SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number--000-14961
PRIMESOURCE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741310
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 E. COLUMBIA STREET, TUCSON, AZ 85714
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code)
(520) 512-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -----
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 February 10, 2004, there were 22,375,144 shares of the Registrant's common
stock outstanding.
PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 2003
and June 30, 2003 3
Consolidated Statements of Operations for the three
and six months ended December 31, 2003 and 2002 5
Consolidated Statements of Stockholders' Equity for
the six months ended December 31, 2003 and June 30, 2003 7
Consolidated Statements of Cash Flows for the six
months ended December 31, 2003 and 2002 8
Notes to Consolidated Financial Statements for the three
and six months ended December 31, 2003 and 2002 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 26
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 33
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND JUNE 30, 2003
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
ASSETS 2003 2003
CURRENT ASSETS:
Cash and cash equivalents $ 116,745 $ 489,911
Accounts receivable--net of allowance for doubtful accounts
of approximately $224,000 and $214,000, respectively 5,660,742 6,111,062
Inventories--net 7,363,244 7,517,965
Income taxes receivable 68,370 67,800
Prepaid expenses and other current assets 201,111 172,397
----------- -----------
Total current assets 13,410,212 14,359,135
PROPERTY AND EQUIPMENT--Net 910,389 996,358
INTANGIBLE ASSETS--Net of accumulated amortization
of approximately $240,000 and $236,000, respectively 113,879 118,290
GOODWILL--Net 15,956,883 15,956,883
OTHER ASSETS--Net of accumulated amortization of
approximately $0 and $782,000, respectively 91,893 233,874
----------- -----------
TOTAL $30,483,256 $31,664,540
=========== ===========
(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND JUNE 30, 2003
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30,
2003 2003
CURRENT LIABILITIES:
Accounts payable $ 4,426,238 $ 5,636,333
Accrued expenses 1,620,412 2,240,770
Accrued restructuring costs 301,048 690,968
Customer deposits 137,543 72,895
Lines of credit 6,594,430 5,926,021
Current portion of long-term debt 104,753 559,877
Current portion of capital lease obligations 16,076 25,425
------------- -------------
Total current liabilities 13,200,500 15,152,289
CAPITAL LEASE OBLIGATIONS--Net of current portion 15,057 21,433
LONG-TERM DEBT--Net of current portion 97,537 105,696
SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK--
No par value--authorized 230,000 shares; issued and outstanding,
222,501 shares; aggregate liquidation preference of $14,974,942 7,854,910
------------- -------------
TOTAL LIABILITIES 21,168,004 15,279,418
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SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK--
No par value--authorized 230,000 shares; issued and outstanding,
222,500 shares; aggregate liquidation preference of $14,687,737 5,699,121
-------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--authorized 75,000,000 shares; issued and
outstanding, 22,375,144 and 22,375,094 shares, respectively 223,751 223,750
Additional paid-in capital 19,295,451 21,347,451
Accumulated deficit (10,203,950) (10,885,200)
------------- -------------
Net stockholders' equity 9,315,252 10,686,001
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TOTAL $ 30,483,256 $ 31,664,540
============= =============
See notes to condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
NET SALES $12,540,745 $11,587,602 $24,703,061 $23,377,378
COST OF SALES 7,853,005 7,307,103 15,518,895 14,805,956
----------- ----------- ----------- -----------
GROSS PROFIT 4,687,740 4,280,499 9,184,166 8,571,422
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling expenses 2,026,450 1,826,671 4,044,698 3,610,663
General and administrative expenses 1,671,203 1,739,398 3,411,525 3,341,635
Depreciation and amortization expenses 172,912 209,447 330,251 408,489
----------- ----------- ----------- -----------
Total operating expenses 3,870,565 3,775,516 7,786,474 7,360,787
----------- ----------- ----------- -----------
OPERATING INCOME 817,175 504,983 1,397,692 1,210,635
INTEREST EXPENSE (432,063) (237,925) (732,032) (564,892)
OTHER (EXPENSE) INCOME (48,070) 117,295 (126,794) 182,225
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION 337,042 384,353 538,866 827,968
INCOME TAX PROVISION (51,000) (51,000)
----------- ----------- ----------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS
OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 286,042 384,353 487,866 827,968
DISCONTINUED OPERATIONS-
INCOME FROM DISCONTINUED OPERATIONS 31,772 72,387
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE- GOODWILL
IMPAIRMENT (4,454,656)
----------- ----------- ----------- -----------
NET INCOME (LOSS) 286,042 416,125 487,866 (3,554,301)
DIVIDENDS AND ACCRETION ON PREFERRED
STOCK (301,204) (407,323)
EFFECT OF EQUITY RECAPITALIZATION 11,809,741
----------- ----------- ----------- -----------
NET INCOME AVAILABLE FOR COMMON
STOCKHOLDERS $ 286,042 $ 114,921 $ 487,866 $ 7,848,117
=========== =========== =========== ===========
(Continued)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
INCOME PER SHARE BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.01 $ - $ 0.02 $ 0.62
========== ========== ========== ==========
Diluted $ 0.01 $ - $ 0.02 $ 0.28
========== ========== ========== ==========
INCOME PER SHARE FROM DISCONTINUED
OPERATIONS:
Basic $ - $ - $ - $ -
========== ========== ========== ==========
Diluted $ - $ - $ - $ -
========== ========== ========== ==========
LOSS PER SHARE FROM CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE-
GOODWILL IMPAIRMENT:
Basic $ - $ - $ - $ (0.22)
========== ========== ========== ==========
Diluted $ - $ - $ - $ (0.10)
========== ========== ========== ==========
NET INCOME PER SHARE AVAILABLE FOR
COMMON STOCKHOLDERS:
Basic $ 0.01 $ - $ 0.02 $0.40
========== ========== ========== ==========
Diluted $ 0.01 $ - $ 0.02 $0.18
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF INCOME (LOSS) PER SHARE
Basic 22,375,136 22,379,345 22,375,115 19,863,495
========== ========== ========== ==========
Diluted 22,375,136 53,931,087 22,375,115 44,874,973
========== ========== ========== ==========
See notes to condensed consolidated financial statements. (Concluded)
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
-------------------------------
SHARES AMOUNT CAPITAL DEFICIT EQUITY
BALANCE, JULY 1, 2003 22,375,094 $ 223,750 $21,347,451 $(10,885,200) $10,686,001
Reclassification of Series G Convertible,
Redeemable Preferred Stock (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 487,866 487,866
---------- --------- ----------- ------------ ----------
BALANCE, DECEMBER 31, 2003 22,375,144 $ 223,751 $19,295,451 $(10,203,950) $9,315,252
========== ========== =========== ============= ==========
See notes to condensed consolidated financial statements.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
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SIX MONTHS ENDED
DECEMBER 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 487,866 $ (3,554,301)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 330,251 411,591
Goodwill impairment 4,454,656
Loss on disposal of property and equipment and intangibles 39,669 2,428
Issuance of compensatory stock options 10,000 50,000
Debt forgiveness (150,000)
Compensation expense on restricted common stock 4,069
Gain on legal settlement (42,548)
Change in operating assets and liabilities:
Accounts receivable 450,320 444,029
Inventories 154,721 1,254,495
Income taxes receivable (570) 88,931
Prepaid expenses and other current assets (28,714) 25,714
Other assets (65,995) (102,218)
Accounts payable (1,210,095) (883,855)
Accrued expenses (608,716) (746,570)
Accrued restructuring costs (389,920) (431,910)
Customer deposits 64,648 (116,240)
----------- ------------
Net cash (used in) provided by operating activities (916,535) 858,271
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (71,605) (125,603)
Proceeds from the sale of property and equipment 40 90
Acquisition of other assets (700)
----------- ------------
Net cash used in investing activities (71,565) (126,213)
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(Continued)
-8-
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31,
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 16,511,507 7,129,717
Repayments on lines of credit (15,843,098) (8,653,709)
Repayments of long-term debt (324,923) (1,305,086)
Repayments on capital leases (15,725) (17,841)
Accrued unpaid dividends on redeemable preferred stock- Series G 287,141
Proceeds from issuance of common and preferred stock-net of costs 32 2,450,000
----------- ----------
Net cash provided by (used in) financing activities 614,934 (396,919)
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (373,166) 335,139
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 489,911 285,735
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 116,745 $ 620,874
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 248,187 $ 353,779
=========== ===========
Taxes $ 51,000
===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Issuance of note payable for debt refinancing costs $ 250,000
==========
Discount on issuance of note payable for legal services $ (11,640) $ (29,350)
=========== ==========
Fair value of common stock cancelled in sale of assets $ 64,160
==========
Fair value of common stock cancelled in legal settlement $ 42,548
==========
Issuance of compensatory stock options $ 10,000 $ 50,000
=========== ==========
See notes to condensed consolidated financial statements. (Concluded)
-9-
PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
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1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
PrimeSource Healthcare, Inc. ("PrimeSource Healthcare") and its
subsidiaries (collectively, "PrimeSource" or the "Company"). The Company's
wholly owned operating subsidiaries include PrimeSource Surgical, Inc.
