 2000, the Company acquired two entities, PEC and NEM,
for aggregate consideration of $1,310,000. The acquisition was accounted for
using the purchase method of accounting and the results of operations of the
acquired entities have been included in the consolidated financial statements
from the date of acquisition through date of sale, as discussed above.
(8) In June 2000, PrimeSource Surgical sold an entity for approximately
$398,000, which resulted in a recorded loss of approximately $732,000. In
addition, in April 2000, PrimeSource Surgical acquired an entity for $405,000.
The acquisition was accounted for using the purchase method of accounting and
the results of operations are included in the consolidated financial statements
from the date of acquisition.
(9) In the fiscal year ended June 30, 2000, PrimeSource Surgical approved plans
for a major restructuring of its operations with the goal of centralizing
distribution facilities, eliminating unprofitable divisions and reducing costs.
The aggregate costs of the restructuring included total charges of $1,031,000.
21
OPERATING DATA:
The following table sets forth unaudited quarterly consolidated operating
results for each of our last eight quarters. We have prepared this information
on a basis consistent with our audited consolidated financial statements and
included all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of the data. These quarterly
results are not necessarily indicative of future results of operations. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the notes thereto. Data is in thousands, except per
share data.
Sep-30, Dec-31, Mar-31, Jun-30, Sep-30, Dec-31, Mar-31, Jun-30,
2002(1) 2002 2003 2003 2003 2003 2004 2004
Net sales $11,789.8 $11,587.6 $11,127.0 $11,855.6 $12,162.3 $12,540.7 $12,253.4 $11,806.6
Cost of sales 7,498.9 7,307.1 6,885.2 7,606.4 7,665.9 7,853.0 7,956.4 7,556.4
------------ -------- --------- --------- -------- -------- ------- -------
Gross profit $4,290.9 $4,280.5 $4,241.8 $4,249.2 $4,496.4 $4,687.7 $4,297.0 $4,250.2
============ ======== ========= ========= ======== ======== ======= =======
Net income (loss) $(3,970.5) $ 416.1 $ (3.0) $ (71.4) $ 201.8 $ 286.0 $ 258.8 $ 859.4
============ ======== ========= ========= ======== ======== ======= =======
Net income (loss) per share-basic $ 0.45 $ 0.01 $ (0.02) $ (0.02) $ 0.01 $ 0.01 $ 0.01 $ 0.04
============ ======== ========= ========= ======== ======== ======= =======
COMPUTED AS DESCRIBED IN OUR ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.
Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to
quarterly fluctuations.
(1) In accordance with SFAS No. 142, the Company recorded a non-cash charge of $4,454,656 to reduce the carrying value of its
goodwill. This is a non-cash charge and is reflected as a cumulative effect of a change in accounting principle, effective
July 1, 2002.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Overview is intended to provide a context for the following Management's
Discussion and Analysis of Financial Condition and Results of Operation.
Management's Discussion and Analysis of Financial Condition and Results of
Operation should be read in conjunction with our audited consolidated financial
statements for the fiscal year ended June 30, 2004 including the notes thereto.
We have attempted to identify the most important matters on which our management
focuses in evaluating our financial condition and operating performance and the
short-term and long-term opportunities, challenges and risks (including material
trends and uncertainties) which we face. We also discuss the actions we are
taking to address these opportunities, challenges and risks. The Overview is not
intended as a summary, or a substitute for review, of either the Management's
Discussion and Analysis of Financial Condition and Results of Operation section
nor of this Report as a whole.
BUSINESS SEGMENTS
We are a specialty medical products sales, marketing, manufacturing and service
company. We sell a broad portfolio of high quality, differentiated specialty
medical products, some of which we manufacture, to hospitals and surgery centers
nationwide through a dedicated organization of sales and marketing
professionals.
The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Manufactured Products, Specialty Medical
Distribution - Surgical, and Specialty Medical Distribution - Critical Care. A
description of each segment and principal products and operations are as
follows:
SPECIALTY MANUFACTURED PRODUCTS - This segment includes the Luxtec division
which we acquired in March 2001. Luxtec designs and manufactures surgical
headlight systems, including light sources, fiber optic cables and other
custom-made surgical equipment for the medical industry.
SPECIALTY MEDICAL DISTRIBUTION - SURGICAL - The surgical segment is a regional
sales and marketing organization that markets and distributes specialty surgical
products primarily to hospitals and surgery centers. The primary specialty areas
include gynecology, cardiovascular, endoscopy and general surgery. These
products and services are used extensively in hospital operating rooms and in
outpatient surgery centers. This segment does business as PrimeSource Surgical,
Inc.
SPECIALTY MEDICAL DISTRIBUTION - CRITICAL CARE - The critical care segment is a
regional sales and marketing organization that markets and distributes products
primarily to hospitals in the southeastern United States. This segment does
business as Bimeco, Inc. Within this segment, the primary specialties include
intensive, neonatal and maternal care.
23
BUSINESS STRATEGY
We differentiate our business from commodity healthcare product sales
organizations by offering "consultative" marketing. The Company's sales force
spends substantial time teaching, training and advising surgeons, physicians,
nurses and hospital staff in the proper use of their products.
We beleive small to medium sized manufacturers of specialty medical devices
often prefer regional distributors to reduce the risk involved in exclusive
national distribution relationships. We maintain three regional distribution
groups, two for surgical products (Southeast and Mid-Atlantic/Central) and one
for critical care products (primarily focused on the Southeast). All of the
Company's sales representatives are our employees, averaging 15 years
experience, and are compensated almost entirely on commissions.
Our goal is to be a leading supplier 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 Luxtec division continues to lead the surgical headlamp business and focuses
its research and development efforts on new and innovative products which can be
sold through our distribution segment.
We believe we are well positioned to continue our growth within the specialty
medical products industry. We expect to experience sales growth in the specialty
medical products industry as a result of:
o favorable industry demographics;
o sustaining or increasing our market share;
o the acquisition of other specialty medical products manufacturers;
o expanding margin opportunities in our manufactured products business;
o further penetration of existing customer accounts due to our
introduction of new products and services;
o entrance into new specialty medical markets and expansion into
international markets; and
24
o marketing efforts which foster partnerships with other medical
products companies to widen the customer base for our products.
BUSINESS OPPORTUNITIES
The Company's historically aggressive distribution growth strategy strained its
financial and managerial resources, leading the Board of Directors to initiate
and implement a restructuring plan in November 2001. The restructuring plan
included replacing senior management, refocusing the Company's strategy on its
core business and consolidating under-performing sales regions. In January 2002,
the Company ceased distribution of most products west of the Rocky Mountains. A
portion of the Company's critical care segment was divested in late 2002, with
the remainder sold in June 2003. During the past two years, the Company has
achieved several significant milestones; strengthening its core business with
the renewal of several key vendor contracts, attracting new product lines,
simplifying its capital structure and consolidating its senior debt facilities.
The Company believes it has validated the restructuring plan it began in 2001 by
improving its operating income (loss) from a loss of $5.6 million in 2002 to
income of $1.4 million in 2003 and $2.5 million in 2004 and by reducing its
senior secured debt from $9.9 million in 2002 to $5.2 million in 2004.
We believe that we are well positioned to leverage our existing distribution
capabilities with additional proprietary products. In addition to the
opportunity for margin expansion, the sales force has incentives to market
proprietary or "corporate" products since those products become an owned
component of their portfolio. The sales force is then able to have a more active
role in product development, resulting in product lines that are better suited
for their customer base. We believe that within the specialty surgical and
critical care markets, there exist numerous quality, high growth acquisition
targets, including several in its current product portfolio.
BUSINESS RISKS
We believe that the following represent our primary business risks:
OUR BUSINESS WILL SUFFER IF WE FAIL TO ATTRACT AND RETAIN EXPERIENCED SALES
REPRESENTATIVES. The success and growth of our business depends on our ability
to attract and retain qualified and experienced sales representatives. There is
significant competition for experienced specialty medical products sales
representatives. It is uncertain whether we can continue to attract and retain
qualified personnel. If we cannot attract, retain and motivate qualified sales
personnel, we will not be able to expand our business and our ability to perform
under our existing contracts will be impaired, which would negatively affect our
results of operations.
OUR BUSINESS WOULD SUFFER IF WE LOST KEY SUPPLIERS. Our success is partly
dependent on our ability to successfully predict and adjust production capacity
to meet demands, which is partly dependent upon the ability of external
suppliers to deliver components at reasonable prices and in a timely manner.
Capacity or supply constraints, as well as purchase commitments, could adversely
affect our future operating results. We cannot assure that we will be able to
maintain our existing supplier relationships or secure additional suppliers as
needed.
25
IF SUPPLIERS TERMINATE THEIR AGREEMENTS WITH US, OUR PRODUCT OFFERINGS MAY
SUFFER. Following an initial one-year term, many of our standard supplier
agreements may be terminated by either party on 90 days' notice or upon a change
in control of the Company. After expiration of the initial term, such suppliers
may terminate or seek to renegotiate their agreements. If a significant number
of suppliers terminate their agreements with us, the range of products we will
be able to offer would be adversely affected. The ability of suppliers to
terminate their agreements may result in new agreement terms that are less
favorable to us, which could have a material adverse effect on our earnings.
OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR PRESENT A
CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE MANAGEMENT AND/OR
OUR BUSINESS. As a result of its ownership of Series G Preferred Stock and
common stock, GE Capital Equity Investments, Inc., is able to exercise
substantial control over the election of our directors and determine the outcome
of most corporate actions requiring stockholder approval, including a merger
with or into another company, the sale of all or substantially all of our assets
and amendment to our Articles of Organization.
