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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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—000-14961

PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

                                                                       Massachusetts                                                                 &nbs p;                                                 04-2741310
                                                             (State or other jurisdiction of                                                                         & nbsp;                               (I.R.S. Employer
                                                             incorporation or organization)                                                                         &n bsp;                              Identification No.)

3708 E. Columbia Street, Tucson, AZ 85714
(Address of principal executive offices) (Zip code)

(Registrant’s telephone number, including area code)
(520) 512-1100


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes _X _ No ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ___  No _X _. 

On November 10, 2004, there were 22,375,144 shares of the Registrant’s common stock outstanding.
 

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PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS                                                                                                                                      
 
Part I Financial Information

Page

Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004  3
Consolidated Statements of Income for the three months ended  
September 30, 2004 5
Consolidated Statements of Cash Flows for the three months ended
September 30, 2004 6
  Notes to Consolidated Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure about Market Risk 22
Item 4. Controls and Procedures 22
Part II Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
Signatures 24
 
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PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS                                                                     
 
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND JUNE 30, 2004      

September 30,

June 30,

ASSETS

2004

2004

CURRENT ASSETS:
  Cash and cash equivalents   $                 76,580    $               98,903 
  Accounts receivable—net of allowance for doubtful accounts 
    of approximately $94,000 and $132,000, respectively                 6,395,590                5,718,346 
  Inventories—net                 6,688,246                6,732,542 
  Income taxes receivable                    155,118                   129,913 
  Prepaid expenses and other current assets                    158,331                   224,865 
           Total current assets               13,473,865              12,904,569 
PROPERTY AND EQUIPMENT—Net                    811,143                   887,325 
INTANGIBLE ASSETS—Net of accumulated amortization 
  of $246,770 and $244,565, respectively                      58,068                     60,273 
GOODWILL—Net                15,956,883              15,956,883 
OTHER ASSETS                      87,548                     90,196 
TOTAL   $          30,387,507    $        29,899,246 

(Continued)



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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND JUNE 30, 2004      
LIABILITIES AND STOCKHOLDERS' EQUITY 

September 30,

 

June 30, 

 

2004

 

2004

 

 

 
CURRENT LIABILITIES:
  Accounts payable   $            3,889,913    $          4,253,295 
  Accrued expenses                 1,437,347                1,509,432 
  Accrued restructuring costs                                                      43,726 
  Customer deposits                    207,509                   166,873 
  Lines of credit                 5,448,263                5,204,139 
  Current portion of notes payable                      17,113                     16,713 
  Current portion of capital lease obligations                      21,891                     21,568 
           Total current liabilities               11,022,036              11,215,746 
CAPITAL LEASE OBLIGATIONS—Net of current portion                      16,410                     22,149 
NOTES PAYABLE—Net of current portion                      84,552                     88,983 
SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK—
  No par value—authorized 230,000 shares; issued and outstanding,
  222,501 shares; aggregate liquidation preference of $15,402,535 and
  $15,258,964, respectively.                 8,282,504                8,138,933 
               Total liabilities               19,405,502              19,465,811 
COMMITMENTS AND CONTINGENCIES (Notes 5, 11 and 12)
STOCKHOLDERS' EQUITY:
  Common stock, $0.01 par value—authorized 75,000,000 shares; issued and
    outstanding, 22,375,144 shares                    223,751                   223,751 
  Additional paid-in capital               19,295,451              19,295,451 
  Accumulated deficit               (8,537,197)             (9,085,767)
  Net stockholders' equity               10,982,005              10,433,435 
TOTAL   $          30,387,507    $        29,899,246 
See notes to condensed consolidated financial statements.

(Concluded)


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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004 and 2003      

  Three Months

 Ended

   September

  30,
        2004         2003
NET SALES  $     12,568,910  $      12,162,316
 
COST OF SALES           8,003,462                  7,665,890     
GROSS PROFIT           4,565,448                  4,496,426      
OPERATING EXPENSES:
  Selling expenses           1,994,296            2,018,248
  General and administrative expenses           1,510,414            1,740,322
  Depreciation and amortization expenses                80,429                     157,339      
    Total operating expenses           3,585,139                  3,915,909      
OPERATING INCOME              980,309               580,517
INTEREST EXPENSE            (270,850)             (299,969)
OTHER EXPENSE            (155,889)                    (78,724)     
INCOME FROM OPERATIONS              553,570               201,824
INCOME TAX PROVISION                (5,000)                                       
NET INCOME  $          548,570  $               201,824
INCOME PER SHARE
    Basic  $                0.02  $                 0.01
    Diluted  $                0.02  $                 0.01
WEIGHTED AVERAGE SHARES USED IN COMPUTATION 
   OF INCOME PER SHARE
    Basic         22,375,144          22,375,094
    Diluted         22,375,144          22,375,094
See notes to condensed consolidated financial statements.