("PrimeSource Surgical") and Bimeco, Inc. ("Bimeco"). All intercompany
balances and transactions are eliminated in consolidation.
In December 2003, the Company consolidated its senior debt facilities. The
Company's senior debt financing is now provided under a revolving demand
note from Wells Fargo Business Credit, Inc. ("Wells Fargo"). As of
December 31, 2003, the Company had $6,594,430 of outstanding borrowings
under the PrimeSource Healthcare Credit and Security Agreement, dated as
of December 10, 2003, by and among the Company, PrimeSource Surgical,
Bimeco and Wells Fargo (the "Credit and Security Agreement") as further
discussed in Note 5. The Credit and Security Agreement includes certain
financial covenants, with which the Company was in compliance at December
31, 2003.
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America ("generally accepted accounting
principles") for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three and six months ended December 31,
2003 are not necessarily indicative of the results that may be expected
for the entire year.
PrimeSource, a Massachusetts corporation formerly known as Luxtec
Corporation, is a specialty medical products sales, marketing,
manufacturing, and service company. The Company sells a broad portfolio of
specialty medical products, some of which it manufactures, to hospitals
and surgery centers nationwide through a dedicated organization of sales
and marketing professionals.
On June 30, 2003, PrimeSource Surgical sold all of the issued and
outstanding capital stock of Ruby Merger Sub, Inc., the Company's indirect
wholly owned subsidiary ("Ruby") for cash proceeds of $1,000,000 to New
England Medical Specialties, Inc., a newly formed entity ("NMSI"). Peter
Miller, a stockholder of NMSI, was the Regional Manager of Ruby prior to
the disposition of the capital stock of Ruby. In connection with the sale
of the capital stock of Ruby, Mr. Miller concluded his employment
relationship with PrimeSource. The cash proceeds were used to pay off the
PrimeSource Term Note and reduce the revolving line of credit with
Citizens Bank of Massachusetts. The loss on the disposal of the operation
of $73,830 was included as discontinued operations in the fourth quarter
of fiscal year 2003, and the related results of operations for the
operation were reclassified as discontinued operations.
-10-
Certain reclassifications have been made to the fiscal 2003 consolidated
financial statements to conform to the current presentation. As a result
of the Company's disposal of Ruby in 2003, the Company's previously
reported consolidated financial statements for 2003 have been restated to
present the discontinued Ruby operations separate from continuing
operations.
2. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING PRINCIPLE
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement 150, Accounting for Certain FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS No. 150"). SFAS No.
150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in the fair value or the redemption
amount, as applicable, in earnings. SFAS No. 150 was effective for the
Company as of July 1, 2003. The Company adopted SFAS No. 150 in the
quarter ended September 30, 2003 and, as a result, reclassified its Series
G Convertible Redeemable, Preferred Stock ("Series G Stock") from equity
to a liability. Further effects of this adoption are discussed in Note 10.
3. INVENTORIES
At December 31, 2003 and June 30, 2003, inventories consisted of the
following:
DECEMBER 31, JUNE 30,
2003 2003
Raw materials $ 938,019 $ 775,583
Work-in-process 153,304 885
Finished goods 7,393,836 7,847,729
Reserve for obsolescence (1,121,915) (1,106,232)
------------- -------------
Inventories--net $ 7,363,244 $ 7,517,965
============= =============
4. GOODWILL, INTANGIBLE AND OTHER ASSETS
At December 31, 2003 and June 30, 2003, the Company had $15,956,883 of
recorded goodwill. In accordance with FASB Statement 142, GOODWILL AND
OTHER INTANGIBLE ASSETS ("SFAS No. 142"), beginning July 1, 2002 the
Company's goodwill is not subject to amortization.
In accordance with SFAS No. 142, the Company completed the test for
impairment as of July 1, 2002, and concluded that consolidated goodwill
was impaired. The Company recorded a non-cash charge of $4,454,656 to
reduce the carrying value of its goodwill. This charge was non-operational
in nature and was reflected as a cumulative effect of a change in
accounting principle, effective July 1, 2002, in the accompanying
consolidated statements of operations. No income tax effect was recognized
as the Company is in a loss position and any expense recorded would be
offset by a reduction in the corresponding valuation allowance.
The total impairment amount of $4,454,656 was attributable to the
Company's manufacturing reporting segment and represents a portion of the
previously unamortized goodwill resulting from the Company's reverse
merger with PrimeSource Surgical on March 2, 2001. In calculating the
-11-
impairment charge, the consolidated goodwill was allocated to the
reporting segment based upon the estimated fair value of each reporting
unit. The fair value of each reporting unit was estimated using a weighted
average of the income methodology approach, the market methodology
approach and the asset based approach.
In accordance with SFAS No. 142, the Company has performed its annual
impairment test in July 2003 and found no further impairment in its
existing goodwill balances.
Included in intangible assets at December 31, 2003 and June 30, 2003, the
Company had intangible assets not subject to amortization totaling
$49,196. The Company's intangible assets subject to amortization had
useful lives of 4 to 20 years, primarily consisting of trademarks and
patents with a total cost of $304,838 and $304,838, respectively, and
accumulated amortization of $240,155 and $235,744, respectively.