The Company's capital structure at June 30, 2004 is summarized below:
SERIES G (1) COMMON STOCK
----------------------------- -- ----------------------------------------
SHAREHOLDER SHARES OPTIONS (2) SHARES OPTIONS (3) WARRANTS TOTAL CSE %
GE Capital Equity 12,500,000 7,967,374 3,721 9,398,639 29,869,734 41.5 %
Coleman Swenson Booth 7,718,750 3,573,089 23,721 4,380,356 15,695,916 21.8 %
Robert Fisher Entities 1,484,375 1,963,953 7,442 1,456,876 4,912,646 6.8 %
William H. Lomicka 546,875 621,328 30,605 186,694 1,385,502 1.9 %
Brad Walker 100 749,900 50 3,249,950 4,000,000 5.6 %
PSHC Management 2,511,046 2,511,046 3.5 %
Others 8,249,350 3,961,445 1,352,203 13,562,998 18.9 %
----------- ----------- ----------- ---------- ----------- -----------
Total 22,250,100 749,900 22,375,144 9,787,930 16,774,768 71,937,842
=========== =========== =========== ========== =========== ===========
Note: All figures shown in common stock equivalents (CSE).
(1) Series G Preferred Stock carries a preference of two times original price
per share plus accrued dividends ($0.64 per CSE) and participates in additional
proceeds as Common Stock.
(2) Series G Preferred Stock options convert to Series G Preferred Stock at a
strike price of $0.32 per CSE.
(3) Common Stock options and warrants convert at an average strike price of
$0.49 and $0.02 per CSE, respectively.
We are a reporting company under the Securities Exchange Act of 1934, but not
traded on a recognized stock exchange. The Company had approximately 1,400
shareholders as of June 30, 2004.
26
As a result of its ownership of Series G Preferred Stock and common stock, GE
Capital Equity Investments, Inc., is able to exercise substantial control over
the election of our directors and many corporate actions require the prior
approval of such stockholder.
This analysis of our financial condition, capital resources and results of
operations should be read in conjunction with the accompanying consolidated
financial statements, including the notes thereto.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted 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 goodwill
and other intangible assets, income taxes and revenue recognition. 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.
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. 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.
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 accounting principles generally accepted in the United States of
America versus U.S. tax laws. These temporary differences result in deferred tax
27
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.
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, and amounts are recorded in net sales, at the net amount
retained by the Company.
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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of net revenues for the fiscal years ended June 30, 2004, 2003 and
2002.
2004 2003 2002
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 63.6 % 63.2 % 65.8 %
Gross profit 36.4 % 36.8 % 34.2 %
Selling expenses 16.7 % 16.1 % 16.6 %
General and administrative expenses 13.4 % 15.1 % 16.1 %
Depreciation and amortization expenses 1.0 % 1.8 % 4.6 %
Restructuring expenses 0.0 % 0.7 % 7.4 %
Interest expense 2.7 % 1.8 % 1.3 %
Net income (loss) 3.3 % (7.8)% (11.5)%
28
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2003
NET SALES--Net sales increased $2,402,987, or 5.2%, in fiscal 2004 compared to
fiscal 2003 primarily due to higher sales volume from existing product lines and
additional selling territory for our proprietary products provided by the Luxtec
division. Sales in the new territory for the year ended June 30, 2004 totaled
$1,114,401. In March 2004, we ended a key vendor relationship in our Surgical
division, which contributed approximately 15% of Surgical divisions sales for
the twelve months ended June 31, 2004. This vendor made a decision to sell its
product directly to its customers, thereby ending all of their independent
distributor contracts. Although we have replaced this product line with another
in the affected territories as of June 2004, our Surgical division sales did
underperform historical levels in the fourth quarter. Any decrease in sales due
to the loss of this vendor has had a corresponding impact on cost of sales,
gross profit, selling expense and net income after the date the relationship
terminated; however, we expect to recover lost revenue as we progress through
fiscal 2005.
COST OF SALES--Cost of sales increased to 63.6% of net sales for fiscal 2004
from 63.2% of net sales for fiscal 2003. The increase of $1,734,128, or 5.9%, in
fiscal 2004 relative to fiscal 2003 was primarily the result of the
corresponding increase in net sales, as discussed above. The slight increase in
the percentage of cost of sales as a percentage of net sales in fiscal 2004
relative to fiscal 2003 is due 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 decreased to 36.4% of net sales in fiscal 2004
compared to 36.8% of net sales in fiscal 2003. The increase in gross profit of
$668,859, or 3.9%, in fiscal 2004 compared to fiscal 2003 was 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 fiscal
2004 compared to fiscal 2003, was 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 fiscal 2004 was approximately $492,000 more than in
fiscal 2003.
SELLING EXPENSES--Selling expenses increased $709,812 in fiscal 2004 compared to
fiscal 2003. The increase is primarily due to higher sales volume and is also
attributable to a sales representative commission program to sell through any
29
remaining Surgical division inventory for the discontinued key vendor discussed
in net sales above. As a result of this program, we liquidated the discontinued
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 stocking sales, and as a result, sales
commissions as a percent of net sales revenue do not fluctuate when the product
mix of agency and stocking sales varies.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses were
13.4% of net sales, for fiscal 2004, compared to 15.1% for fiscal 2003. The
decrease of $474,192, or 6.8%, is a result of lower salaries and wages related
to reduced headcount by obtaining further overhead efficiencies and reduced
legal fees, primarily related to the settled legal complaint with the Company's
former officers as mentioned in Note 12 to the consolidated financial
statements.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased to 1.0% for fiscal 2004 compared to 1.8% for fiscal 2003. The decrease
of $349,975, or 41.5%, in depreciation and amortization expenses is primarily
the result of certain assets and intangible assets becoming fully depreciated
prior to the year ended June 30, 2004.
RESTRUCTURING EXPENSES: Restructuring expense decreased $340,690 in fiscal 2004
compared to fiscal 2003. The decrease is due to the lack of any restructuring
activities initiated in fiscal 2004 and the continued payments under the
existing restructuring plans. The expenses recorded in fiscal 2004 related to
the June 30, 2003 final closing fees related to the sale of Ruby, Inc.
INTEREST EXPENSE--The increase in interest expense of $468,697, or 55.8%, is the
result of the costs incurred relating to the refinancing of the Company's senior
debt in the quarter ended December 31, 2003. Due to the demand provision in the
line of credit, all financing costs relating to the refinancing were expensed as
incurred. The increase also relates to the implementation of SFAS 150, which
requires all dividends accrued on our preferred stock to be recorded as interest
expense effective July 1, 2003 because the preferred stock is classified as a
liability in accordance with the provisions of SFAS 150. These increases are
offset by decreases relating to lower interest rates and fees on the Company's
senior debt, as compared to the prior year, as a result of the refinancing.
Interest expense on the Company's senior debt, excluding the financing costs,
actually decreased by $155,754, or 23%, during fiscal 2004 over fiscal 2003.
INCOME TAX PROVISION--We recorded no income tax expense in fiscal 2004 and a
$19,700 income tax benefit in fiscal 2003. Our current year taxable income for
federal and certain states can be offset by the use of net operating loss
carryforwards to offset federal and state income tax liabilities in addition to
certain tax credit carryovers.
NET INCOME (LOSS)--Net income increased $5,234,848 in fiscal 2004 compared to
the fiscal 2003 net loss. The increase resulted primarily from the goodwill
impairment charge of $4,454,656 recorded in July 2002 as a result of SFAS No.
142 implementation. In addition, we recorded other income of approximately
$370,000 resulting from the resolution of certain disputed distribution costs
which had been previously accrued for. This increase is offset by the write off
of deferred financing fees of approximately $190,000 for previously outstanding
debt related to the refinancing of our banking facilities during December 2003.
30
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2002
NET SALES--Net sales decreased $7,335,698, or 13.7%, in fiscal 2003 compared to
fiscal 2002. The decrease in net sales in fiscal year 2003 was primarily due to
the closure of the Company's western sales territory as a result of the
Company's restructuring plan initiated in November 2001 and the divesture of PEC
in June 2002. Remaining decreases were due to a shift in our distribution sales
mix from stocking to agency-based sales, lost lines and other effects of the
2002 restructuring. The western sales territory closure resulted in
approximately $2,542,000 of the decrease and the divesture of PEC resulted in
approximately $1,327,000 of the decrease.
COST OF SALES--Cost of sales decreased to 63.2% for fiscal 2003 from 65.8% for
fiscal 2002. The decrease in cost of sales of $6,031,556, or 17.1%, was
primarily due to lower sales levels related to the closure of the western sales
territory and the divesture of PEC. The remaining decreases are due to a shift
in our distribution sales mix from stocking to agency-based sales, lost lines
and other effects of the 2002 restructuring. The western sales territory closure
resulted in approximately $1,810,000 of the decrease and the divesture of PEC
resulted in approximately $683,000 of the decrease. The decrease in cost of
sales as a percentage of net sales in 2003 compared to 2002 is due to the
difference in the product mix sold and the non-recurring prior year inventory
reserve adjustments.
GROSS PROFIT--Gross profit decreased to 36.8% of net sales for fiscal 2003 from
34.2% of net sales for fiscal 2002. The $1,304,142 decrease in gross profit was
primarily due to lower sales levels related to the closure of the western sales
territory and the divesture of PEC. The western sales territory closure resulted
in approximately $732,000 of the decrease and the divesture of PEC resulted in
approximately $644,000 of the decrease. The increase in gross profit margins is
due to a favorable change in product mix and the non-recurring prior year
inventory reserve adjustment from 2002 which caused a higher cost of goods sold.
