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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] 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 000-24025
HORIZON MEDICAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1882343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE HORIZON WAY
P.O. BOX 627
MANCHESTER, GEORGIA 31816
(Address of principal executive offices, including zip code)
(706) 846-3126
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK,
$.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $11,681,892 on March 15, 2000, based on the closing sale price
of such stock on The American Stock Exchange. The number of shares outstanding
of the Registrant's Common Stock, $.001 par value, as of March 15, 2000 was
13,366,278.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from
the proxy statement of the Company for the 2000 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A not later than 120
days after the end of the fiscal year covered by this report.
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TABLE OF CONTENTS
PAGE NO.
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PART I
1. Business...................................................................... 1
2. Properties.................................................................... 11
3. Legal Proceedings............................................................. 11
4. Submission of Matters to a Vote of Security Holders........................... 12
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters....................................................... 12
6. Selected Financial Data....................................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 14
7A. Quantitative and Qualitative Disclosures About Market Risk.................... 28
8. Financial Statements and Supplementary Data................................... 28
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................... 28
PART III
10. Directors and Executive Officers of the Registrant............................ 28
11. Executive Compensation........................................................ 29
12. Security Ownership of Certain Beneficial Owners and
Management.................................................................... 29
13. Certain Relationships and Related Transactions................................ 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 30
SIGNATURES..................................................................................... 35
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PART I
ITEM 1. BUSINESS
Horizon Medical Products, Inc. (including its subsidiaries, the
"Company"), headquartered in Manchester, Georgia, is a specialty medical device
company focused on manufacturing and marketing vascular access products. The
Company's oncology product lines include implantable ports, tunneled central
venous catheters, and stem cell transplant catheters used primarily in cancer
treatment protocols. The Company has a complete line of acute and chronic
dialysis catheters and immediate access hemodialysis grafts used for kidney
failure patients and a specialty line of embolectomy balloon catheters, carotid
balloon shunts and occlusion balloon products used to maintain the vascular
system. In addition, the Company distributes certain specialty devices used
primarily in general and emergency surgery, radiology, anesthesiology,
respiratory therapy, and blood filtration and critical care settings.
The Company was incorporated and began its operations in February 1990
as a distributor of medical devices and began to distribute vascular access
devices in 1990. In November 1992, the Company entered into a collaborative
effort with a leading heart valve manufacturer to design and develop a new line
of vascular access ports for the Company. This new line of ports, the
Triumph-1(R) line, was introduced in September 1994. The Company continues to
market the Triumph-1(R) line of vascular access ports. Since 1996, certain
models in the Triumph-1(R) line have been manufactured for the Company by ACT
Medical. In May 1995, the Company began to distribute the NeoStar Medical(R)
line of hemodialysis catheters. In March 1996, the Company began construction of
a 20,000 square foot manufacturing, distribution and administrative facility in
Manchester, Georgia. The Company began manufacturing the NeoStar Medical(R)
product line at this facility in October 1996 and expanded this facility in 1998
to approximately 45,000 square feet. In July 1997, the Company acquired the port
business of Strato(R)/Infusaid(TM). The primary product lines obtained in the
Strato(R)/Infusaid(TM) acquisition included the LifePort(R) and Infuse-a-Port(R)
vascular access ports, and the Infuse-a-Cath(R) line of catheters. In 1998, the
Company made additional product acquisitions and acquired the CVS AND Stepic
medical device distribution businesses. See "-- 1998 Acquisitions" below.
Distribution of non-Company medical devices through Stepic and CVS currently
comprises approximately 54.1% of the Company's revenue.
DISTRIBUTION AGREEMENTS
PERMA-SEAL DIALYSIS ACCESS GRAFT. On December 11, 1998, the Company
entered into a multi-year distribution agreement with Possis Medical, Inc. for
the Perma-Seal Dialysis Access Graft. On February 14, 1999, the Company launched
the Perma-Seal Dialysis Access Graft and began marketing the product on a
worldwide basis. The Perma-Seal Graft is constructed of silicone elastomer and
polyester yarn and is designed for immediate access and is capable of allowing
the dialysis clinician to access the patient the same day as the graft is
implanted.
OTHER DISTRIBUTION AGREEMENTS. On September 15, 1999, the Company
entered into a distribution agreement with Flanagan Instruments, Inc.,
principally covering the states of Louisiana, Mississippi, lower Alabama, and
western Florida. On September 30, 1999, the Company entered into a distribution
agreement with Kentec Medical, Inc., principally covering the states of
California, Nevada and Arizona. Each of these distribution agreements is for the
distribution of the full range of products manufactured by the Company.