The Company also had other intangible assets included in other assets on
the balance sheet consisting primarily of deferred financing costs with a
total cost of $922,068 and accumulated amortization of $781,705, at June
30, 2003. The intangible assets related to the two previous banking
facilities were written off in December 2003 in connection with the
Company's consolidation of their debt facility.
Intangible and other asset amortization expense for the three and six
months ended December 31, 2003 was approximately $93,000 and $173,000,
respectively. Estimated, approximate amortization expense remaining for
the five succeeding fiscal years ending June 30 and thereafter is as
follows:
2004 $ 4,400
2005 8,800
2006 8,800
2007 8,400
2008 8,400
Thereafter 25,800
----------
Total $ 64,600
==========
5. LONG-TERM DEBT AND LINES OF CREDIT
At December 31, 2003 and June 30, 2003, lines of credit consisted of the
following:
DECEMBER 31, JUNE 30,
2003 2003
Line of credit--PrimeSource Healthcare $ 6,594,430
Line of credit--PrimeSource Surgical $ 4,654,436
Line of credit--Luxtec 1,271,585
------------ ------------
Total lines of credit $ 6,594,430 $ 5,926,021
============ ============
In December 2003, the Company refinanced its senior debt facilities. The
Company paid off its revolving note under the Amended and Restated
Security and Loan Agreement with ARK CLO 2000-1 LIMITED for $1,271,585.
Simultaneously, the Company paid off its revolving line of credit with
-12-
Citizens Bank of Massachusetts ("Citizens") (the "PrimeSource Surgical
Line of Credit") under the Amended and Restated Credit Agreement (the
"PrimeSource Surgical Credit Agreement") for $4,793,944.
In connection with the refinancing of its senior debt, the Company used
proceeds from the refinancing with Wells Fargo to pay Citizens an $180,000
term loan facility fee described below. PrimeSource Surgical accrued a
$75,000 fee on August 6, 2002, in connection with the amendment to the
PrimeSource Surgical Credit Agreement. PrimeSource Surgical was obligated
to pay an additional $75,000 fee under the PrimeSource Surgical Term Loan
on the last day of each calendar quarter, beginning on September 30, 2002
and for every quarter thereafter until the earlier of payment in full of
the PrimeSource Surgical Term Loan or December 31, 2003. The accrued term
loan facility fees were $300,000 on June 30, 2003, but were reduced by 40%
because on June 30, 2003, the Company paid off the entire outstanding
balance of the PrimeSource Surgical Term Loan in connection with the sale
of Ruby and the most recent offering of Series G Stock.
In conjunction with the Credit and Security Agreement with Wells Fargo,
the Company entered into $7,500,000 revolving demand note (the
"PrimeSource Healthcare Line of Credit"). Pursuant to the Credit and
Security Agreement, the maximum amount available to borrow under the
PrimeSource Healthcare Line of Credit is limited to the lesser of
$7,500,000 or a certain percentage of accounts receivable and inventory,
as defined by the Credit and Security Agreement ($7,322,035 at December
31, 2003). As of December 31, 2003, borrowings bore interest at Wells
Fargo's prime rate plus 3.0% (7.00% at December 31, 2003). Borrowings are
secured by substantially all assets held by PrimeSource Healthcare and its
subsidiaries. At December 31, 2003, there was $727,605 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 December 31, 2003.
Other notes payable include:
DECEMBER 31, JUNE 30,
2003 2003
Luxtec tenant note $ 70,227 $ 77,650
PrimeSource legal counsel note, net of unamortized
discount of $1,187 and $12,827, respectively 88,813 357,173
PrimeSource Citizens Bank note 187,500
Other long-term note 43,250 43,250
--------- ---------
Total other notes payable 202,290 665,573
Less current portion (104,753) (559,877)
---------- ----------
Total long-term debt $ 97,537 $ 105,696
========= ==========
The Luxtec tenant note for tenant improvements to Luxtec's leased premises
in West Boylston, Massachusetts, which bears interest at 9.5% and is due
September 19, 2005. Payments are interest only for the first 12 months,
with remaining payments calculated on a 7-year amortization table with a
balloon payment due on September 19, 2005.
-13-
The PrimeSource legal counsel note is a non-interest bearing demand note
payable with an original balance of $559,977 (net of unamortized discount
of $40,023 based on an imputed interest rate of 8%) to its special legal
counsel in payment of prior accounts payable. This note matures on May 30,
2004. Special legal counsel reduced the balance of this note by $150,000
in November 2003. Monthly principal payments are $30,000 commencing on
March 20, 2004.
The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens
due for the bank refinancing amendment fee. This note was paid off in
December 2003 simultaneous with the refinancing described above.
6. RESTRUCTURING AND OTHER CHARGES
In October 2001, PrimeSource engaged a restructuring agent to evaluate the
Company's operations for possible reorganization. In November 2001, the
Company commenced with a restructuring plan involving narrowing the focus
of the Company's operations, the consolidation of certain underperforming
sales regions, the reduction of corporate overhead through workforce
reductions, the restructuring of the Company's balance sheet through the
refinancing of the Company's and PrimeSource Surgical's senior bank debt
and the reduction of debt levels through improved earnings.
As a result of the restructuring plan, during fiscal year 2002, the
Company recorded restructuring costs of approximately $4.0 million
consisting of $800,000 in specialized restructuring consultants, $500,000
related to a remaining lease liability for a facility to be closed,
$300,000 in costs for exited product lines related to the closure of the
western sales region, $1.4 million in employee severance and $1.0 million
attributable to the loss on disposal of a division. Approximately 29
administrative employees were released along with resignation of several
members of the Company's senior management team, including the Company's
former Chief Executive Officer, its former Chief Financial Officer and its
former Chairman and Executive Vice President. Activity related to accrued
restructuring costs for the six-month period ended December 31, 2003
consisted of the following:
EMPLOYEE OTHER
RELATED CONTRACTS TOTAL
Balance, July 1, 2003 $ 263,768 $ 427,200 $ 690,968
Cash payments (182,366) (132,554) (314,920)
----------- ----------- -----------
Other Adjustments (75,000)
Balance, December 31, 2003 $ 81,402 $ 219,646 $ 301,048
========== ========== ==========
7. INCOME TAXES
At December 31, 2003 and June 30, 2003, the Company had deferred tax
assets resulting from federal net operating loss carryforwards of
approximately $6,569,700 and $6,763,700, respectively. A full valuation
allowance has been provided against these deferred tax assets as of
December 31, 2003 as it is more likely than not that sufficient taxable
income will not be generated to realize these carryforwards.
-14-
8. SEGMENT REPORTING
The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing,
Specialty Distribution Services--Surgical, and Specialty Distribution
Services--Critical Care. A description of each segment and principal
products and operations follows:
SPECIALTY MEDICAL PRODUCTS MANUFACTURING--This segment includes the Luxtec
division acquired in March 2001, which designs and manufactures fiber
optic headlight and video camera systems, light sources, cables,
retractors, and custom-made and other surgical equipment for the medical
and dental industries.