SELLING EXPENSES--Selling expenses decreased $1,439,986 in fiscal 2003 compared
to fiscal 2002. The decrease in selling expense is primarily due to the closure
of the western sales territory as a result of the Company's restructuring plan
initiated in November 2001 and the divesture of PEC in June 2002. Decreased
salaries, commissions, benefits and travel expenses related to the western sales
territory account for approximately $502,000 of the decrease and the PEC
divesture resulted in approximately $500,000 of the decrease.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
decreased to $7,015,217 for fiscal 2003, from $8,625,555 for fiscal 2002, a
decrease of $1,610,338, or 18.7%. The decrease is primarily a result of the
Company's restructuring plan initiated in November 2001 and the divesture of PEC
in June 2002. The restructuring plan decreased general and administrative
expenses by narrowing the focus of the Company's operations and reducing
corporate overhead through workforce reductions. Non-recurring reserve
adjustments for inventory and accounts receivable recorded in December 2001 of
approximately $474,000 also contributed to the decrease. The PEC divesture
resulted in approximately $268,000 of the decrease.
31
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased to $843,500 for fiscal 2003, from $2,455,081 for fiscal 2002, a
decrease of $1,611,581, or 65.6%. The decrease in depreciation and amortization
expense in fiscal 2003 is primarily due to the implementation of SFAS No. 142
Goodwill and Other Intangible Assets effective July 2002. As a result of this
adoption, goodwill was no longer amortized in fiscal 2003.
RESTRUCTURING EXPENSES--Restructuring expense decreased to $345,507 for fiscal
2003, from $3,954,498 for fiscal 2002. Fiscal 2003 restructuring expenses
include a reserve recorded for the former President's severance agreement for
$195,507 and other restructuring expenses of $150,000. Fiscal 2002 restructuring
expenses relate to the restructuring plan which began in early November 2001,
involving narrowing the focus of our operations, the consolidation of certain
under performing sales regions, the reduction of corporate overhead through
workforce reductions, the restructuring of our balance sheet through a
recapitalization and refinancing of the PrimeSource Healthcare and the
PrimeSource Surgical senior bank debt and a reduction of debt levels through
projected improved earnings and potential asset sales. From November 2001
through August 2002 significant aspects of our new business model, including a
reduction in workforce and executive staff, exit of the western sales region,
recapitalization of equity and a refinancing of our existing debt, were
completed. As a result of this, restructuring expense of $2,915,675 was recorded
for fiscal 2002. In addition, during 2002, a decision was made to dispose of the
PEC division, and the write-off of PEC goodwill and other impaired assets
totaled $1,038,823 which was included in restructuring expenses.
INTEREST EXPENSE--Interest expense increased $159,999, or 23.6%. Our interest
cost increased as a result of increased interest rates and fees incurred related
to the restructuring of the PrimeSource Healthcare and PrimeSource Surgical
debt.
INCOME TAX BENEFIT--Income tax benefit decreased to $19,700 during fiscal 2003,
compared to $61,700 during fiscal 2002. The decrease is the result of decreased
taxable net income (loss) at state levels.
NET LOSS--Net loss decreased $2,561,764, or 41.4%. The decrease in net loss
resulted primarily from expense reductions related to our fiscal 2002
restructuring and decreased amortization expense. These expense decreases were
offset by goodwill impairment expense of $4,454,656 recorded in fiscal 2003,
resulting from the Company's implementation of SFAS No. 142 in July 2002.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had working capital of $1,688,823 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, lines of credit and
current obligations for long-term debt, offset by decreased receivable and
inventory balances. Accounts payable, accrued expenses and obligations for
long-term debt were paid with the increased cash generated from operations and
the increased availability of the line of credit, as discussed below.
In December 2003, we consolidated our senior debt facilities into a $7,500,000
revolving demand note (the "PrimeSource Healthcare Line of Credit") from Wells
32
Fargo 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"). 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 ($6,757,524 at June 30, 2004). As of June 30, 2004,
borrowings bore interest at Wells Fargo's prime rate plus 3.0% (7.25% at June
30, 2004). Borrowings are secured by substantially all assets held by
PrimeSource Healthcare and its subsidiaries. At June 30, 2004, there was
$1,553,385 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 June 30, 2004.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
TOTAL LESS THAN 1 - 3 YEARS 3-5 YEARS MORE THAN 5
1 YEAR YEARS
Long-term debt obligations $ 62,446 $ 16,71 3 $ 45,733
Capital lease obligations - - -
Operating lease obligations 882,320 606,293 274,382 1,645
Series G Preferred Stock 8,138,933 8,138,933
---------- ---------- ---------- ---------- ----------
Total $9,083,699 $8,761,939 $ 320,115 $ 1,645
========== ========== ========== ========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
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 8 to the
accompanying consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
Revenue Recognition, which codifies, revises, and rescinds certain sections of
SAB No. 101, Revenue Recognition, in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The changes in SAB No. 104 did not have a material impact
on our financial position or results of operations.
33
On March 31, 2004, the FASB issued an exposure draft, Share-Based Payment, an
Amendment of SFAS No. 123 and 95. The exposure draft proposes to expense the
fair value of share-based payments to employees beginning in July 2005. We are
currently evaluating the impact of this proposed standard on our financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our market risk exposure relates to outstanding debt. The balance of our
outstanding bank debt at June 30, 2004 was $5,204,139, all of which is subject
to interest rate fluctuations. A hypothetical 10% change in interest rates
applied to the fair value of debt would not have a material impact on our
earnings or cash flows.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
Consolidated Financial Statements
as of June 30, 2004 and 2003,
and for the Years Ended
June 30, 2004, 2003 and 2002 and
Independent Auditors' Report
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 2004 and 2003 F-2 - F-3
Consolidated Statements of Operations for the Years Ended
June 30, 2004, 2003 and 2002 F-4 - F-5
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the Years Ended June 30, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004, 2003 and 2002 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-26
35
INDEPENDENT AUDITORS' REPORT
Board of Directors
PrimeSource Healthcare, Inc.
Tucson, Arizona
We have audited the accompanying consolidated balance sheets of PrimeSource
Healthcare, Inc. and subsidiaries (the "Company") as of June 30, 2004, and 2003,
and the related consolidated statements of operations, stockholders' equity (net
capital deficiency), and cash flows for each of the three years in the period
ended June 30, 2004. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of PrimeSource Healthcare, Inc. and
subsidiaries as of June 30, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2004, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for its Series G Redeemable, Convertible
preferred stock as required by Statement of Financial Accounting Standards No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY, which was effective for the Company July 1, 2003.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
September 28, 2004
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
- -----------------------------------------------------------------------------------------------------------
ASSETS (Note 7) 2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 98,903 $ 489,911
Accounts receivable - net of allowance for doubtful accounts
of approximately $132,000 (2004) and $214,000 (2003) 5,718,346 6,111,062
Inventories - net (Note 4) 6,732,542 7,517,965
Income taxes receivable (Note 11) 129,913 67,800
Prepaid expenses and other current assets 224,865 172,397
---------- ------------
Total current assets 12,904,569 14,359,135
PROPERTY AND EQUIPMENT - Net (Note 5) 887,325 996,358
GOODWILL - Net (Note 6) 15,956,883 15,956,883
INTANGIBLE ASSETS - Net of accumulated amortization
of approximately $245,000 (2004) and $236,000 (2003) (Note 6) 60,273 118,290
OTHER ASSETS - Net of accumulated amortization of
approximately $782,000 (2003) 90,196 233,874
---------- ------------
TOTAL $29,899,246 $ 31,664,540
========== ============
(Continued)
F-2
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
CURRENT LIABILITIES:
Accounts payable $ 4,253,295 $ 5,636,333
Accrued expenses 1,509,432 2,240,770
Accrued restructuring costs (Note 14) 43,726 690,968
Customer deposits 166,873 72,895
Lines of credit (Note 7) 5,204,139 5,926,021
Current portion of long-term debt (Note 7) 16,713 559,877
Current portion of capital lease obligations (Note 12) 21,568 25,425
----------- -----------
Total current liabilities 11,215,746 15,152,289
CAPITAL LEASE OBLIGATIONS - Net of current portion (Note 12) 22,149 21,433
LONG-TERM DEBT - Net of current portion (Note 7) 88,983 105,696
SERIES G REDEEMABLE, CONVERTIBLE PREFERRED
STOCK - No par value - authorized, 230,000 shares;
issued and outstanding, 222,501 shares; aggregate liquidation
preference of $15,258,964 (Note 8) 8,138,933
----------- -----------
TOTAL LIABILITIES 19,465,811 15,279,418
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10 and 12)
SERIES G REDEEMABLE, CONVERTIBLE 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 (2004) and 22,375,094 (2003)
shares 223,751 223,750
Additional paid-in capital 19,295,451 21,347,451
Accumulated deficit (9,085,767) (10,885,200)
----------- -----------
Total stockholders' equity 10,433,435 10,686,001
----------- -----------
TOTAL $ 29,899,246 $31,664,540
=========== ============
See notes to consolidated financial statements. (Concluded)
F-3
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------------------------------------------
2004 2003 2002
NET SALES $ 48,763,006 $ 46,360,019 $ 53,695,717
------------- ------------ -------------
COST OF SALES 31,031,700 29,297,572 35,329,128