1998 ACQUISITIONS
VASCULAR ACCESS PRODUCTS
Norfolk. On June 2, 1998, the Company consummated the acquisition of
certain assets used in the human vascular access business of Norfolk Medical
Products, Inc. ("Norfolk"). The assets included all of the assets used by
Norfolk in manufacturing its human port products line. With the acquisition of
Norfolk, the Company acquired several vascular products including the Vortex(TM)
port, the TitanPort(TM), the OmegaPort(R) and other port accessories. The
Company (i) paid Norfolk and its sole shareholder approximately $7.4 million in
cash, and (ii) paid approximately $1.86 million in cash into an escrow account,
of which $930,000 was released in December 1998. The remaining amount was
released during 1999.
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IFM. On May 19, 1998, the Company acquired the vascular access port
product line of Ideas for Medicine, Inc. ("IFM"), a wholly owned subsidiary of
Cryolife, Inc., for approximately $100,000 in cash and a promissory note in the
amount of $482,110, which has been paid. On September 30, 1998, the Company
consummated the acquisition of certain medical device products, product lines
and assets used in the manufacture and sale of such medical devices by IFM. The
assets acquired included certain of the assets used by IFM to manufacture its
product line. In this transaction, the Company acquired several products
including embolectomy catheters, carotid shunts, occlusion catheters and
surgical instruments (the "Products"). The Company paid IFM $15,000,000 in cash.
In connection with the acquisition, the Company and IFM entered into a
manufacturing agreement (the "Manufacturing Agreement") pursuant to which, for a
four year term, IFM agreed to manufacture exclusively for the Company, and the
Company agreed to purchase from IFM a minimum of $6,000,000 per year of the
Products.
On June 22, 1999, IFM notified the Company that the Company was in
breach of the Manufacturing Agreement. IFM notified the Company that the Company
was in violation of the payment provision contained in the Manufacturing
Agreement, which calls for the Company to pay amounts due to IFM within 45 days
of the date of each invoice. The total accounts payable due to IFM under the
Manufacturing Agreement at March 1, 2000 was approximately $660,000.
Additionally, IFM notified the Company that the Company was in violation of the
Manufacturing Agreement due to the nonpayment of interest related to such past
due accounts payable. In addition, IFM notified the Company that the Company was
in breach for failing to provide a production schedule at the end of the first
six months of the term of the Manufacturing Agreement and on a monthly basis
thereafter. Finally, IFM notified the Company that the Company was in breach for
the failure to provide packaging and labeling. The Company is currently in
default under the Manufacturing Agreement. As a result, IFM may terminate the
Manufacturing Agreement and may be entitled to receive an amount equal to (i)
the direct costs incurred by IFM for all purchase orders committed for raw
materials and components, (ii) the direct and indirect costs incurred by IFM for
six months after such termination for labor utilized in the manufacture of the
Products, and (iii) the fixed facility costs incurred by IFM in connection with
the manufacture of the Products for the remainder of the term of the
Manufacturing Agreement.
The Company has continued to indicate to IFM that it will not be able to
meet the minimum purchase requirements outlined in the Manufacturing Agreement.
The Company is currently in negotiations with IFM to purchase the existing
inventory, fixed assets and leasehold improvements. The Company would assume
responsibility for the plant and manufacturing of the IFM product line. The
parties are currently operating under a verbal modification to the Manufacturing
Agreement. Should the Company be unable to revise the Manufacturing Agreement to
include acceptable terms or fail to continue to operate under the verbal
modification to the Manufacturing Agreement, then any liabilities incurred as a
result of the default could have a material adverse effect on the Company's
consolidated financial position and disrupt the Company's ability to obtain and
sell the Products.
MEDICAL DEVICE DISTRIBUTION
STEPIC AND CVS. Effective as of September 1, 1998, the Company
consummated the acquisition of certain assets used in the distribution and sale
of medical devices by Columbia Vital Systems, Inc. ("CVS"). The Company (i) paid
CVS $4 million in cash at closing, (ii) will pay $225,000 in September 2000 and
(iii) may pay up to an additional $3 million subject to the terms of the
purchase agreement, including the successful achievement of future sales
targets. Effective October 15, 1998, the Company consummated the acquisition of
the outstanding stock of Stepic Corporation ("Stepic"). The assets acquired
included primarily accounts receivable and inventory derived from and used in
the distribution of medical products. The Company paid Stepic's shareholders $8
million in cash at closing, paid $2.4 million in December 1999, is obligated to
pay an additional $4.8 million over a two year period (which is supported by
standby letters of credit), and paid $27,266 after closing pursuant to a working
capital adjustment. In addition, the Company agreed to pay up to an additional
$4.8 million under the terms of the stock purchase agreement upon the successful
achievement of certain specified future earnings targets by Stepic, of which
amount $2.05 million was earned during 1999 and is being paid, together with
interest, over a period from December 1999 through April 2000. The CVS and
Stepic acquisitions allowed the Company to form a medical device distribution
business currently with an aggregate of 22 sales representatives distributing
general and emergency surgery, radiology, anesthesiology, respiratory therapy,
blood filtration and critical care medical products, as well as products
manufactured and distributed by the Company.