SPECIALTY DISTRIBUTION SERVICES--SURGICAL--The surgical segment is a
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.
The total assets of each segment consist primarily of net property and
equipment, inventories, accounts receivable, and other assets directly
associated with the segments' operations. Included in the total assets of
the corporate staff operations are property and equipment, intangibles and
other assets.
Total sales between the manufacturing and surgical segments totaled
approximately $1,525,080 and $2,974,649 for the three and six-month period
ended December 31, 2003, and approximately $1,284,411 and $2,667,269,
respectively, for the same periods in 2002.
The Company charges a management fee allocation to each segment and
reclassifies a portion of the corporate expense to the operating segments.
-15-
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below for the three
months ending December 31 and total assets as of the end of each period:
DISTRIBUTION DISTRIBUTION
- -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales
2003 $ 7,416,649 $ 3,247,230 $ 1,876,866 $ 12,540,745
2002 6,678,255 2,795,875 2,113,472 11,587,602
Net income (loss)
2003 $ 280,307 $ 143,624 $ 358,599 $ (496,488) $ 286,042
2002 49,386 146,552 298,135 (77,948) 416,125
Depreciation and amortization
2003 $ 32,989 $ 293 $ 46,246 $ 93,384 $ 172,912
2002 52,276 3,111 36,856 117,204 209,447
Interest expense
2003 $ 38,729 $ 22,604 $ 26,231 $ 344,499 $ 432,063
2002 51,702 17,614 27,248 141,361 237,925
Total assets
December 31, 2003 $ 26,122,599 $ 2,301,382 $ 1,984,491 $ 74,784 $ 30,483,256
June 30, 2003 25,041,081 3,361,430 2,935,095 326,934 31,664,540
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below for the six
months ending December 31 and total assets as of the end of each period:
DISTRIBUTION DISTRIBUTION
- -
PRIMESOURCE PRIMESOURCE CORPORATE/
SURGICAL CRITICAL CARE MANUFACTURING OTHER TOTAL
Net sales
2003 $ 14,714,682 $ 6,174,529 $ 3,813,850 $ 24,703,061
2002 12,991,345 6,359,414 4,026,619 23,377,378
Net income (loss)
2003 $ 494,622 $ 140,448 $ 653,948 $ (801,152) $ 487,866
2002 113,426 286,778 (3,636,010) (318,495) (3,554,301)
Depreciation and amortization
2003 $ 65,839 $ 470 $ 91,010 $ 172,932 $ 330,251
2002 117,132 6,104 71,641 213,612 408,489
Interest expense
2003 $ 125,844 $ 53,756 $ 51,459 $ 500,973 $ 732,032
2002 135,727 75,848 61,117 292,200 564,892
Total assets
December 31, 2003 $ 26,122,599 $ 2,301,382 $ 1,984,491 $ 74,784 $ 30,483,256
June 30, 2003 25,041,081 3,361,430 2,935,095 326,934 31,664,540
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9. NET INCOME PER SHARE
Net income per share amounts are calculated using net income available to
common stockholders and weighted average common shares outstanding, which
consisted of the following for the three and six months ended December 31:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
Numerator:
Net income before discontinued
operations and cumulative effect of
change in accounting principle $ 286,042 $ 384,353 $ 487,866 $ 827,968
Discontinued operations 31,772 72,387
Cumulative effect of change in accounting
principle- Goodwill impairment (4,454,656)
Preferred dividends and accretion (301,204) (407,323)
Effect of equity recapitalization 11,809,741
---------- ---------- ---------- ----------
Net income available to common
Stockholders $286,042 $114,921 $487,866 $7,848,117
========== ========== ========== ==========
Denominator: ` `
Basic weighted average common shares
Outstanding 22,375,136 22,379,345 22,375,115 19,863,495
Dilutive effect of:
Warrants 12,712,104 10,239,339
Assumed conversion of Series G Stock 18,839,638 14,772,139
---------- ---------- ---------- ----------
Weighted average common shares for
the purpose of calculating diluted
earnings per share 22,375,136 53,931,087 22,375,115 44,874,973
========== ========== ========== ==========
For the three and six months ended December 31, 2003, options and warrants
to purchase common stock totaling 26,683,295, were not included in
weighted average common shares outstanding for the purpose of calculating
diluted earnings per share because the result would be antidilutive
because the exercise price exceeded the average market price. For the
three and six months ended December 31, 2002, options and warrants to
purchase common stock totaling 5,689,822, were not included in weighted
average common shares outstanding for the purpose of calculating diluted
earnings per share because 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 Stock is no longer considered a
dilutive equity security and therefore there was no effect given to the
potential dilutive effect of these shares in the calculation of weighted
average common shares outstanding for the three and six months ended
December 31, 2003. Put warrants outstanding totaling 282,022 at December
31, 2002 were not included in weighted average common shares for the
purpose of calculating diluted earnings per share because the result would
be antidilutive because the put exercise price exceeded the average market
price.
10. PREFERRED STOCK
On August 6, 2002, the Company created a new series of preferred stock,
Series G Stock, no par value. 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 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
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the Company's articles or bylaws and merger or consolidation of the
Company.
Upon adoption of SFAS No. 150, the Company's Series G Stock has been
reclassified in the consolidated balance sheet as of July 1, 2003 from
equity presentation to the liability section. Upon original issuance of
the Series G Stock, $2,062,000 relating to warrants issued was recorded to
additional paid-in capital. These amounts were reversed out of additional
paid-in capital and the book value of the Series G Stock was increased to
the redemption amount of $7,711,308 upon adoption of SFAS No. 150.
On October 15, 2003, one option for the purchase of Series G Stock was
exercised for $16.
11. STOCK OPTIONS AND WARRANTS
OPTIONS - At December 31, 2003, the Company had three stock-based employee
compensation plans, which are described more fully in Note 9 to the
Company's Annual Report on Form 10-K as filed on October 14, 2003. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
WARRANTS - At December 31, 2003, the Company had warrants outstanding,
which are described more fully in Note 9 to the Company's Annual Report on
Form 10-K as filed on October 14, 2003.