------------- ------------ -------------
GROSS PROFIT 17,731,306 17,062,447 18,366,589
------------- ------------ -------------
OPERATING EXPENSES:
Selling expenses 8,160,206 7,450,394 8,890,380
General and administrative expenses 6,541,025 7,015,217 8,625,555
Depreciation and amortization expenses 493,525 843,500 2,455,081
Restructuring expenses (Note 14) 4,817 345,507 3,954,498
------------- ------------ -------------
Total operating expenses 15,199,573 15,654,618 23,925,514
------------- ------------ -------------
OPERATING INCOME (LOSS) 2,531,733 1,407,829 (5,558,925)
INTEREST EXPENSE (1,307,940) (839,243) (679,244)
OTHER INCOME (EXPENSE) 382,256 189,704 (115,357)
------------- ------------ -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT 1,606,049 758,290 (6,353,526)
INCOME TAX BENEFIT (Note 11) 19,700 61,700
------------- ------------ -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,606,049 777,990 (6,291,826)
------------- ------------ -------------
DISCONTINUED OPERATIONS:
INCOME FROM DISCONTINUED OPERATION -
Net of income tax 121,697 101,263
LOSS ON DISPOSAL OF DISCONTINUED OPERATION -
Net of income tax (73,830)
------------- ------------ -------------
Total 47,867 101,263
------------- ------------ -------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - GOODWILL IMPAIRMENT (4,454,656)
------------- ------------ -------------
NET INCOME (LOSS) 1,606,049 (3,628,799) (6,190,563)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK (1,147,094) (2,652,571)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
------------- ------------ -------------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS $ 1,606,049 $ 7,033,848 $ (8,843,134)
============= ============ =============
(Continued)
F-4
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------------------------------------------
2004 2003 2002
INCOME (LOSS) PER SHARE BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.07 $ 0.54 $ (1.13)
=========== =========== ===========
Diluted $ 0.07 $ 0.24 $ (1.13)
=========== =========== ===========
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS - NET OF INCOME TAX - DISPOSAL
OF OPERATION:
Basic $ 0.02
===========
Diluted $ 0.02
===========
LOSS PER SHARE FROM CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - GOODWILL IMPAIRMENT:
Basic $ (0.21)
===========
Diluted $ (0.09)
===========
INCOME (LOSS) PER SHARE:
Basic $ 0.07 $ 0.33 $ (1.11)
=========== =========== ===========
Diluted $ 0.07 $ 0.15 $ (1.11)
=========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF INCOME (LOSS) PER SHARE:
Basic $22,375,130 $21,059,853 $ 7,975,208
=========== =========== ===========
Diluted $22,375,130 $53,024,512 $ 7,975,208
=========== =========== ===========
See notes to consolidated financial statements. (Concluded)
F-5
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Stockholders'
------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit ( Net Capital Deficiency)
BALANCE, JULY 1, 2001 7,959,704 $ 79,597 $ 8,434,697 $ (9,075,914) $ (561,620)
Issuance of common stock 18,605 186 24,814 25,000
Warrants and beneficial conversion
features of preferred stock 3,912,000 3,912,000
Preferred stock dividends and accretion (2,652,571) (2,652,571)
Restricted common stock vesting 118,709 118,709
Refund fractional shares (18) (18)
Net loss - - - (6,190,563) (6,190,563)
---------- ---------- ---------- ----------- ----------
BALANCE, JUNE 30, 2002 7,978,309 79,783 12,490,202 (17,919,048) (5,349,063)
Equity recapitalization 14,735,066 147,351 6,785,864 11,809,741 18,742,956
Warrants issued with issuance of Series G
preferred stock 2,062,000 2,062,000
Preferred stock dividends and accretion (1,147,094) (1,147,094)
Cancellation of shares in legal settlement (132,963) (1,330) (41,218) (42,548)
Cancellation of shares in sale of PEC assets (201,067) (2,011) (62,330) (64,341)
Cancellation of shares in sale of Ruby Merger (4,251) (43) (1,317) (1,360)
Issuance of compensatory stock options 110,000 110,000
Restricted common stock vesting 4,250 4,250
Net loss - - - (3,628,799) (3,628,799)
---------- ---------- ---------- ----------- ----------
BALANCE, JUNE 30, 2003 22,375,094 223,750 21,347,451 (10,885,200) 10,686,001
Reclassification of Series G
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 - - - 1,606,049 1,606,049
---------- ---------- ---------- ----------- ----------
BALANCE, JUNE 30, 2004 22,375,144 $ 223,751 19,295,451 (9,085,767) 10,433,435
========== ========== ========== =========== ==========
See notes to consolidated financial statements.
F-6
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,606,049 $(3,628,799) $ (6,190,563)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expenses 493,525 849,657 2,462,411
Loss on disposal of property and equipment 46,317 22,147 124,132
Stock compensation expense 10,000 110,000 118,709
Debt forgiveness (150,000)
Goodwill impairment 4,454,656
Loss on sale of division 73,830 1,038,823
Issuance of common stock for services 4,250 25,000
Gain on legal settlement (42,548)
Change in fair value of warrant put obligation (95,000)
Write-off of intangible assets 12,406
Amortization of debt discount 28,600
Changes in operating assets and liabilities - net of
effect of business acquisitions and dispositions:
Accounts receivable 392,716 (313,913) 2,208,904
Inventories 785,423 (397,713) 1,978,659
Income taxes receivable (62,113) 42,200 (119,500)
Prepaid expenses and other current assets (52,468) (31,021) 4,644
Other assets (9,688) (80,723) (181,504)
Accounts payable (1,383,038) 578,565 (5,235,025)
Accrued expenses (717,878) (604,266) 568,636
Accrued restructuring costs (647,242) (420,165) 1,111,133
Customer deposits 93,978 (148,006) (347,215)
----------- ---------- -----------
Net cash provided by (used in) operating activities 405,581 468,151 (2,486,750)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (199,356) (255,320) (86,828)
Proceeds from sale of property and equipment 5,233 157 6,462
Purchase of intangible assets (64,166)
Acquisition of other assets (31,904)
Proceeds from business disposition 1,000,000
----------
Net cash (used in) provided by investing activities (194,123) 744,837 (176,436)
----------- ---------- -----------
(Continued)
F-7
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ----------------------------------------------------------------------------------------------------------------
2004 2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 38,844,614 16,785,191 19,506,353
Repayments under lines of credit (39,566,496) (18,390,045) (20,027,304)
Borrowings under long-term debt 600,000
Repayment of long-term debt (422,704) (2,731,323) (872,711)
Repayment on capital leases (29,076) (36,666) (47,192)
Proceeds from issuance of stock 32
Proceeds from issuance of preferred stock - net of costs 571,164 3,364,031 3,167,170
Stock repurchases (18)
Net cash (used in) provided by financing activities (602,466) (1,008,812) 2,326,298
----------- ----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (391,008) 204,176 (336,888)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 489,911 285,735 622,623
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 98,903 489,911 285,735
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:
Interest 728,358 698,685 741,905
=========== =========== ==========
Income taxes 60,910 30,000 256,100
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Forgiveness of notes payable (150,000)
===========
Equipment acquired under capital lease 25,304 54,745
=========== =========== ==========
Issuance of note payable for debt refinancing cost 250,000
===========
Discount on issuance of note payable for legal services 12,827 (12,827)
=========== ===========
Fair value of common stock cancelled in sale of asset 64,341
===========
Fair value of common stock cancelled in legal settlement 42,548
===========
Common stock issued for services 4,250 25,000
=========== ==========
See notes to consolidated financial statements. (Concluded)
F-8
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
PrimeSource Healthcare, Inc. ("PrimeSource" or the "Company"), a
Massachusetts corporation formerly known as Luxtec Corporation ("Luxtec"),
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, Inc., a wholly owned subsidiary of
the Company ("PrimeSource Surgical"), sold all of the issued and outstanding
capital stock of Ruby Merger Sub, Inc., an indirect wholly owned subsidiary
("Ruby") for cash proceeds of $1,000,000 to New England Medical Specialties,
Inc., a newly formed entity. The Company recognized a loss of $73,830 on the
sale. The cash proceeds were used to payoff a portion of the Company's
outstanding long-term debt.
Prior to the sale of Ruby, effective June 30, 2002 the Company sold all of
the assets of Professional Equipment Corporation, a wholly owned subsidiary
of Ruby ("PEC"), line of business in exchange for the cancellation of
previously issued stock to the founder of PEC and the assumption of certain
liabilities with respect to the PEC line of business. Goodwill and other
impaired assets were written off in 2002, resulting in a loss of $1,038,823,
which is recorded as restructuring expenses in the consolidated statement of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared on the accrual basis of accounting.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries: PrimeSource
Surgical; Ruby (see Note 3) and Bimeco, Inc. All intercompany balances and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company primarily sells to hospitals and other
healthcare providers, and ongoing customer credit evaluations are performed
with respect to the Company's customers. Collateral is generally not
required. In addition, the Company does not routinely maintain cash in
excess of $100,000 and, as a result, at June 30, 2004, the Company had no
uninsured cash balances.
F-9
INVENTORIES consist of raw materials and finished goods, stated at the lower
of cost or market. Cost is recorded using the first-in first-out method for
Luxtec and average costing for the remaining companies.
INVENTORY RESERVES FOR OBSOLESCENCE - The Company writes down its 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.
PROPERTY AND EQUIPMENT are recorded at cost. Depreciation has been provided
using the straight-line method over estimated useful lives, generally three
to ten years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful life of the asset or the
lease term.
LONG-LIVED ASSETS - The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets should
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The
Company periodically reviews the carrying value of long-lived assets to
determine whether impairment to such value has occurred.