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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003      

   Three months

  ended

          September

 30,
         2004         2003
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income   $        548,570    $        201,824 
  Adjustments to reconcile net income to net cash used in
    operating activities:
   Depreciation and amortization               80,429             157,339
   Loss on disposal of property and equipment and intangibles                 5,463                     64
   Issuance of compensatory stock options              10,000
   Change in operating assets and liabilities:
      Accounts receivable           (677,244)            119,008
      Inventories              44,296              97,467
      Income taxes receivable             (25,205)                 (569)
      Prepaid expenses and other current assets              66,534               9,866
      Other assets                2,648            (26,151)
      Accounts payable           (363,382)          (537,862)
      Accrued expenses              71,486           (253,690)
      Accrued restructuring costs             (43,726)          (129,696)
      Customer deposits              40,636                8,103 
           Net cash used in operating activities           (249,495)          (344,297)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment              (8,140)            (43,449)
  Proceeds from the sale of property and equipment                  635                     40 
           Net cash used in investing activities              (7,505)            (43,409)

(Continued)


 
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003    

   Three months  

 ended

        September

30,

      2004

         2003
CASH FLOWS FROM FINANCING ACTIVITIES:
   Borrowings under lines of credit  $    12,085,262   $     5,048,982
   Repayments on lines of credit      (11,841,138)        (4,704,833)
   Repayments on notes payable               (4,031)           (213,667)
   Repayments on capital leases               (5,416)               (7,998)
           Net cash provided by financing activities             234,677             122,484 
NET DECREASE IN CASH AND CASH EQUIVALENTS              (22,323)           (265,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               98,903              489,911 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $           76,580    $        224,689 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION -Cash paid during the period for:
    Interest  $          127,279    $        150,653 
    Taxes  $              4,680 
SUPPLEMENTAL DISCLOSURES OF NONCASH
  TRANSACTIONS:
    Discount on issuance of note payable for legal services   $          (5,784)
See notes to condensed consolidated financial statements.

 (Concluded) 
 
 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of PrimeSource Healthcare, Inc. (“PrimeSource Healthcare”) and its subsidiaries (collectively, “PrimeSource” or the “Company”). The Company’s wholly owned operating subsidiaries include PrimeSource Surgical, Inc. (“PrimeSource Surgical”) and Bimeco, Inc. (“Bimeco”). All intercompany balances and transactions are eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (hereafter referred to as “generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the three months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year.

PrimeSource Healthcare, a Massachusetts corporation formerly known as Luxtec Corporation, is a specialty medical products sales, marketing, manufacturing, and service company. The Company sells a broad portfolio of specialty medical products, some of which it manufactures, to hospitals and surgery centers nationwide through a dedicated organization of sales and marketing professionals.

Certain reclassifications have been made to the fiscal 2004 consolidated financial statements to conform to the current presentation.

2. New Accounting Pronouncements

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure draft, Share-Based Payment, an Amendment of SFAS No. 124 and 95. The exposure draft proposes to expense the fair value of share-based payments to employees for periods beginning after June 15, 2005. We are currently evaluating the impact of this proposed standard on our financial statements.

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3. INVENTORIES

At September 30, 2004 and June 30, 2004, inventories consisted of the following:

 

September 30,

 

June 30,

 

2004

 

2004

Raw materials   $                     731,063   $          708,949.00
Work-in-process                            65,102                             -  
Finished goods                       6,613,511            6,693,999.00
Reserve for obsolescence                         (721,430)            (670,406.00)
Inventories—net   $                  6,688,246   $       6,732,542.00

4. GOODWILL, INTANGIBLE AND OTHER ASSETS

At both September 30, 2004 and June 30, 2004, the Company had $15,956,883 of recorded goodwill. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company’s goodwill is not subject to amortization.