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DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
Product Manufacturing
The Company manufactures and/or markets vascular access products
including implantable ports, hemodialysis catheters, central venous catheters,
embolectomy catheters, hemodialysis access grafts, carotid shunts and
accessories used in vascular procedures. Vascular access ports are implantable
devices utilized for the central venous administration of a variety of medical
therapies and for blood sampling and diagnostic purposes. Central venous access
facilitates a more systemic delivery of treatment agents, while mitigating
certain of the harsh side effects of certain treatment protocols and eliminating
the need for repeated access to peripheral veins. Once implanted in the body, a
port can be utilized for up to approximately 2,000 accesses. The Company's
vascular access ports are used primarily in systemic or regional short- and
long-term cancer treatment protocols that require frequent infusions of highly
concentrated or toxic medications (such as chemotherapy agents, antibiotics or
analgesics) and frequent blood samplings. Port sales totaled $10 million, $16.8
million and $15.9 million for 1997, 1998 and 1999, respectively. Specialty
surgical product (IFM) sales totaled $2.1 million and $7.7 million for October
1 through December 31, 1998 and 1999, respectively.
The Company's lines of vascular access ports consist of the following
families of products: (i) Triumph-1(R); (ii) LifePort(R); (iii)
Infuse-a-Port(R); (iv) Vortex(TM) port; (v) TitanPort(TM); and (vi)
OmegaPort(R).
The Company produces and/or markets hemodialysis, apheresis and
embolectomy catheters. Hemodialysis catheters are used in the treatment of
patients suffering from renal failure who are required to undergo short-term
(acute) care or long-term (chronic) hemodialysis, a process involving the
removal of waste products from the blood by passing a patient's blood through a
dialysis machine. Stem cell apheresis is a protocol for treating certain forms
of mid- and late-stage cancers, particularly breast cancer. The typical
apheresis procedure involves the insertion of a catheter into a patient through
which (i) blood is withdrawn from the patient, cycled through an apheresis
machine in which stem cells (cells which perform a key role in the body's immune
system) are removed from the blood and the blood is reinfused into the body,
(ii) high doses of chemotherapy agents, as well as antibiotics and blood
products, are administered to the patient over extended periods of time, and
(iii) the previously removed stem cells are subsequently reintroduced into the
patient. Embolectomy catheters remove emboli from clotted hemodialysis grafts by
using a balloon and catheter system that helps prevent graft damage. The
Company's catheters are used primarily in hemodialysis and apheresis procedures.
The Company's catheters include the following families of products: (i)
single and dual lumen hemodialysis catheters; (ii) Pheres-Flow(R) triple lumen
catheters; and (iii) Infuse-a-Cath(R) catheters. The Company expects that its
specialty hemodialysis and apheresis families of catheters will continue to
benefit from the unique Circle C(R) and Pheres-Flow(R) designs and the growth of
underlying markets.
The Company maintains a sales and marketing organization for its
vascular access products of approximately 42 full-time employees and 9
independent specialty distributors employing over 75 sales representatives. The
Company's direct sales force focuses primarily on vascular and general surgeons
who implant vascular access devices and other physicians and clinicians who
utilize vascular access devices in the delivery of treatments. The Company's
marketing strategy emphasizes the importance of building relationships with
these medical professionals in order to provide such professionals with the
benefits of the Company's broad knowledge of vascular access products and
procedures and focused clinical support. These relationships also facilitate the
Company's ability to modify its product lines in response to new clinical
protocols and to meet its customers' changing needs. The Company also has a
network of 35 active distributors in Europe and 53 active international
distributors outside of Europe.