GOODWILL AND OTHER INTANGIBLE ASSETS - Effective July 1, 2002, for the
Company goodwill is no longer amortized but instead is subject to periodic
impairment testing in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). See Note 6. Intangible assets with
finite lives are stated at cost, net of accumulated amortization and are
tested for impairment in accordance with SFAS No. 144. These assets are
amortized on the straight-line method over the estimated useful lives or
periods of expected benefit, but not in excess of 20 years. Intangible
assets with indefinite lives are no longer amortized but instead are subject
to periodic impairment testing in accordance with SFAS No. 142. In
accordance with SFAS No. 142, the Company performed its annual impairment
test in July 2003 and found no further impairment in its existing goodwill
balances.
OTHER ASSETS consist principally of deposits and deferred financing costs.
Deferred financing costs are amortized over the life of the related debt
using the effective interest method.
REVENUE RECOGNITION - The Company recognizes revenue at the time of shipment
and passage of title. The Company also receives revenues under certain
agency arrangements and recognizes revenue, on a net basis, when the agency
sale is complete. Provision is made currently for estimated sales returns
and allowances, which have historically been insignificant. The Company
expenses warranty costs as incurred as amounts have historically been
insignificant, and Luxtec offers minimal warranty of products. There were no
warranty costs for the years ended June 30, 2004, 2003 and 2002.
SHIPPING AND HANDLING COSTS are included in costs of sales.
RESEARCH AND DEVELOPMENT COSTS are incurred by the Company's Luxtec division
and are charged to operations as incurred. Total research and development
costs for the years ended June 30, 2004, 2003 and 2002 were approximately
$185,000, $253,000 and $87,000 respectively.
INCOME TAXES - The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under SFAS No. 109,
income taxes are recognized for: (a) the amount of taxes payable or
F-10
refundable for the current year, and (b) deferred tax liabilities and assets
for the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic-value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. 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.
Had compensation expense for these employee stock option grants been
determined based on the fair value at the grant dates, consistent with SFAS
No. 123, the Company's net income (loss) for fiscal years ending 2004, 2003
and 2002 would have been the pro forma amounts indicated below:
2004 2003 2002
Net income (loss) available to common stockholders, as
reported $ 1,606,049 $ 7,033,848 $ (8,843,134)
Stock-based employee compensation expense determined under
fair-value method (576,585) (521,258) (401,185)
------------ ------------ -------------
Pro forma net income (loss) $ 1,029,464 $ 6,512,590 $ (9,244,319)
============ ============ =============
Earnings (Loss) Per Share:
Basic- as reported $ 0.07 $ 0.33 $ (1.11)
Basic- pro forma $ 0.05 $ 0.31 $ (1.16)
Diluted- as reported $ 0.07 $ 0.15 $ (1.11)
Diluted- pro forma $ 0.05 $ 0.14 $ (1.16)
Black-Scholes Assumptions
Risk-free interest rate 4.23% 3.10% 5.21%
Expected volatility 50% 50% 50%
Expected lives - in years 6 6 7
Expected dividend yield 0% 0% 0%
FINANCIAL INSTRUMENTS - Pursuant to SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, the Company is required to disclose the fair
value of all financial instruments at June 30, 2004, 2003 and 2002. The
Company generally considers the carrying value of such amounts in the
financial statements to approximate their fair value due to the relatively
short period of time between origination of the instruments and their
expected realization or the variable interest rate nature of such
instruments. At June 30, 2004, 2003 and 2002, the estimated fair value of
the company's long-term debt was approximately $106,000, $666,000 and
$3,100,000, respectively. The Company estimates the fair value of its
long-term debt generally using discounted cash flow analysis based on
current interest rates for instruments with similar maturities.
F-11
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
LOSS PER COMMON SHARE - SFAS No. 128, EARNINGS PER SHARE, requires the dual
presentation of basic and diluted earnings (loss) per share on the face of
the statement of operations and the disclosure of the reconciliation between
the numerators and denominators of basic and diluted earnings (loss) per
share calculations. The following represents a reconciliation from basic
earnings per share to diluted earnings per share. Options and warrants to
purchase common stock totaling 26,562,698, 1,640,185 and 5,713,342 were
outstanding at June 30, 2004, 2003 and 2002, respectively, but were not
included in the computation of diluted earnings per share because the effect
would be antidilutive. Put warrants totaling 282,022 for the year ended June
30, 2002 were not included in the computation of diluted earnings per share
because the effect would also be antidilutive.
2004 2003 2002
Weighted-average shares outstanding - basic 22,375,130 21,059,853 7,975,208
Incremental shares due to assumed exercise of 14,479,944
outstanding options and warrants
Incremental shares due to assumed conversion of
Series G preferred stock 17,484,715
------------ ------------ ---------
Weighted average shares outstanding - diluted 22,375,130 53,024,512 7,975,208
============ ============ =========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -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 8.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
REVENUE RECOGNITION, which codifies, revises, and rescinds certain sections
of SAB No. 101, REVENUE RECOGNITION, in order to make this interpretive
guidance consistent with current authoritative accounting guidance and SEC
rules and regulations. SAB No. 104 did not have a material impact on the
Company's financial position or results of operations.
On March 31, 2004, the FASB issued an exposure draft, SHARE-BASED PAYMENT,
AN AMENDMENT OF SFAS NO. 123 AND 95. The exposure draft proposes to expense
the fair value of share-based payments to employees beginning in 2005. We
are currently evaluating the impact of this proposed standard on our
financial statements.
F-12
RECLASSIFICATIONS - Certain reclassifications were made to the 2002
consolidated financial statements to conform to the 2003 presentation.
3. ACQUISITIONS AND DISPOSALS
PEC DISPOSAL - As discussed in Note 1, effective September 20, 2002, Ruby
sold all of the assets of the former PEC line of business in exchange for
the cancellation of previously issued stock to the founder of PEC and the
assumption of certain liabilities with respect to the PEC line of business.
Goodwill and other impaired assets were written off in June 2002, resulting
in a loss of $1,038,823, which is recorded in restructuring expense in the
statement of operations.
NEMS DISPOSAL, DISCONTINUED OPERATION - On June 30, 2003, PrimeSource
Surgical sold all of the issued and outstanding capital stock of Ruby for
cash proceeds of $1,000,000 to NMSI. The Company recognized a loss on
disposal of $73,830. Ruby was reported in the critical care business
segment.
Revenues and income from the discontinued operation, net of income tax
effect were as follows:
2003 2002
Net sales $5,740,135 $5,249,566
========== ==========
Income from discontinued operation - net
of income tax effect $ 121,697 $ 101,263
========== ==========
F-13
4. INVENTORIES
Inventories consist of the following at June 30:
2004 2003
Raw materials $ 708,949 $ 776,468
Finished goods 6,693,999 7,847,729
Reserve for obsolescence (670,406) (1,106,232)
---------- ----------
Inventories - net $6,732,542 $7,517,965
========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
2004 2003
Office equipment $ 656,859 $ 466,598
Furniture and fixtures 394,740 346,031
Machinery and equipment 665,750 731,916
Leasehold improvements 503,540 477,8009
========== ==========
Total 2,220,889 2,022,354
========== ==========
Less accumulated depreciation and amortization (1,333,564) (1,025,996)
========== ==========
Property and equipment - net $ 887,325 $ 996,358
========== ==========
Depreciation expense totaled $321,596, $381,145 and $536,707 for the years
ended June 30, 2004, 2003 and 2002, respectively. Property and equipment
held under capital leases amounted to $82,178, $46,291 and $81,194, less
accumulated amortization of $33,548, $30,456 and $26,705, at June 30, 2004,
2003 and 2002, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
In 2001, the FASB issued SFAS No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS,
AND SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 142
modified accounting for business combinations after June 30, 2001 and
affected the Company's treatment of goodwill and other intangible assets
with indefinite lives effective July 1, 2002. SFAS No. 142 requires that
goodwill and intangible assets with indefinite lives existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
performed at least annually. Additionally, intangible assets with finite
lives must be assessed and classified consistent with the statement's
criteria. Intangible assets with finite lives will continue to be amortized
over those periods. Amortization of goodwill and intangible assets with
indefinite lives will cease.
F-14
The following table sets forth, for the year ended June 30, 2002, a
reconciliation of net income to conform to the requirements of SFAS No. 142.
2002
Reported net loss $(6,190,563)
Add back -
Goodwill amortization 1,722,256
------------
Adjusted net loss $(4,468,307)
============
Basic earnings per share:
Reported net loss $ (1.11)
Goodwill adjustments 0.21
------------
Adjusted net loss $ (0.90)
============
Diluted earnings per share:
Reported net loss $ (1.11)
Goodwill adjustments 0.21
------------
Adjusted net loss $ (0.90)
============
There were no changes in the carrying amount of goodwill for the year ended
June 30, 2004.
7. LINES OF CREDIT AND LONG-TERM DEBT
Lines of credit consisted of the following as of June 30:
2004 2003
Line of credit - PrimeSource Healthcare $5,204,139
Line of credit - PrimeSource Surgical $4,654,436
Line of credit - Luxtec 1,271,585
---------
Total line of credit $5,204,139 $5,926,021
=========== ==========
In December 2003, the Company consolidated its previously outstanding senior
debt facilities. The Company's senior debt financing is now provided under a
$7,500,000 revolving demand note (the "PrimeSource Healthcare Line of
Credit") from Wells Fargo Business Credit, Inc. ("Wells Fargo") 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"). 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 ($6,757,524 at June 30, 2004). As of June
30, 2004, borrowings bore interest at Wells Fargo's prime rate plus 3.0%
(7.25% at June 30, 2004). Borrowings are secured by substantially all assets
held by PrimeSource Healthcare and its subsidiaries. At June 30, 2004, there
was $1,553,385 of availability under the PrimeSource Healthcare Line of
Credit.