In accordance with SFAS No. 142, the Company performed its annual impairment test in July 2004 and found no impairment in its existing goodwill balances.

At September 30, 2004 and June 30, 2004, the Company had intangible assets subject to amortization with useful lives of 4 to 20 years, primarily consisting of trademarks and patents with a total cost of $304,838 and accumulated amortization of $246,770 and $244,565, respectively.

The Company also had other intangible assets included in other assets on the balance sheet consisting primarily of security deposits with a total cost of $87,548 and $90,196, respectively.

Intangible and other asset amortization expense for the three months ended September 30, 2004 and 2003 was approximately $2,200 and $79,000, respectively. Estimated amortization expense remaining for the five succeeding fiscal years ending June 30 and thereafter is as follows:
 
2005   $               6,600 
2006                    8,800 
2007                    8,400 
2008                    8,400 
2009                    8,400 
Thereafter                  17,500 
Total   $             58,100 

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5.      LINES OF CREDIT AND NOTES PAYABLE

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 ($7,500,000 at September 30, 2004). As of September 30, 2004, borrowings bore interest at Wells Fargo’s prime rate plus 3.00% (7.75% at September 30, 2004). Borrowings are secured by substantially all assets held by PrimeSource Healthcare and its subsidiaries. At September 30, 2004 and June 30, 2004, there were outstanding borrowings of $5,448,263 and $5,204,139, respectively. At September 30, 2004, there was $2,051,737 of availability under the PrimeSource Healthcare Line of Credit.

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 September 30, 2004.

Notes payable include the Luxtec tenant note payable for tenant improvements to the lessor of Luxtec’s leased premises in West Boylston, Massachusetts. The note bears interest at 9.5% and is due September 19, 2005. Payments were 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. At September 30, 2004 and June 30, 2004, Luxtec had outstanding borrowings of $58,415 and $62,446, respectively, under the tenant note payable. In addition, notes payable include a long-term note with an outstanding balance of $43,250 at both September 30, 2004 and June 30, 2004.

6. RESTRUCTURING AND OTHER CHARGES

In October 2001, PrimeSource engaged a restructuring agent to evaluate the Company’s operations for possible reorganization. In November 2001, the Company commenced with a restructuring plan involving narrowing the focus of the Company’s operations, the consolidation of certain underperforming sales regions, the reduction of corporate overhead through workforce reductions, the restructuring of the Company’s balance sheet through the refinancing of the Company’s and PrimeSource Surgical’s senior bank debt and the reduction of debt levels through improved earnings.

As a result of the restructuring plan, during fiscal year 2002, the Company recorded restructuring costs of approximately $4.0 million consisting of $800,000 in specialized restructuring consultants’ fees, $500,000 related to a remaining lease liability for a facility to be closed, $300,000 in costs for exited product lines related to the closure of the western sales region, $1.4 million in employee severance and $1.0 million attributable to the loss on disposal of a division. Approximately 29 administrative employees were released along with resignation of several members of theCompany’s senior management team, including the Company’s former Chief Executive Officer, its former Chief Financial Officer and i ts former Chairman and Executive Vice President. Accrued restructuring costs remaining at June 30, 2004 totaling $43,726 relating to certain contracts were paid during the quarter ended September 30, 2004.
 

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7. INCOME TAXES

At September 30, 2004 and June 30, 2004, the Company had deferred tax assets primarily resulting from federal net operating loss carryforwards of approximately $5,036,600 and $5,254,600, respectively. A full valuation allowance has been provided against these deferred tax assets as of September 30, 2004 as it is more likely than not that sufficient taxable income will not be generated to realize these carryforwards. In addition, the Company’s federal net operating loss carryforwards may be subject to limitations relating to ownership changes.

The Company generated pre-tax net income of $553,570 for the three-month period ending September 30, 2004. However, this amount is expected to be offset by net operating losses in the Company’s income tax return for the year ended June 30, 2005. The Company recognized income tax expense totaling $5,000 for the three-month period ending September 30, 2004 relating to state income taxes in states with no offsetting net operating loss carryforwards.

The Company generated pre-tax net income of $201,824 for the three-month period ending September 30, 2003. This amount was offset by net operating losses in the Company’s income tax return for the year ended June 30, 2004. The Company recognized no income tax expense for the three-month period ending September 30, 2003.