Changes in shares under options and warrants, in common stock equivalents,
for the period ended December 31, 2003 are as follows:
OPTIONS WARRANTS
-------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Balance, July 1, 2003 8,602,264 $ 0.53 16,838,554 $ 0.02
Grants 1,300,000 0.32
Exercised (50) 0.32
Canceled (57,473) 1.27
--------- ----------
Balance, December 31, 2003 9,844,741 $ 0.50 16,838,554 $ 0.02
========= ==========
Vested and exercisable, June 30, 2003 1,474,960 16,838,554
========= ==========
Vested and exercisable, December 31, 2003 4,759,662 16,838,554
========= ==========
The weighted-average fair value of option grants per share for options
granted during the three and six months ended December 31, 2003 was
approximately $0.11 per share.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but
does not require, companies to record compensation cost based on the fair
value of employee stock option and warrant grants. The Company has chosen
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to continue to account for employee option and warrant grants using
intrinsic value under APB Opinion No. 25. However, compensation expense in
the amounts of $30,000 for the three-month period ended December 31, 2002,
and $10,000 and $50,000, respectively for the six-month periods ended
December 31, 2003 and 2002, has been recognized for certain employee stock
options granted below market value. No compensation expense has been
recognized for the remaining employee stock option grants and warrant
grants. Had compensation expense for these employee stock option grants
been determined based on the fair value at the grant dates, consistent
with SFAS No. 123, the Company's net income for the three and six months
ended December 31, 2003 and 2002 would have been the pro forma amounts
indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
Net income available to common
stockholders, as reported $ 286,042 $ 114,921 $ 487,866 $ 7,848,117
Stock-based employee compensation expense
determined under fair-value method (103,399) (101,505) (378,817) (180,669)
---------- ---------- ---------- ------------
Pro forma net income $ 182,643 $ 13,416 $ 109,049 $ 7,667,448
========== ========== ========== ============
Earnings Per Share:
Basic- as reported 0.01 0.00 0.02 0.39
Basic- pro forma 0.01 0.00 0.01 0.39
Diluted- as reported 0.01 0.00 0.02 0.18
Diluted- pro forma 0.01 0.00 0.00 0.17
Black-Scholes Assumptions
Risk-free interest rate 2.32% 2.52% 2.32% 2.53%
Expected volatility 50% 50% 50% 50%
Expected lives- in years 3 3 3 3
Expected dividend yield 0% 0% 0% 0%
12. COMMITMENTS AND CONTINGENCIES
LITIGATION-- On September 5, 2002, John F. Rooney and Michael K. Bayley,
each former executive officers and directors of PrimeSource, filed a
complaint against the Company in Arizona Superior Court, County of Pima.
The complaint alleged a breach by the Company of the severance agreements
with each of Messrs. Rooney and Bayley. The complaint was settled in
November 2003. The terms of settlement included cash payments totaling
$125,000 to Messrs. Rooney and Bayley over a period of four months, ending
in February 2004.
The Company is also involved in litigation incidental to its business.
Management does not believe the ultimate disposition of this litigation
will have a material adverse effect on the Company's financial position,
results of operations or liquidity.
EXECUTIVE COMPENSATION--In August 2002, the Company entered into a
two-year employment agreement with its President and Chief Executive
Officer. The employment agreement committed the Company to minimum
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compensation, severance amounts, and future equity-based incentives. In
September 2003, the Company entered into a severance agreement with the
executive pursuant to which he resigned as the Company's President, Chief
Executive Officer and a member of the Board of Directors. Amounts due
under the severance agreement have been accrued.
* * * * * *
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
All statements contained herein that are not historical facts, including but not
limited to, statements regarding our expectations concerning future operations,
margins, profitability, liquidity, capital expenditures and capital resources,
are based on current expectations. These statements are forward-looking in
nature and involve a number of risks and uncertainties. Generally, the words
"anticipates," "believes," "estimates," "expects" and similar expressions as
they relate to us and our management are intended to identify forward-looking
statements. Although we believe that the expectations in such forward-looking
statements are reasonable, we cannot assure that any forward-looking statements
will prove to be correct. We wish to caution readers not to place undue reliance
on any forward-looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995. The forward-looking statements contained
in this quarterly report on Form 10-Q speak only as of the date that we have
filed the report. We expressly disclaim any obligation or undertaking to update
or revise any forward-looking statement contained in this report, including to
reflect any change in our expectations with regard to that forward-looking
statement or any change in events, conditions or circumstances on which that
forward-looking statement is based.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of America. During
preparation of these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, goodwill and other intangible assets and income taxes. We base our
estimates on historical experience and various other assumptions that we believe
are reasonable under the circumstances. The results form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following critical accounting policies require us to make significant
judgments and estimates used in the preparation of our financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine the
adequacy of this allowance by regularly evaluating individual customer
receivables and considering a customer's financial condition, credit history,
and current economic conditions. If the financial condition of our customers
were to deteriorate, additional allowances may be required. Our accounts
receivable are written off once an account is deemed uncollectible. This
typically occurs once we have exhausted all efforts to collect the account,
which includes collection attempts by company employees and outside collection
agencies.
-21-
INVENTORY RESERVES FOR OBSOLESCENCE
We write down our inventory for estimated obsolescence or unmarketable inventory
in an amount equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions prove to be less favorable than those
projected by management, additional inventory write-downs may be required.
GOODWILL AND OTHER INTANGIBLE ASSETS
We evaluate goodwill and other intangible assets with indefinite lives for
impairment at least annually, in accordance with Statement of Financial
Accounting Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). For goodwill, we first compare the fair value of a reporting unit with
its carrying amount, including goodwill. If the carrying amount of a reporting
unit exceeds the fair value of a reporting unit, additional tests would be used
to measure the amount of impairment loss, if any. We use a present value
technique to measure reporting unit fair value. If the carrying amount of any
other intangible asset exceeds its fair value, we would recognize an impairment
loss for the difference between fair value and the carrying amount. We
recognized impairment losses in the year ended June 30, 2002 upon the
disposition of a subsidiary and an impairment loss effective July 1, 2002 upon
completion of SFAS No. 142 implementation. If other events occur and
circumstances change, causing the fair value of a reporting unit to fall below
its carrying amount, impairment losses may be recognized in the future.
DEFERRED TAX ASSETS
We estimate our actual current tax exposure obligations together with the
temporary differences that have resulted from the differing treatment of items
dictated by generally accepted accounting principles versus U.S. tax laws. These
temporary differences result in deferred tax assets and liabilities. On an
on-going basis, we then assess the likelihood that our deferred tax assets will
be recovered from future taxable income. If we believe the recovery to be less
than likely, we establish a valuation allowance against the deferred tax asset
and charge the amount as an income tax expense in the period in which such a
determination is made.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic-value method in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and elected the
disclosure-only alternative under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Common stock of the Company has been delisted since November 17,
2000 and does not trade on any exchange and is not quoted on any quotation
system. Fair value of the Company's common stock is determined by the Company's
Board of Directors based upon the most recent significant capital stock
transaction adjusted by current major events affecting the Company's financial
condition. Certain equity-based compensation cost is included in net income
(loss), as certain options granted during periods presented had an exercise
price below the market value of the stock on the date of grant. In accordance
with SFAS No. 148, ACCOUNTING FOR STOCK BASED COMPENSATION - TRANSITION AND
DISCLOSURE, the Company will continue to disclose the required pro-forma
information in the notes to the consolidated financial statements and will
disclose the required information in quarterly unaudited consolidated financial
statements.
-22-
SALES RECOGNITION POLICY
Product sales are recorded upon transfer of title to customers, generally, upon
shipment of product. Revenue earned from agency commission is recognized when
the customer has received product.
RESULTS OF OPERATIONS
NET SALES--Net sales increased to $12,540,745 and $24,703,061 for the three and
six months ended December 31, 2003, respectively, compared to $11,587,602 and
$23,377,378 for the same periods in 2002. The net sales increase of $953,143, or
8.2%, and $1,325,683, or 5.7%, in the three and six-month periods ended December
31, 2003 relative to the comparable periods in 2002 was primarily due to higher
sales volume from existing product lines and the addition of a new selling
territory for our proprietary products.