F-15
The Credit and Security Agreement contains certain covenants, including
covenants that require the maintenance of defined income levels and maximum
capital expenditures. The Company was in compliance with these covenants as
of June 30, 2004.
Prior to December 2003, the Company's senior debt financing was provided
under separate lines of credit at Luxtec and PrimeSource Surgical.
The Company's Amended and Restated Security and Loan Agreement (the "Luxtec
Credit Agreement") provided for a $2,500,000 line of credit (the "Luxtec
Line of Credit") with ARK CLO 2000-1 LIMITED ("ARK"). On August 6, 2002, the
Company amended the Luxtec Credit Agreement whereby ARK waived and amended
certain provisions under the Luxtec Credit Agreement. Under the amendment,
as of June 30, 2003, the maximum amount available to borrow under the Luxtec
Line of Credit was limited to the lesser of $1,275,000 or a certain
percentage of accounts receivable and inventory ($1,271,585 at June 30,
2003). As of June 30, 2003, borrowings bore interest at ARK's prime rate
plus 3.0% (7.0% at June 30, 2003). Unused portions of the Luxtec Line of
Credit accrued a fee at an annual rate of 1.00%. Borrowings were secured by
substantially all of PrimeSource Healthcare's assets, excluding the capital
stock of, and assets held by, PrimeSource Surgical. Borrowings under the
Luxtec Line of Credit were payable upon maturity on December 31, 2003. In
December 2003, the Company refinanced its senior debt facilities, and paid
off the Luxtec Line of Credit in the amount of $1,271,585.
The Company's PrimeSource Surgical Amended and Restated Credit Agreement
(the "PrimeSource Surgical Credit Agreement") with Citizens Bank of
Massachusetts ("Citizens") provided for a line of credit (the "PrimeSource
Surgical Line of Credit") with a maturity date of March 31, 2004. Under the
PrimeSource Surgical Credit Agreement, as amended, the maximum amount
available to borrow under the PrimeSource Surgical Line of Credit was
limited to the lesser of $8,000,000 or a certain percentage of accounts
receivable and inventory, as defined by the PrimeSource Surgical Credit
Agreement ($5,281,805 at June 30, 2003). As of June 30, 2003, borrowings
bore a variable step interest rate at Citizens' prime rate plus 4.50% (8.50%
at June 30, 2003). Unused portions of the PrimeSource Surgical Line of
Credit accrued a fee at an annual rate of 0.375%. Borrowings were secured by
substantially all of the assets directly held by PrimeSource Surgical. In
December 2003, the Company paid off the PrimeSource Surgical Line of Credit
in the amount of $4,793,944.
On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note (the
"PrimeSource Surgical Term Loan") in the original amount of $5,000,000 with
Citizens. 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 funding of the last Preferred Series G round. The PrimeSource
Surgical Term Loan was collateralized by substantially all the assets
directly held by PrimeSource Surgical.
The PrimeSource Surgical Term Loan was also subject to a term loan facility
fee. In December 2003, 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.
F-16
Long term debt includes notes payable as follows:
June 30, June 30,
2004 2003
Luxtec tenant note $ 62,446 $ 77,650
PrimeSource legal counsel note, net of unamortized
discount of $12,827 357,173
PrimeSource Citizens Bank note 187,500
Other long-term note 43,250 43,250
--------- ----------
Total other notes payable 105,696 665,573
Less current portion (16,713) (559,877)
--------- ----------
Total long-term debt $ 88,983 $ 105,696
========= ==========
The Luxtec tenant note is a 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, with remaining payments calculated on a 7-year
amortization table with a balloon payment due on September 19, 2005.
The PrimeSource legal counsel note was 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 for payment of prior accounts payable. This note matured on
May 30, 2004. Special legal counsel reduced the balance of this note by
$150,000 in November 2003. As of June 30, 2004 the note payable had been
paid off.
The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens
for the bank refinancing amendment fee. This note was paid off in December
2003 in connection with the refinancing of the Company's senior debt, as
described above.
8. PREFERRED STOCK
SERIES G REDEEMABLE, CONVERTIBLE 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 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
F-17
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 $571,167 for the year ended
June 30, 2004 are included in interest expense in the consolidated
statements of operations. As of June 30, 2004, cumulative unpaid dividends
on the Series G Stock totaled $1,018,900, and were included in the Series G
Stock in the consolidated balance sheet.
Upon adoption of SFAS No. 150 as of July 1, 2003, the Series G Stock has
been reclassified in the consolidated balance sheet from presentation in the
equity section 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 upon adoption of SFAS No. 150.
During the year ended June 30, 2003, the Company granted 7,500 options to
purchase Series G Stock for $16.00 a share to an executive of the Company.
Options vested one year from August 6, 2002, the date of grant, and have a
10 year life.
On October 15, 2003, one option for the purchase of Series G Stock was
exercised for $16. At June 30, 2004, the remaining 7,499 options were vested
and exercisable.
9. STOCK OPTIONS AND WARRANTS
COMMON STOCK OPTIONS - In January 1997, PrimeSource Surgical adopted a stock
option plan (the "1997 Plan") for the grant of stock options and other
awards to certain officers, key employees, or other persons affiliated with
the Company. The maximum number of shares of common stock that may be issued
pursuant to the 1997 Plan is 12,000,000. The 1997 Plan also provides for
various vesting schedules, as determined by the compensation committee of
the Board of Directors, and options have terms not to exceed 10 years. The
vested options may be exercised at any time and generally expire 10 years
from the date of grant.
The Company issued equity-based options to certain employees during fiscal
year 2003. The exercise price was at the deemed fair market value of the
stock at the date of grant, except as discussed below.
During fiscal year 2003, the Company also issued equity-based options to a
certain employee as required under the executed employment agreement with
the Company. The exercise price was below the deemed fair market value of
the stock at the date of grant. In accordance with the requirements of APB
Opinion No. 25, the Company has recorded equity-based compensation for the
difference between the exercise price of the stock and the deemed fair
market value of the Company's stock at the date of grant. The deferred
equity-based compensation is amortized to expense on a straight-line basis,
over the one-year period during which the options become vested. As of June
30, 2004 and 2003, the Company had recorded cumulative deferred equity-based
compensation related to these options of $10,000 and $110,000, respectively.
On October 15, 2003, fifty options for the purchase of common stock were
exercised for $16.
In addition to the 1997 Plan, the Company has several stock option plans
sponsored by Luxtec. The 1992 stock plan (the "1992 Plan") provides for the
grant of incentive stock options, nonqualified stock options, stock awards,
and direct sales of stock. Under the 1992 Plan, incentive stock options may
be granted at an exercise price not less than the fair market value of the
Company's common stock on the date of grant. The Board of Directors at its
F-18
discretion may grant nonqualified options. The 1992 Plan also provides for
various vesting schedules, as determined by the compensation committee of
the Board of Directors, and have options terms not to exceed 10 years. Under
the 1992 Plan, 500,000 total shares are authorized for issuance.
The 1995 directors' plan (the "1995 Director Plan") was adopted for
non-employee directors and provides that an aggregate of up to 200,000
nonqualified options may be granted to non-employee directors, as determined
by the compensation committee of the Board of Directors. Under the terms of
the 1995 Director Plan, options are granted at not less than the fair market
value of the Company's common stock on the date of grant. The 1995 Director
Plan also provides that the options are exercisable at varying dates, as
determined by the compensation committee of the Board of Directors, and that
they have terms not to exceed 10 years. At both June 30, 2004 and June 30,
2003, there were 64,000 shares available for future grants under the 1995
Director Plan.
WARRANTS - In connection with the issuance of its Series G Stock in August
2002, the Company granted warrants to purchase 3,300,000 shares of common
stock at $.01 per share. The warrants became exercisable on December 31,
2002 and expire in August 2012.
Prior to the issuance and sale of Series G Stock in August 2002, the Company
converted outstanding shares of Series C Stock into shares of Company common
stock. In connection with the conversion of the Series C Stock, the Company
granted former holders of Series C Stock warrants to purchase 7,390,613
shares of common stock with an exercise price of $.01 per share. The
warrants became exercisable on December 31, 2002 and expire in August 2012.
Additionally, exercise prices on warrants to purchase 140,330 shares of
common stock previously issued to certain preferred stockholders were
repriced from $1.68 per share to $.01 per share.
Simultaneously with the conversion of Series C Stock in August 2002, each
outstanding share of Series F Stock was converted into shares of common
stock. In connection with the conversion, the Company granted the former
holders of Series F Stock warrants to purchase 1,614,560 shares of common
stock with an exercise price of $.01 per share. The warrants became
exercisable on December 31, 2002 and expire in August 2012. Additionally,
the exercise price on previously issued warrants to purchase 1,751,130
shares of common stock was adjusted from $1.00 per share to $.01 per share.
The warrants vested immediately and expire in December 2010.
Subsequent to the conversion of the Series C Stock and Series F Stock, each
outstanding share of the Company's Series E Stock was exchanged for shares
of Series G Stock. In connection with the exchange of the Series E Stock,
the Company granted former holders of Series E Stock warrants to purchase
817,000 shares of the Company's common stock with an exercise price of $.01
per share. The warrants became exercisable on December 31, 2002 and expire
in August 2012. Additionally, the exercise price on 1,625,000 warrants to
purchase common stock previously issued to certain Series E Stock
stockholders was repriced from $1.00 per share to $.01 per share. The
warrants vested immediately and expire in July 2011.