8. SEGMENT REPORTING

The Company is organized into three operating segments based on management’s operating criteria. These segments are Specialty Medical Products Manufacturing, Specialty Distribution Services—Surgical, and Specialty Distribution Services—Critical Care. A description of each segment and principal products and operations is as follows:

Specialty Medical Products Manufacturing—This segment includes the Massachusetts division acquired in March 2001, which designs and manufactures fiber optic headlight and video camera systems, light sources, cables, retractors, and custom-made and other surgical equipment for the medical and dental industries.

Specialty Distribution Services—Surgical—The surgical segment is a regional sales and marketing organization that markets and sells surgical products primarily to hospitals and surgery centers. The primary specialty areas include gynecology, cardiovascular, endoscopy, and general surgery. These products and services are primarily used in hospital operating rooms and in outpatient surgery centers. This segment does business as PrimeSource Surgical.

Specialty Distribution Services—Critical Care—The critical care segment is a regional sales and marketing organization that sells products primarily to hospitals and surgery centers in the southeastern and northeastern United States. Within this segment, the primary specialties include maternal, childcare, and neonatal intensive care. This segment does business as Bimeco.

Operations that are not included in any of the segments are included in the category “Other” and consist primarily of corporate staff operations, including unallocated corporate general and administrative expenses. Operating income for each segment consists of net revenues less cost of products sold, operating expense, depreciation and amortization, and the segment’s selling, general, and administrative expenses. The sales between segments are made at market prices and are eliminated in consolidation. Cost of products sold reflects current costs adjusted, where appropriate, for lower of cost or market inventory adjustments.
 

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The total assets of each segment consist primarily of net property and equipment, inventories, accounts receivable, and other assets directly associated with the segments’ operations. Included in the total assets of the corporate staff operations are property and equipment, intangibles and other assets.

Total sales between the manufacturing and surgical segments totaled $1,548,917 for the three-month period ended September 30, 2004, and $1,449,569, for the same period in 2003.

The Company charges a management fee allocation to each segment based on estimates of each segment’s corporate resource usage and reclassifies a portion of the corporate expense to the operating segments.

Disclosures regarding the Company’s reportable segments with reconciliations to consolidated totals are presented below:

Distribution –

Distribution –

 

Corporate/

 

 

 

Surgical

Critical Care

Manufacturing

Other/Elimination

Total

Net sales
        2004
  $         7,555,742  $         3,180,578  $           3,381,507  $          (1,548,917)  $        12,568,910
        2003             7,298,033             2,927,299               3,386,553              (1,449,569)            12,162,316
Net income 
        2004                342,083                130,594                  225,042                 (149,149)                 548,570
        2003                214,315                  (3,176)                  295,349                 (304,664)                 201,824
Depreciation and amortization
        2004                  29,179                       338                    48,707                      2,205                   80,429
        2003                  32,850                       177                    44,764                    79,548                 157,339
Interest expense
        2004                  43,536                  46,687                    36,089                  144,538                 270,850
        2003                  87,115                  31,152                    25,228                  156,474                 299,969
Total assets
        September 30, 2004           24,425,814             2,894,519               2,953,405                  113,769            30,387,507
        June 30, 2004           23,524,547             3,290,404               2,899,675                  184,620            29,899,246

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9.      INCOME PER SHARE

Income per share amounts are calculated using net income and weighted average common shares outstanding, which consisted of the following for the three months ended September 30:

                 Three months ended
                        September 30,

2004

2003

Numerator:
  Net income   $         548,570    $      201,824 
     
Weighted average common shares for the purpose of 
    calculating diluted income per share          22,375,144       22,375,094 

For the three months ended September 30, 2004 and 2003, options and warrants to purchase common stock totaling 26,546,150 and 1,632,363, respectively, were not included in weighted average common shares outstanding for the purpose of calculating diluted earnings per share since the result would be antidilutive because the exercise price exceeded the average market price. Upon implementation of SFAS No. 150, the Company’s Series G Convertible Redeemable Preferred Stock, no par value, is no longer considered a dilutive equity security and therefore there was no effect given to the potential dilutive effect of these shares in the calculation of weighted average common shares outstanding for the three months ended September 30, 2004 or 2003.