COST OF SALES--Cost of sales increased to $7,853,005, or 62.6% of net sales, and
$15,518,895, or 62.8% of net sales, for the three and six months ended December
31, 2003, respectively, compared to $7,307,103, or 63.1% of net sales, and
$14,805,956, or 63.39% of net sales, for the same periods in 2002. The increase
of $545,902, or 7.5%, and $712,939, or 4.8%, in the three and six-month periods
ended December 31, 2003 relative to the comparable periods in 2002 was primarily
due to increased sales as discussed above. The change in cost of sales as a
percentage of net sales in the three and six-month periods ended December 31,
2003 compared to the same periods in 2002 is due to a difference in our 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
whereby 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
six months, our product mix between stocking and agency based sales has shifted
slightly to a higher agency component. Agency sales have no direct cost of
sales. As a result, cost of sales as a percentage of net sales has decreased due
to an increase in net revenue with no associated increase in cost of sales.
GROSS PROFIT--Gross profit was $4,687,740, or 37.4% of net sales, and
$9,184,166, or 37.2% of net sales, for the three and six months ended December
31, 2003, respectively, compared to $4,280,499, or 36.94% of net sales, and
$8,571,422, or 36.7% of net sales, for the same periods in 2002. The increase of
$407,241, or 9.5%, and $612,744, or 7.1%, in the three and six-month periods
ended December 31, 2003 relative to the comparable periods in 2002 is primarily
due to higher sales volume from existing product lines and the addition of a new
selling territory for our proprietary products. The increase in gross profit
margins in the three and six-month periods ended December 31, 2003 compared to
the same periods in 2002 is due to a difference in product mix sold as discussed
above. Our product mix between stocking and agency based sales has shifted
slightly to a higher agency component. Agency sales have no direct cost of
sales. As a result, gross profit as a percentage of net sales has increased due
to an increase in net revenue with no associated increase in cost of sales.
SELLING EXPENSES--Selling expenses increased to $2,026,450, or 16.2% of net
sales, and $4,044,698, or 16.4% of net sales, for the three and six months ended
December 31, 2003, respectively, compared to $1,826,671, or 15.8% of net sales,
and $3,610,663, or 15.4% of net sales, for the same periods in 2002. The
increase of $199,779, or 10.9%, and $434,035, or 12.0%, is primarily due to
increased commission expense related to increased sales in the three and six
months ended December 31, 2003, compared to the same periods in 2002. The
increase in selling expense as a percentage of net sales in the three and
six-month periods ended December 31, 2003 compared to the same periods in 2002
is also due to a difference in our product mix between stocking sales and agency
sales. Selling commissions are paid on agency sales at approximately the same
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percentage as stocking sales. As a result, selling commissions are higher as a
percent of net sales revenue when the product mix has a higher comparative
content of agency sales. The remaining increase is the result of an increase in
self-insured health benefit expenses.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses were
$1,671,203, or 13.3% of net sales, and $3,411,525, or 13.8% of net sales, for
the three and six months ended December 31, 2003, respectively, compared to
$1,739,398, or 15.0% of net sales, and $3,341,635, or 14.3%, for the same
periods in 2002. The decrease of $68,195, or 3.9%, for the three-month period is
a result of lower legal fees, primarily those related to the settled legal
complaint with the Company's former officers as mentioned in Note 12 of the
notes to the condensed consolidated financial statements. The increase of
$69,890, or 2.1%, for the six-month period ended December 31, 2003 is primarily
the result of investment banking consultant fees, legal fees related to the
settled legal complaint and an increase in self-insured health benefit expenses.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased to $172,912, or 1.4% of net sales, and $330,251, or 1.3% of net sales,
for the three and six months ended December 31, 2003, respectively, compared to
$209,447, or 1.8% of net sales, and $408,489, or 1.7% of net sales, for the same
periods in 2002. The decrease of $36,535, or 17.4%, and $78,238, or 19.2%, in
depreciation and amortization expenses is primarily the result of certain assets
and intangible assets becoming fully depreciated.
INTEREST EXPENSE--Interest expense was $432,063 and $732,032 for the three and
six months ended December 31, 2003, respectively, compared to $237,925 and
$564,892 for the same periods in 2002. The increase of $194,138, or 81.6%, for
the three-month period is the result of the financing costs relating to the
refinancing of the Company's senior debt. The increase of $167,140, or 29.6%,
for the six-month period is also the result of the financing costs relating to
the refinancing of the Company's senior debt and the implementation of SFAS 150
which requires all dividends accrued on preferred stock to be recorded as
interest expense effective July 1, 2003. However, the increase is offset by
decreases relating to lower interest rates and fees on the Company's senior debt
as a result of the payoff of the Citizens term loan in June 2003. Interest
expense on the Company's senior debt actually decreased by $84,678 or 25.9%
during the six-month period ended December 31, 2003 over the same period in
2002.
INCOME TAX PROVISION--The Company recorded an income tax expense of $51,000 for
the three and six-month periods ended December 31, 2003 and no income tax
expense for the same periods in 2002. Although the Company's current year
taxable income for federal and certain states was eliminated due to the use of
net operating loss carryforwards to offset federal and state income tax
liabilities, the Company may be subject to income taxes in 2004 based on
limitations on the use of its net operating loss carryforwards.
NET INCOME (LOSS)--Net income decreased to $286,042 and increased to $487,866
for the three and six months ended December 31, 2003, compared to a net income
of $416,125 and a net loss of ($3,554,301) for the same periods in 2002. The
decrease of $130,083, or 31.3%, for the three-month period is primarily due to
the write off deferred financing fees of approximately $190,000 related to our
banking facilities. The increase of $4,042,167, or 113.7%, resulted primarily
from the goodwill impairment charge of $4,454,656 recorded in July 2002 as a
result of SFAS No. 142 implementation.
-24-
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had a working capital of $209,712 compared to a deficit
of $793,154 at June 30, 2003. The increase in our working capital was primarily
the result of decreased accounts payable, accrued expenses and current
obligations for long-term debt, offset by decreased receivable and inventory
balances and increase in lines of credit.
In December 2003, the Company refinanced its senior debt facilities with Wells
Fargo. The proceeds of the refinancing were used to pay off its revolving under
the Amended and Restated Security and Loan Agreement with ARK CLO 2000-1 LIMITED
for $1,271,585 and its revolving line of credit with Citizens Bank of
Massachusetts ("Citizens") (the "PrimeSource Surgical Line of Credit") under the
Amended and Restated Credit Agreement (the "PrimeSource Surgical Credit
Agreement") with Citizens for $4,793,944.
In connection with the refinancing of its senior debt, the Company used proceeds
from the refinancing with Wells Fargo to pay Citizens an $180,000 term loan
facility fee described below. PrimeSource Surgical accrued a $75,000 fee on
August 6, 2002, in connection with the amendment to the PrimeSource Surgical
Credit Agreement. PrimeSource Surgical was obligated to pay an additional
$75,000 fee under the PrimeSource Surgical Term Loan on the last day of each
calendar quarter, beginning on September 30, 2002 and for every quarter
thereafter until the earlier of payment in full of the PrimeSource Surgical Term
Loan or December 31, 2003. The accrued term loan facility fees were $300,000 on
June 30, 2003, but were reduced by 40% because on June 30, 2003, the Company
paid off the entire outstanding balance of the PrimeSource Surgical Term Loan in
connection with the sale of Ruby and the most recent offering of Series G Stock.