An additional 118,605 warrants were issued to certain other stockholders
related to prior year grants with expiration dates of June 2011, and
exercise prices of $1.00 and $2.35.
F-19
Related to a private placement of its preferred stock in September 2000, the
Company granted warrants to purchase 157,860 shares of the Company's common
stock at $1.68 per share. These warrants vested immediately and expire in
September 2011.
Changes in shares under options and warrants, in common stock equivalents,
for the years ended June 30, 2002, 2003 and 2004 are as follows:
Options Warrants
---------------------------- ---------------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Outstanding Price Outstanding Price
Balance, July 1, 2001 3,393,030.00 $ 1.81 1,016,259.00 $ 3.15
Grants 112,000.00 1.00 3,494,780.00 1.01
Canceled (1,864,554.00) 1.72 (438,173) 5.70
------------ -------------
Balance, June 30, 2002 1,640,476 1.85 4,072,866 1.04
Grants 7,487,000.00 0.32 13,122,173 0.01
Canceled (525,212.00) 1.42 (356,485) 1.01
------------ -------------
Balance, June 30, 2003 8,602,264.00 0.53 16,838,554.00 0.02
Grants 1,300,000.00 0.32
Exercised (50.00) 0.32
Cancelled (114,284.00) 1.86 (63,786) 1.18
------------ -------------
Balance, June 30, 2004 9,787,930.00 0.49 16,774,768.00 0.02
============ =============
Vested and exercisable, June 30, 2004 6,544,957.00 16,774,768.00
============ =============
Vested and exercisable, June 30, 2003 1,474,960.00 16,838,554.00
============ =============
Vested and exercisable, June 30, 2002 996,076.00 4,072,866.00
============ =============
The weighted-average per share fair value of option grants in fiscal 2004,
2003 and 2002 was approximately $0.1147, $0.1602 and $0.5803, respectively.
F-20
Outstanding stock options and warrants at June 30, 2004 consist of the
following:
Options Warrants
---------------------------------------- ----------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Contractual Exercise Contractual Exercise
Exercise Prices Shares Life (Years) Price Shares Life (Years) Price
$0.00 - $1.60 9,077,745 6.8 $0.37 16,738,633 7.8 $0.02
$1.61 - $3.20 693,185 5.3 1.98 36,135 6.5 2.03
$3.21 - $4.80 17,000 0.5 4.57
--------- ----------
9,787,930 6.7 0.49 16,774,768 7.8 0.02
========= ==========
Compensation expense in the amount of $10,000 and $110,000 for fiscal 2004
and 2003, respectively, 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.
10. 401(k) RETIREMENT PLAN
The Company and PrimeSource Surgical separately maintain qualified 401(k)
retirement plans. The plans cover substantially all employees who have over
six months of service and have attained ages 18 and 21 for the Company and
PrimeSource Surgical plans, respectively. The 401(k) plans provide for a
contribution by the Company each year. The Company match totaled $145,426,
$110,706 and $169,347, for the years ended June 30, 2004, 2003 and 2002,
respectively.
11. INCOME TAXES
The benefit (provision) for income taxes for the years ended June 30 is
based on the following components:
2004 2003 2002
Current income taxes
Federal $ $ 1,600
State 18,100 $ 61,700
----------------- -------------- ---------------
Total current 19,700 61,700
----------------- -------------- ---------------
Deferred income taxes:
Federal (1,904,700) (172,700) 1,458,900
State (407,100) (18,800) 209,200
----------------- -------------- ---------------
Total deferred (2,311,800) (191,500) 1,668,100
----------------- -------------- ---------------
Change in valuation allowance 2,311,800 191,500 (1,668,100)
----------------- --------------- ----------------
Total $ - $ 19,700 $ 61,700
----------------- -------------- ---------------
F-21
A reconciliation of the provision for income taxes to the amount of income
tax benefit (expense) that would result from applying the federal statutory
rate (35%) to income (loss) before income tax benefit (provision) is as
follows:
2004 2003 2002
Income tax (provision) benefit at statutory rate $ (562,100) $ 1,270,080 $ 2,223,700
Nondeductible warrant put expense (income) 66,500 (33,250)
State tax (expense) benefit, net of federal benefit (73,500) 112,700 202,350
Meals and entertainment (13,700) (20,100) (14,300)
Nondeductible goodwill 78,800 (1,448,700) (613,100)
Change in valuation allowance 2,311,800 191,500 (1,668,100)
Change in prior years estimastes (1,660,600)
General business credit (13,200) (45,000)
Loss on sale of subsidiary (18,100)
Expiration and adjustments of net operating
losses and income tax credits (85,800) (118,000)
Other 5,100 (2,980) 9,400
--------- ------- -----------
Total $ - $19,700 $ 61,700
========= ======= ===========
On an annual basis, the Company reviews its deferred tax assets based on
open tax years, available net operating loss carryforwards and other
factors. Based on its 2004 review, the Company decreased its deferred tax
assets by $1,660,600, and decreased the offsetting valuation allowance by
the same amount.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as
follows at June 30:
2004 2003
Current:
Restructuring reserve 17,000 229,400
Accrued vacation 59,800 62,400
Inventory valuation adjustment 139,000 453,600
Bad debt reserve 49,000 87,700
Accrued distributor costs 205,000
Other 25,300 46,400
---------- ----------
Total current 290,100 1,084,500
---------- ----------
Long-term:
Depreciation and amortization (39,800) 114,600
Credit carryforwards 165,800 243,600
Capital loss carryforwards 516,200 300,100
Charitable loss carryforwards 14,600 6,800
Net operating loss carryforwards 5,254,600 6,763,700
---------- ----------
Total long-term 5,911,400 7,428,800
---------- ----------
Total 6,201,500 8,513,300
Valuation allowance (6,201,500) (8,513,300)
---------- ----------
Total - -
========== ==========
F-22
Certain of the Company's current deferred tax assets, including inventory
valuation adjustment and bad debt reserve, are reduced due to limitations in
deductible amounts relating to the Company's prior acquisition of these assets
in stock transactions.
At June 30, 2004, the Company had federal net operating loss carryforwards of
approximately $13,266,700, pre-tax, and state net operating loss carry forwards
of approximately $10,191,000, pre-tax. The Company's federal and state net
operating losses expire in the tax years ending June 30, 2005 through 2024. At
June 30, 2004, the Company had federal and State research and development credit
carryforwards of approximately $154,800 and $11,000, respectively. The Company's
federal and state credits will generally expire in the tax years ended June 30,
2005 through 2021. The Company also has a federal capital loss carryforward of
approximately $1,326,900, pre-tax, that will begin to expire in the tax year
ending June 30, 2006. Certain changes in stock ownership may result in a
limitation on the amount of net operating loss carryforwards that can be
utilized each year.
A full valuation allowance has been provided against the Company's deferred tax
assets as of June 30, 2004 and 2003, as it is more likely than not that
sufficient taxable income will not be generated to realize these temporary
differences. Any future reduction of the valuation allowance established at the
dates of the acquisitions (see Note 3) will reduce the goodwill related to such
acquisition.
12. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space and certain computer equipment and
software under capital and noncancelable operating leases. Rent expense for the
years ended June 30, 2004, 2003, and 2002 was $628,259, $654,116 and $726,455,
respectively. Minimum annual lease payments under capital and noncancelable
operating leases are as follows for the years ending June 30:
CAPITAL OPERATING
LEASES LEASES
2005 26,124 606,293
2006 19,691 266,250
2007 4,411 8,132
2008 1,645
-------- --------
Total minimum lease payments 50,226 $882,320
========
Amount representing interest (6,509)
--------
Present value of future minimum lease payments 43,717
Less current portion of capital lease obligations (21,568)
--------
Capital lease obligations - net of current portion $22,149
========
EXECUTIVE COMPENSATION - At June 30, 2004, certain executive officers of the
Company and its subsidiaries had employment agreements that provide for
compensation and certain severance benefits. As a result of an employment
agreement with the Company's former President/Chief Executive Officer certain
benefits were accrued at June 30, 2003 in the amount of $195,507. All accrued
amounts were paid as of June 30, 2004.
LITIGATION - The Company is involved in litigation incidental to its business.
Management does not believe the ultimate disposition of this litigation will
have a material adverse effect on the Company's consolidated financial
statements.
F-23
On September 5, 2002, former executive officers and directors of the Company
filed a complaint in Arizona Superior Court, County of Pima. The complaint
alleged a breach by the Company of the severance agreements with each of the
officers. The complaint was settled in November 2003. The terms of the
settlement included cash payments totaling $125,000 to the officers over a
period of four months, ended in February 2004.
During the quarter ended September 30, 2002, the Company resolved an outstanding
matter relating to alleged non-compete violations with a former employee.
Pursuant to the terms of the settlement, the former employee paid the Company a
cash settlement in the amount of $168,099, net of costs of $71,901, and returned
for cancellation 132,963 shares of Company common stock valued at $42,548.
13. BUSINESS SEGMENTS
The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing, Specialty
Distribution Services - Surgical, and Specialty Distribution Services - Critical
Care. A description of each segment and principal products and operations are as
follows:
SPECIALTY MANUFACTURED PRODUCTS - This segment includes the Luxtec division
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 MEDICAL DISTRIBUTION - SURGICAL - The surgical segment is a
regional sales and marketing organization that markets and sells surgical
products primarily to hospitals and surgery centers. The primary specialty
areas include gynecology, cardiovascular, endoscopy, and general surgery.