10. PREFERRED STOCK

On August 6, 2002, the Company created a new series of preferred stock, Series G Convertible Redeemable Preferred Stock, no par value (the “Series G Stock”). The Series G Stock has 230,000 authorized shares. Each share of Series G Stock is convertible into 100 shares of common stock, subject to 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 30, 2005, and is redeemable at the original issue price of $32.00 per share plus accrued but unpaid dividends. The Series G Stock also has special consent rights to certain of the Company’s activities, including, but not limited to, amendment of the Company’s articles or bylaws and merger or consolidation of the Company. Accordingly, accrued dividends of $143,571 for the three-month periods ended September 30, 2004 and 2003, respectively, are included in interest expense in the consolidated statements of income. As of September 30, 2004, cumulative unpaid dividends on the Series G Stock totaled $1,162,471, and were included in the Series G Stock in the consolidated balance sheet.

The Company is evaluating its alternatives with respect to the mandatory redemption feature of Series G.

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.

-13-
 
     
 

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.

11. STOCK OPTIONS AND WARRANTS


Options - At September 30, 2004, the Company had three stock-based employee compensation plans, which are described more fully in Note 9 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Warrants - At September 30, 2004, the Company had warrants outstanding, which are described more fully in Note 9 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

Changes in shares under options and warrants, in common stock equivalents, for the period ended September 30, 2004 are as follows:
 

 
                          Opti

ons 
                       War

rants 

   
          Weighted
   Weighted
          Average
   Average
          Exercise
   Exercise
          Shares
            Price
       Shares
   Price
         
Balance, July 1, 2004
         9,787,930
          $       0.49
            16,774,768
                   $     0.02
 
 
      
Cancellations
             (16,548)
                   1.82
 
 
         
Balance, September 30, 2004
          9,771,382
          $       0.49
            16,774,768
                   $     0.02
         
Vested and exercisable, September 30, 2004
          6,835,841
 
            16,774,768
 
         
Vested and exercisable, June 30, 2004
          6,544,957
 
            16,774,768
  
 
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost based on the fair value of employee stock option and warrant grants. The Company has chosen to continue to account for employee option and warrant grants using intrinsic value under APB Opinion No. 25. However, compensation expense in the amount of $10,000 for the three-month period ended September 30, 2003, has been recognized for certain employee stock options granted below market value. No compensation expense has been recognized for the remaining employee stock option and warrant grant s.

-14-
 
     
 

Had compensation expense for these employee stock option grants been determined based on the fair value at the grant dates, consistent with SFAS No. 123, the Company’s net income for the three months ended September 30, 2004 and 2003 would have been the pro forma amounts indicated below:

        Three Months  

 Ended

              September  

 30,
      2004

2003

Net income, as reported   $      548,570    $    201,824 
 
Stock-based employee compensation expense determined under fair-value method           (94,276)       (275,418)
Pro forma net income (loss)    $     454,294    $    (73,594)
Income (loss) per share:            
  Basic- as reported   $          0.02    $          0.01 
  Basic- pro forma               0.02                0.00 
  Diluted- as reported               0.02                0.01 
  Diluted- pro forma               0.02                0.00 
Black-Scholes Assumptions:
  Risk-free interest rate              4.23%              2.32%
  Expected volatility                 50%                 50%
  Expected lives - in years                   6                    3 
  Expected dividend yield                   0%                   0%

12. COMMITMENTS AND CONTINGENCIES

Subsequent to September 30, 2004, the Company agreed in principal to resolve a legal matter with a former employee. As a result, the Company has accrued certain amounts in other expense relating to the matter.

On October 20, 2004, the Board of Directors recommended that the Company’s Articles of Organization be amended and restated to change our name from PrimeSource Healthcare, Inc. to LXU Healthcare, Inc. The Board recommended the adoption of the Amendment of the Articles after a claim was asserted against the Company by PrimeSource Healthcare Systems, Inc., an Illinois corporation, for, among other things, trademark infringement and unfair competition. The Company has not been served with the complaint. As a result of settlement discussions, the parties have agreed that the dispute can be resolved by changing the Company’s name. The name change has been submitted for vote at the Company’s annual shareholders meeting on December 10, 2004.

The Company is also involved in litigation incidental to its business. Management does not believe the ultimate disposition of this litigation will have a material adverse effect on the Company’s financial position, results of operations or liquidity.  