In conjunction with the Credit and Security Agreement with Wells Fargo, the
Company entered into $7,500,000 revolving demand note (the "PrimeSource
Healthcare Line of Credit"). Pursuant to the Credit and Security Agreement, the
maximum amount available to borrow under the PrimeSource Healthcare Line of
Credit is limited to the lesser of $7,500,000 or a certain percentage of
accounts receivable and inventory, as defined by the Credit and Security
Agreement ($7,322,035 at December 31, 2003). As of December 31, 2003, borrowings
bore interest at Wells Fargo's prime rate plus 3.0% (7.00% at December 31,
2003). Borrowings are secured by substantially all assets held by PrimeSource
Healthcare and its subsidiaries. At December 31, 2003, there was $727,605 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 December 31, 2003.
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Other notes payable include:
DECEMBER 31, JUNE 30,
2003 2003
Luxtec tenant note $70,227 $77,650
PrimeSource legal counsel note, net of unamortized
discount of $1,187 and $12,827, respectively 88,813 357,173
PrimeSource Citizens Bank note 187,500
Other long-term note 43,250 43,250
------ ------
Total other notes payable 202,290 665,573
Less current portion (104,753) (559,877)
--------- ---------
Total long-term debt $97,537 $105,696
======= ========
The Luxtec tenant note for tenant improvements to Luxtec's leased premises in
West Boylston, Massachusetts, which bears interest at 9.5% and is due September
19, 2005. Payments are interest only for the first 12 months beginning November
2000, with remaining payments calculated on a 7-year amortization table with a
balloon payment due on September 19, 2005.
The PrimeSource legal counsel note is a non-interest bearing demand note payable
with an original balance of $559,977 (net of unamortized discount of $40,023
based on an imputed interest rate of 8%) to its special legal counsel in payment
of prior accounts payable. This note matures on May 30, 2004. Special legal
counsel reduced the balance of this note by $150,000 in November 2003. Monthly
principal payments are $30,000 commencing on March 20, 2004.
The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens due
for the bank refinancing amendment fee. Equal principal payments on the note of
$62,500 were due quarterly and the balance of the note was due December 31,
2003. This note was paid off in December 2003 simultaneous with the refinancing
described above.
As of December 31, 2003, we had $116,745 of cash and cash equivalents. In
addition, the principal source of our short-term borrowing is the PrimeSource
Healthcare Line of Credit. As of December 31, 2003, we had $727,605 available
under the PrimeSource Healthcare Line of Credit. In addition, we may attempt to
raise additional equity or debt capital in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the Company's credit facilities at December 31, 2003 is $6,594,430,
all of which is subject to interest rate fluctuations. A hypothetical 10% change
in interest rates applied to the fair value of debt would not have a material
impact on earnings or cash flows of the Company.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
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(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 December 31, 2003. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2003, 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
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On September 5, 2002, John F. Rooney and Michael K. Bayley, each former
executive officers and directors of PrimeSource, filed a complaint against the
Company in Arizona Superior Court, County of Pima. The complaint alleged a
breach by the Company of the severance agreements with each of Messrs. Rooney
and Bayley. The complaint was settled in November 2003. The terms of settlement
included cash payments totaling $125,000 to Messrs. Rooney and Bayley over a
period of four months, ending February 2004.
We are also subject to claims and suits arising in the ordinary course of our
business. We believe that ordinary course legal proceedings will not have a
material adverse effect on our financial position, results of operations or
liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
2.1 Agreement and Plan of Merger, dated November 27, 2000, by and
between Luxtec Corporation, Laser Merger Sub, Inc. and
PrimeSource Surgical, Inc. (Incorporated by reference to Form
8-K, File No. 0-14961, filed on November 30, 2000).
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated
February 8, 2001, by and between Luxtec Corporation, Laser
Merger Sub, Inc. and PrimeSource Surgical, Inc. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March
16, 2001).
3.1 Articles of Organization. (Incorporated by reference to Form
S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.2 Amendment, dated March 30, 1982, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.3 Amendment, dated August 9, 1984, to Articles of Organization.
(Incorporated by reference to Form S-18, File No. 33-5514B,
declared effective on July 7, 1986).
3.4 Amendment, dated April 10, 1992, to Articles of Organization.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1993).
3.5 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.6 Amendment, dated October 20, 1995, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1995).
3.7 Amendment, dated September 16, 1996, to Articles of
Organization. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed for the fiscal year ended October 31,
1996).
3.8 Certificate of Vote of Directors Establishing a Series of a
Class of Stock dated September 16, 1996. (Incorporated by
reference to Form 10-K, File No. 0-14961, filed for the
fiscal year ended October 31, 1996).
3.9 Certificate of Correction dated October 4, 1996.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1996).
3.10 Certificate of Correction dated October 4, 1996.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed for the fiscal year ended October 31, 1996).
3.11 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series B Convertible
Preferred Stock). (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on March 16, 2001).
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3.12 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series C Convertible
Preferred Stock). (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on March 16, 2001).
3.13 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated February 27, 2001 (Series D
Exchangeable Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.14 Certificate of Correction dated March 2, 2001 (Series C
Convertible Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.15 Certificate of Correction dated March 2, 2001. (Incorporated
by reference to Form 8-K, File No. 0-14961, filed on March
16, 2001).
3.16 Articles of Amendment to Articles of Organization, dated as
of June 27, 2001. (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on July 11, 2001).
3.17 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated June 28, 2001 (Series E Convertible
Preferred Stock). (Incorporated by reference to Form 8-K,
File No. 0-14961, filed on July 11, 2001).
3.18 Certificate of Correction dated July 13, 2001. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed October
15, 2001).
3.19 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated January 23, 2002 (Series F Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 10-Q, File No. 0-14961, filed on February 14, 2002).
3.20 Certificate of Vote of Directors Establishing a Series or a
Class of Stock, dated August 6, 2002 (Series G Convertible
Redeemable Preferred Stock). (Incorporated by reference to
Form 8-K, File No. 0-14961, filed on August 8, 2002).
3.21 Articles of Amendment to Articles of Organization, dated as
of December 17, 2002. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed February 14, 2003).
3.22 Amended and Restated By-Laws (Incorporated by reference to
Form 8-K, File No. 0 -14961, filed August 8, 2002).
4.1 Specimen of Common Stock Certificate. (Incorporated by
reference to Form S-18, File No. 33-5514B, declared effective
on July 7, 1986).
4.2 Registration Rights Agreement made as of June 3, 1996,
between the Company and the Purchasers identified therein.
(Incorporated by reference to Form 10-Q, File No. 0-14961,
filed September 13, 1996).
4.3 Second Amended and Restated Registration Rights, dated as of
August 6, 2002, by and among PrimeSource Healthcare, Inc. and
the persons listed as Stockholders therein. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed August 8,
2002).