These products and services are primarily used in hospital operating rooms
and in outpatient surgery centers. This segment does business as PrimeSource
Surgical.
SPECIALTY MEDICAL DISTRIBUTION - CRITICAL CARE - The critical care segment
is a regional sales and marketing organization that sells products primarily
to hospitals and surgery centers in the southeastern and northeastern United
States and includes the Bimeco, Inc. operations. Within this segment, the
primary specialties include maternal and childcare and neonatal intensive
care. The results of the NEMS and PEC operations are only included in fiscal
years prior to their sales in 2003 and 2002, respectively.
In June 2003, the Company sold the capital stock of Ruby which was included
in the Critical Care segment. The segment information has been restated to
reflect historical segment information as adjusted for the reclassification
of the NEMS portion of Ruby's operations as discontinued operations.
Operations that are not included in any of the segments are included in the
category "Other" and consist primarily of corporate staff operations,
including selling, general, and administrative expenses of $2,867,349,
$3,527,516 and $4,194,680 for 2004, 2003, and 2002, respectively.
Operating income for each segment consists of net sales less cost of sales,
selling expenses, depreciation and amortization expenses, and the segment's
F-24
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 segment's operations. Included in the total assets of
the corporate staff operations are property and equipment and other assets.
Certain products of the Specialty Medical Products Manufacturing segment are
sold to the Specialty Medical Distribution - PrimeSource Surgical segment.
Total sales between these segments totaled $5,382,852, $5,055,400 and
$5,178,351 for the years ended June 30, 2004, 2003 and 2002.
Disclosures regarding the Company's reportable segments including a
corporate management fee allocation with reconciliation to consolidated
totals are presented below.
DISTRIBUTION - DISTRIBUTION -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales
2004 $27,330,958 $13,296,821 $ 8,135,227 $ 48,763,006
2003 26,181,812 11,939,529 8,238,678 46,360,019
2002 29,412,136 16,743,545 7,540,036 53,695,717
Net income (loss)
2004 $ 774,776 $ 383,550 1,576,755 $(1,129,032) $ 1,606,049
2003 137,765 260,978 $(3,090,253) (937,289) (3,628,799)
2002 448,525 (242,670) 913,610 (7,310,028) (6,190,563)
Total assets
2004 $23,524,547 $ 3,290,404 2,899,675 $ 184,620 $ 29,899,246
2003 25,041,081 3,361,430 2,935,095 326,934 31,664,540
2002 14,827,268 6,895,708 $15,406,712 457,080 37,586,768
Restructuring expenses
2004 $ 4,817 $ 4,817
2003 345,507 345,507
2002 $ 1,038,823 2,915,675 3,954,498
Depreciation and amortization
2004 $ 133,736 $ 1,058 $ 186,802 $ 171,929 $ 493,525
2003 195,959 24,048 155,984 467,509 843,500
2002 243,350 170,495 1,344,814 696,422 2,455,081
Interest expense
2004 $ 219,370 $ 152,790 $ 121,078 $ 814,702 $ 1,307,940
2003 282,899 129,604 111,959 314,781 839,243
2002 273,612 207,856 159,218 38,558 679,244
F-25
PrimeSource Surgical and its subsidiaries have no significant sales to foreign
companies; however, Luxtec has several foreign customers. The Company's external
sales, based upon the customer's country of origin by geographic area for the
years ended June 30, 2004, 2003 and 2002, totaled $46,065,000, $44,015,000 and
$51,688,000 respectively for sales in the United States and $2,698,000,
$2,345,000 and $2,008,000, respectively, for sales to foreign companies.
14. RESTRUCTURING
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,
and several members of the Company's senior management team resigned, including
the Company's 2002 Chief Executive Officer, Chief Financial Officer and Chairman
and Executive Vice President.
In fiscal year 2003, the Company recorded additional severance amounts for the
resignation of its 2003 President and Chief Executive Officer, costs of probable
legal settlement for two former executive officers and directors of the Company
and the sale of NEMS. Activity consists of the following:
Loss on
Employee disposal Other
related of division contracts Total
Estimated costs for 2002 restructuring $1,379,000 $1,038,823 $1,536,675 $3,954,498
Cash payments (585,000) - (901,000) (1,486,000)
Other adjustments (141,000) (1,038,823) (177,542) (1,357,365)
---------- ----------- ---------- -----------
Balance, June 30, 2002 653,000 - 458,133 1,111,133
Estimated costs for 2003 restructuring 195,507 150,000 345,507
Cash payments (584,739) (166,320) (751,059)
Other adjustments - - (14,613) (14,613)
---------- ----------- ---------- -----------
Balance, June 30, 2003 263,768 - 427,200 690,968
Cash payments (263,768) (159,584) (423,352)
Other adjustments - - (223,890) (223,890)
---------- ----------- ---------- -----------
Balance, June 20, 2004 $ - $ - $ 43,726 $ 43,726
========== =========== ========== ===========
******
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 June
30, 2004. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of June 30, 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 (the registrant's fourth fiscal
quarter in the case of our annual report) that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item relating the Executive Officers is
incorporated by reference from the material captioned "Directors",
"Identification of Executive Officers", and "Section 16(A) Beneficial Ownership
Reporting Compliance" in our definitive proxy statement for our annual meeting
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference from the
material captioned "Executive Compensation" in our definitive proxy statement
for our annual meeting which will be filed within 120 days after the end of the
fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Information required under this Item is incorporated by reference from the
material captioned "Security Ownership of Management" and "Security Ownership of
Certain Beneficial Owners" in our definitive proxy statement for our annual
meeting which will be filed within 120 days after the end of the fiscal year
covered by this report.
64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated by reference from the
material captioned "Certain Relationships and Related Transactions" in our
definitive proxy statement for our annual meeting which will be filed with 120
days after the end of the fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is incorporated by reference from the
material captioned "Audit Fees" in our definitive proxy statement for our annual
meeting which will be filed within 120 days after the end of the fiscal year
covered by this report.
65
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
---------------------------------
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003.
Consolidated Statements of Operations
for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.
Consolidated Statements of Cash Flows for the years ended June 30, 2004,
June 30, 2003 and June 30, 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules - Schedule II
66
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
Additions
--------------------------------
Balance at the Charged to Balance at
beginning of costs and Charged to the end of
year expenses other amounts Deductions the year
FOR THE YEAR ENDED JUNE 30, 2003:
Accounts receivable allowances for
doubtful accounts $ 400,373 $173,345 $ (92,964) $ (266,859) $ 213,895
Inventory reserves for obsolescence 1,598,172 416,716 (80,869) (827,787) 1,106,232
Deferred income tax valuation allowance 8,704,800 (191,500) 8,513,300
----------- -------- ------------ ----------- ---------
Total allowances deducted from assets $10,703,345 $590,061 $ (173,833) $(1,286,146) $9,833,427
=========== ======== ============ =========== =========
FOR THE YEAR ENDED JUNE 30, 2004:
Accounts receivable allowances for
doubtful accounts $ 213,895 $ 34,415 $ (115,835) $ 132,475
Inventory reserves for obsolescence 1,106,232 159,406 (595,232) 670,406
Deferred income tax valuation allowance 8,513,300 $ (2,311,800) 6,201,500
----------- -------- ------------ ----------- ---------
Total allowances deducted from assets $ 9,833,427 $193,821 $ (2,311,800) $ (711,067) $7,004,381
=========== ======== ============ =========== =========
67
3. Exhibits
--------
Each exhibit set forth below in the Index to Exhibits is filed as a part of this
report. All exhibits not filed herewith are incorporated herein by reference to
a prior filing as indicated.
3.1 Articles of Organization. (Incorporated by reference to Form
S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.6 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.7 Amendment, dated September 16, 1996, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.8 Certificate of Vote of Directors Establishing a Series of a
Class of Stock dated September 16, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.9 Certificate of Correction dated October 4, 1996.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1996).
3.11 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series B Convertible
Preferred Stock). (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on March 16, 2001).
3.12 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on March 16, 2001).
68
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).
69
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Amended and Restated Loan and Security Agreement, dated March
2, 2001, by and among Luxtec Corporation, Fiber Imaging
Technologies, Inc., Cathtec Incorporated, CardioDyne, Inc.
and ARK CLO 2000-1, Limited. (Incorporated by reference to
Form 10-Q, File No. 0-14961, filed May 21, 2001).
10.8 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).
70
10.9 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).
10.10 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed January
28, 1994).
10.11 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.12 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).
10.13 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).
10.14 Form of Warrant. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed July 11, 2001).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
71
10.20 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).
21.1 Subsidiaries of the Registrant.
31.1 Certification of the President 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 the President and CFO Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
72
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRIMESOURCE HEALTHCARE, INC.
by /s/Joseph H. Potenza
-------------------------------------
Joseph H. Potenza, President and
Chief Executive Officer
September 28, 2004
73
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William H. Lomicka Director September 28, 2004
- ----------------------
William H. Lomicka
/s/ Larry H. Coleman Director September 28, 2004
- ---------------------------
Larry H. Coleman
/s/ Joseph H. Potenza September 28, 2004
- --------------------------- President, Chief Executive
Joseph H. Potenza Officer, Director, (Principal
Executive Officer)
/s/ Shaun D. McMeans September 28, 2004
- --------------------------- Chief Operating Officer,
Shaun D. McMeans Chief Financial Officer
and Treasurer, Director,
(Principal Accounting
Officer)
74