* * * * * *
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004                                                                                                                                  &nb sp;                          
 
All statements contained herein that are not historical facts, including but not limited to, statements regarding our expectations concerning future operations, margins, profitability, liquidity, capital expenditures and capital resources, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Generally, the words “anticipates,” “believes,” “estimates,” “expects” and similar expressions as they relate to us and our management are intended to identify forward-looking statements. Although we believe that the expectations in such forward-looking statements are reasonable, we cannot assure that any forward-looking statements will prove to be correct. We wish to caution readers not to place undue relian ce on any forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995. The forward-looking statements contained in this quarterly report on Form 10-Q speak only as of the date that we have filed the report. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this report, including to reflect any change in our expectations with regard to that forward-looking statement or any change in events, conditions or circumstances on which that forward-looking statement is based.

Business Overview
 
General

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. 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. The Company was incorporated on November 11, 1981. As of September 30, 2004, we had 136 employees and generated total revenue of $12.6 million for the quarter ended September 30, 2004.

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:

  · hiring experienced territory sales representatives;

  · securing additional specialty product lines to our product offerings; and

  · 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.
 

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We believe our Manufactured Products 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.

Products and Services

Specialty Medical Distribution

Within the Specialty Medical Distribution business, we divide our business into PrimeSource Surgical, or Surgical, and PrimeSource Critical Care, or Critical Care. The Surgical segment is a regional sales and marketing organization that markets and sells a large number of surgical products primarily to hospitals and surgery centers in the midwestern, mid-atlantic and southeastern United States. The Critical Care segment is a regional sales and marketing organization that sells a large number of products primarily to hospitals and surgery centers in the southeastern and northeastern United States.

Within the Surgical segment, the primary specialties are Cardio Vascular, Endoscopy, General Surgery and Gynecology.

Within the Critical Care segment, the primary specialties are Neonatal Intensive Care and Maternal and Child Care.

The sale of specialty disposable products and capital equipment account for the majority of our revenues. Our capital equipment products are typically complex and require significant consultative selling and training of medical staff personnel. Our specialty disposable products are often sold to support the growing base of installed capital equipment products and offer a recurring and stable source of revenue.

The Manufactured Products Division

We operate the Manufactured Products business through our Luxtec division, which designs, manufactures and markets fiber optic headlight and video camera systems, light sources, cables, retractors and surgical and other custom-made equipment for the medical and dental industries. Luxtec has developed a proprietary, fiber optic drawing system designed to manufacture optical glass to a specified diameter. The fibers are utilized in fiber optic cables, which are incorporated with Luxtec's surgical headlight systems and video camera systems, as well as into an array of fiber optic transilluminators utilized with Luxtec’s surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs, and light sources for use with other manufacturers' products, including various endoscopic systems used in minim ally 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.

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Results of Operations

Net Sales—Net sales increased $406,594, or 3.3%, in the three-month period ended September 30, 2004, relative to the comparable period in 2003 primarily due to higher sales volume from existing product lines and the addition of a new selling territory for our proprietary products provided by the Luxtec division. Sales of the Luxtec product increased approximately $245,000 in the three months ended September 30, 2004 compared to the same period in 2003.

Cost of Sales—Cost of sales increased to 63.7% of net sales for the three months ended September 30, 2004, compared to 63.0% of net sales, for the same period in 2003. The increase of $337,572, or 4.4%, in the three-month period ended September 30, 2004 relative to the comparable period in 2003 was primarily the result of the corresponding increase in net sales, as discussed above. The increase in cost of sales as a percentage of net sales in the three-month period ended September 30, 2004 compared to the same period in 2003 is due primarily to the difference in product mix between stocking sales and agency sales. A majority of our business is comprised of stocking relationships whereby we st ock 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 three months, our product mix between stocking and agency based sales has shifted slightly to a lower 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, a decrease in agency sales will increase cost of sales as a percentage of net sales as net sales have decreased with no associated decrease in cost of sales.

Gross Profit—Gross profit was 36.3% of net sales for the three months ended September 30, 2004, and 37.0% of net sales for the same period in 2003. The increase of $69,022, or 1.5%, in the three-month period ended September 30, 2004 relative to the comparable period in 2003 is primarily due to higher sales volume from existing product lines and the addition of a new selling territory for our proprietary products provided by the Luxtec division. Gross profit of the Luxtec product increased approximately $80,000 in the three months ended September 30, 2004 compared to the same period in 2003. The decrease in gross profit margins, as a percentage of net sales in the three-month period ended Sept ember 30, 2004 compared to the same period in 2003, is primarily due to a difference in product mix sold as discussed above. Gross profit from our agency business for the three-month period ended September 30, 2004 was approximately $125,000 less than in the same period in 2003.