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4.4 Amended and Restated Co-Sale Agreement, dated June 28, 2001,
by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed October 15, 2001).
4.5 Co-Sale Agreement, dated as of August 6, 2002, by and among
PrimeSource Healthcare, Inc. and the persons listed as
Stockholders on the signature pages thereto. (Incorporated by
reference to Form 8-K, File No. 0-14961, filed August 8,
2002).
10.1 Employment Agreement, entered into between PrimeSource
Healthcare, Inc. and Bradford C. Walker, effective upon the
Initial Closing (as defined in the Purchase Agreement dated
as of August 6, 2002). (Incorporated by reference to Form
10-K, File No. 0-14961, filed September 30, 2002).
10.2 Employment Agreement entered into between James L. Hersma and
Luxtec Corporation, a Massachusetts corporation, dated as of
May 4, 2001. (Incorporated by reference to Form 10-Q, File
No. 0-14961, filed May 21, 2001).
10.3 Amended and Restated Credit Agreement, dated as of June 14,
1999, by and among PrimeSource Surgical, Inc, a Delaware
corporation, Bimeco, Inc., a Florida corporation ("Bimeco"),
Medical Companies Alliance, Inc., a Utah corporation, Douglas
Medical, Inc., a Florida corporation and Citizens Bank of
Massachusetts. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed September 30, 2002).
10.4 First Amendment to Amended and Restated Credit Agreement,
dated as of August 22, 2000, by and among PrimeSource
Surgical, Inc, a Delaware corporation, Bimeco, Inc., a
Florida corporation, and Citizens Bank of Massachusetts.
(Incorporated by reference to Form 10-K, File No. 0-14961,
filed September 30, 2002).
10.5 Second Amendment to Amended and Restated Credit Agreement,
dated as of December 15, 2000, by and among PrimeSource
Surgical, Inc., Bimeco, Inc. Ruby Merger Sub, Inc. and
Citizens Bank of Massachusetts. (Incorporated by reference to
Form 10-K, File No. 0-14961, filed September 30, 2002).
10.6 Third Amendment to Amended and Restated Credit Agreement,
dated as of March 2, 2001, by and among PrimeSource Surgical,
Inc, a Delaware corporation, Bimeco, Inc., a Florida
corporation, Ruby Merger Sub, Inc., a Delaware corporation,
Luxtec Corporation, a Massachusetts corporation and Citizens
Bank of Massachusetts. (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2001).
10.7 Fourth Amendment to Amended and Restated Credit Agreement,
dated as of August 6, 2002, among PrimeSource Surgical, Inc.,
Bimeco, Inc., Ruby Merger Sub, Inc., PrimeSource Healthcare,
Inc. and Citizens Bank of Massachusetts. (Incorporated by
reference to Form 8-K, File No 0-14961, filed August 8,
2002).
10.8 Amended and Restated Loan and Security Agreement, dated March
2, 2001, by and among Luxtec Corporation, Fiber Imaging
Technologies, Inc., Cathtec Incorporated, CardioDyne, Inc.
and ARK CLO 2000-1, Limited. (Incorporated by reference to
Form 10-Q, File No. 0-14961, filed May 21, 2001).
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10.9 First Amendment to Amended and Restated Loan and Security
Agreement, dated as of August 31, 2001, by and among
PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation),
Fiber Imaging Technologies, Inc., Cathtec Incorporated, and
Cardiodyne, Inc., and ARK CLO 2000-1, Limited. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed September
30, 2002).
10.10 Second Amendment and Waiver to the Amended and Restated Loan
and Security Agreement, dated as of August 6, 2002, by and
among PrimeSource Healthcare, Inc. (f/k/a Luxtec
Corporation), Fiber Imaging Technologies, Inc., Cathtec
Incorporated, and Cardiodyne, Inc., and ARK CLO 2000-1,
Limited. (Incorporated by reference to Form 8-K, File No
0-14961, filed August 8, 2002).
10.11 Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed January
28, 1994).
10.12 Luxtec Corporation 1995 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Form 10-K, File No.
0-14961, filed January 27, 1996).
10.13 Tucson Medical Corporation 1997 Stock Option / Stock Issuance
Plan, as amended. (Incorporated by reference to Schedule 14A,
File No. 0-14961, filed June 1, 2001).
10.14 Unit Purchase Agreement among PrimeSource Healthcare, Inc.
and the Purchasers named in Schedule I thereto, dated as of
June 28, 2001. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed July 11, 2001).
10.15 Form of Warrant. (Incorporated by reference to Form 8-K, File
No. 0-14961, filed July 11, 2001).
10.16 Conversion and Exchange Agreement, dated as of August 6,
2002, by and among PrimeSource Healthcare, Inc. and the
persons listed in the signature pages thereto. (Incorporated
by reference to Form 8-K, File No 0-14961, filed August 8,
2002).
10.17 Purchase Agreement, dated as of August 6, 2002, among
PrimeSource Healthcare, Inc. and the Initial Purchasers named
in Schedule I thereto. (Incorporated by reference to Form
8-K, File No 0-14961, filed August 8, 2002).
10.18 Lease Agreement, dated as of March 1, 2000, by and between
Holualoa Butterfield Industrial, L.L.C. and PrimeSource
Surgical, Inc. (Incorporated by reference to Form 10-K, File
No. 0-14961, filed on October 15, 2001).
10.19 Stock Purchase Agreement, dated June 30, 2003, by and among
PrimeSource Surgical, Inc., Peter Miller, Peter Eule and New
England Medical Specialties, Inc. (Incorporated by reference
to Form 8-K, File No. 0-14961, filed July 2, 2003).
10.20 Waiver Agreement, dated June 30, 2003, by and among
PrimeSource Healthcare, Inc. and the Purchasers named
therein. (Incorporated by reference to Form 8-K, File No.
0-14961, filed July 2, 2003).
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10.21 Severance Agreement, dated September 5, 2003, by and between
PrimeSource Healthcare, Inc. and Bradford C. Walker.
(Incorporated by reference to Form 8-K, File No. 0-14961,
filed September 8, 2003).
10.22 Credit and Security Agreement, dated as of December 10, 2003,
by and among PrimeSource Healthcare, Inc., PrimeSource
Surgical, Inc., Bimeco, Inc. and Wells Fargo Business Credit,
Inc.
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 - The Company filed the following current reports on
Form 8-K during the three-month period ended December 31, 2003:
(1) On December 17, 2003, the Company filed a current report on
Form 8-K, announcing under Item 5, its entry into a Credit
and Security Agreement, dated as of December 10, 2003, with
PrimeSource Surgical, Inc., Bimeco, Inc. and Wells Fargo
Business Credit, Inc. for a conditional, discretionary,
demand, secured revolving credit line.
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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESOURCE HEALTHCARE, INC.
(Registrant)
February 13, 2004 /s/ Shaun D. McMeans
- ----------------- -----------------------------
Date Shaun D. McMeans
Chief Financial Officer
Principal Accounting Officer and Duly
Authorized Executive Officer)
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