Selling Expenses—Selling expenses decreased $23,952 for the three nine months ended September 30, 2004 compared to the same period in 2003. The decrease is primarily due to lower employee benefits and travel and entertainment expenses offset by increased selling commissions. 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 do not generally fluctuate when the product mix of agency and stocking sales varies.

General and Administrative Expenses—General and administrative expenses were 12.0% of net sales, for the three months ended September 30, 2004, compared to 14.3% for the same period in 2003. The decrease of $229,908, or 13.2%, for the three-month period is a result of decreasing legal fees and lower salaries due to the consolidation of positions as certain employees left the Company.

Depreciation and Amortization Expenses—Depreciation and amortization expenses decreased to 0.6% of net sales for the three months ended September 30, 2004, compared to 1.3% of net sales, for the same period in 2003. The decrease of $76,910, or 48.9%, in depreciation and amortization expenses is primarily the result of certain assets and intangible assets becoming fully depreciated prior to the quarter ended September 30, 2004.
 
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Interest Expense—The decrease in interest expense of $29,119, or 9.7%, for the three months ended September 30, 2004 is the result of non-recurring fees on the Company’s senior debt in the quarter ended September 30, 2003. Interest expense on the Company’s senior debt decreased by $23,374 during the three-month period ended September 30, 2004 over the same period in 2003.

Income Tax Provision—The Company recorded $5,000 of income tax expense for the three-month period ended September 30, 2004 and no income tax expense for the same period in 2003. Although the majority of the Company’s current year taxable income for federal and certain states can be eliminated due to the use of net operating loss carryforwards to offset federal and state income tax liabilities, the Company may still be subject to income taxes in certain jurisdictions in the year ending June 30, 2005 based on limitations on the use of its net operating loss carryforwards.

Net Income—Net income increased for the three months ended September 30, 2004, compared to the same period in 2003. The increase of $346,746 for the three-month period resulted primarily from the increase in gross profit and the decrease in both selling expenses and general and administrative expenses discussed above.

Liquidity and Capital Resources

Year to date performance through September 2004 continues to allow us to maintain our cash and retain our credit availability at its higher benchmark since the refinancing. Our cash and availability remains relatively stable due to the consistent sales in the quarter ended September 30, 2004 and working capital management. We expect our cash position to remain stable based on projected second quarter net sales, reductions in non-operating cash outflows and containment or further reductions in operating expenses.  

At September 30, 2004, we had working capital of $2,451,829 compared to $1,688,823 at June 30, 2004. The increase in our working capital was primarily the result of decreased accounts payable, accrued expenses and current obligations for long-term debt and increases in accounts receivable and inventory balances, offset by the increase in the line of credit. Accounts payable, accrued expenses and obligations for long-term debt were paid with the cash generated from operations and the increased availability of the line of credit, as discussed below.

In December 2003, we consolidated our previously outstanding senior debt facilities. Our 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 ($7,500,000 at September 30, 2004). As of September 30, 2004, borrowings bore interest at Wells Fargo’s prime rate plus 3.00% (7.75% at September 30, 2004). Borrowings are secured by substantially all assets held by PrimeSource Healthcare and its subsidiaries. At September 30, 2004 and June 30, 2004, there were outstanding borrowings of $5,448,263 and $5,204,139, respectively. At September 30, 2004, there was $2,051,737 of availability under the PrimeSource Healthcare Line of Credit.

The Credit and Security Agreement contains certain covenants, including covenants that require the maintenance of defined income levels and maximum capital expenditures. We were in compliance with these covenants as of September 30, 2004.
 
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Notes payable include the Luxtec tenant note payable for tenant improvements to the lessor of Luxtec’s leased premises in West Boylston, Massachusetts. The note bears interest at 9.5% and is due September 19, 2005. Payments were 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. At September 30, 2004 and June 30, 2004, Luxtec had outstanding borrowings of $58,415 and $62,446, respectively, under the tenant note payable. In addition, notes payable include a long-term note with an outstanding balance of $43,250 at September 30, 2004 and June 30, 2004.

As of September 30, 2004, we had $76,580 of cash. In addition, the principal source of our short-term borrowing is the PrimeSource Healthcare Line of Credit. As of September 30, 2004, we had $2,051,737 of available credit under the PrimeSource Healthcare Line of Credit. In addition, we may attempt to raise additional equity or debt capital in the future.


Application of Critical Accounting Policies
 
Our discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. During preparation of these financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, goodwill and other intangible assets and income taxes. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of a ssets 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 Standards 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 othe r intangible asset exceeds its fair value, we would recognize an impairment loss for the difference between fair value and the carrying amount. If 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 performed its annual impairment test in July 2004 and found no impairment in its existing goodwill balances.
 
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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 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 allowance for doubtful accounts. In determining the amount of the allowance, 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.

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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                                                                        

The Company’s market risk exposure relates to outstanding debt. The outstanding balance of the Company’s credit facilities at September 30, 2004 is $5,448,263, all of which is subject to interest rate fluctuations. A hypothetical 10% change in interest rates applied to the fair value of debt would not have a material impact on earnings or cash flows of the Company.

ITEM 4. CONTROLS AND PROCEDURES                                                                                                                                   &nb sp;                                      

(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 September 30, 2004. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 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 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS                                                                                                                                    &nb sp;                                                      

Subsequent to September 30, 2004, the Company agreed in principal to resolve a legal matter with a former employee. As a result, the Company has accrued certain amounts in other expense relating to the matter.

On October 20, 2004, the Board of Directors recommended that the Company’s Articles of Organization be amended and restated to change our name from PrimeSource Healthcare, Inc. to LXU Healthcare, Inc. The Board recommended the adoption of the Amendment of the Articles after a claim was asserted against the Company by PrimeSource Healthcare Systems, Inc. an Illinois corporation, for, among other things, trademark infringement and unfair competition. The Company has not been served with the complaint. As a result of settlement discussions, the parties have agreed that the dispute can be resolved by changing the Company’s name. The name change will be submitted for vote at the Company’s annual shareholders meeting on December 10, 2004.

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We are also subject to claims and suits arising in the ordinary course of our business. We believe that ordinary course legal proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                                             

None.



ITEM 6. EXHIBITS                                                                                                                                                                                                                   

(a)    Exhibits
 
              See Exhibit Index
 







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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

SIGNATURES                                                                                                                                                                                                                           

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








PRIMESOURCE HEALTHCARE, INC.
                                                      (Registrant)






November 12, 2004                                                                                                           /s/ Shaun D. McMeans
Date                                                                                                                                 Shaun D. McMeans
                                                                                                                                        Chief Financial Officer
 (Principal Accounting Officer and Duly
 Authorized Executive Officer)


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INDEX TO EXHIBITS

  3.1 Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
 
  3.2 Amendment, dated March 30, 1982, to Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
 
  3.3 Amendment, dated August 9, 1984, to Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
 
  3.4 Amendment, dated April 10, 1992, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1993).
 
  3.5 Amendment, dated October 20, 1995, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1995).
 
  3.6 Amendment, dated October 20, 1995, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1995).
 
  3.7 Amendment, dated September 16, 1996, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
 
  3.8 Certificate of Vote of Directors Establishing a Series of a Class of Stock dated September 16, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
 
  3.9 Certificate of Correction dated October 4, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
 
  3.10 Certificate of Correction dated October 4, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
 
  3.11 Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series B Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
 
  3.12 Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series C Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
 
  3.13 Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series D Exchangeable Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
 
  3.14 Certificate of Correction dated March 2, 2001 (Series C Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
 

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  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 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).
 
  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 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 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated by reference to Form 10-K, File No. 0-14961, filed January 28, 1994).
 
 
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  10.3      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).
 
  10.4      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).
 
  10.5      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).
 
  10.6      Form of Warrant. (Incorporated by reference to Form 8-K, File No. 0-14961, filed July 11, 2001).
 
  10.7      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).
 
               10.8      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).
 
  10.9     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).
  
   10.10  Credit and Security Agreement, dated as of December 10, 2003, by and among PrimeSource Healthcare, Inc., PrimeSource Surgical, Inc., 
              Bimeco, Inc. and Wells Fargo Business Credit, Inc. (Incorporated by reference to Form 8-K, File No. 0-14961, filed December 17, 2003).
 
  10.11   WaiverAgreement, 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).
 
  10.12   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.


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