Hospital chains and large buying groups have played, and are expected to
continue to play, an increasingly significant role in the purchase of medical
devices. In 1997, group purchasing organization ("GPO") purchasing accounted for
approximately $28 billion of sales in the medical products industry. In recent
years, these groups have sought to narrow their list of suppliers. By acting as
a supplier to a GPO the Company can operate its sales force much more
efficiently. As a result, the Company has increased its focus on marketing its
products to these buying groups. Simultaneously, the Company's direct sales
force continues to call on physicians associated with these buying groups in
order to improve compliance with these group purchasing agreements and improve
market share.
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As a result of such efforts, in March 1998 the Company entered into a
purchasing agreement with Premier Purchasing Partners, a national purchasing
group that includes over 1,800 owned, leased, managed and affiliated members.
Pursuant to the agreement, the Company is an approved vendor for the hospitals
participating in Premier's purchasing program. The agreement was amended in
March 1999 to extend the term of the agreement to February 28, 2004. The
Company's products approved for distribution under the agreement are vascular
access ports, port introducers and Huber needles. Premier is entitled to receive
an administrative fee of 2% on gross sales of the Company's products to its
members. In connection with the execution of the purchasing agreement, the
Company issued to Premier a warrant to purchase 500,000 shares of the Company's
stock for $14.50 per share which vests as and only if certain specific sales
goals in the warrant are met.
On January 1, 1999, the Company amended its Consulting and Services
Agreement with Healthcare Alliance, Inc., an affiliate of one of the Company's
directors (the "Alliance Agreement"). The Alliance Agreement provides for (i)
the payment to Healthcare Alliance of an annual consulting fee of $36,000, (ii)
the payment to Healthcare Alliance of an annual performance incentive fee equal
to 5% of any annual sales increase achieved by the Company that results from
Healthcare Alliance's efforts and (iii) the grant of options to purchase up to
1% of the Company's outstanding common stock. The options will vest and become
exercisable by Healthcare Alliance only if it procures group purchasing
agreements with certain GPOs, and the Company achieves amounts of incremental
sales revenue under its agreement with the particular GPO (at an exercise price
of the closing stock price of the Company's common stock on the effective date
of the purchasing agreement). In addition, under the amended agreement, the
Company has granted an option to Healthcare Alliance for the purchase of 45,000
shares of common stock of the Company. Such options will become vested and
exercisable by Healthcare Alliance only if the Company achieves certain amounts
of incremental sales revenue under the Company's group purchasing agreement with
Premier Purchasing Partners, L. P. The exercise price for these options will be
the closing stock price of the Company's common stock on the day that the
options vest. The options are exercisable for a period of five years upon
vesting. The Alliance Agreement terminates on December 31, 2001. See Item 5.
"Market for the Registrant's Common Stock and Related Security Holder Matters --
Recent Sales of Unregistered Securities."
The Company has also entered into group purchasing agreements with
AmeriNet, Inc., University Healthsystem Consortium; Health Services Corporation
of America; HealthTrust Purchasing Group, L.P.; and Promina Health System.
Product Distribution
Through the operations the Company acquired in the CVS and Stepic
acquisitions, distribution of medical devices currently is the largest
revenue-generating segment of the Company's business. Subsequent to consummating
the Stepic acquisition, the Company consolidated the CVS operations into Stepic
to establish a centralized distribution operation. The Company distributes a
broad range of specialty medical products throughout the Midwest and Northeast
United States to hospitals and regional and hospital owned blood banks.
The product applications for the devices the Company distributes include
general and emergency surgery, radiology, anesthesiology, respiratory therapy,
blood filtration and critical care. The Company currently sells more than 1,200
SKUs from ten major product lines and distributes to over 950 customers.
Stepic has generated approximately 64% of its sales through distribution
of products of three major manufacturers: Arrow International, Ballard Medical,
and Pall Biomedical. Arrow sales totaled $3.2 million and $13.9 million for 1998
and 1999, respectively; Pall sales totaled $4 million and $8.4 million in 1998
and 1999, respectively; and Ballard sales totaled $2.1 million and $7.7 million
in 1998 and 1999, respectively. (1998 sales figures are for the period from
October 15, 1998 through December 31, 1998.) Stepic is the top distributor in
the country for each of these manufacturers. The Arrow products include
catheters and introducer kits that are used for vascular access in surgical
settings and for epidurals. The Ballard product line primarily consists of
low-tech products such as foam soap. The majority of Pall products that Stepic
distributes are blood filters used in surgical procedures. Of these three
manufacturers, only Pall has executed a distribution agreement with Stepic.
However, Stepic has distributed Arrow and Ballard products for 22 years and 14
years, respectively. While Stepic's supplier concentration is significant, the
Company believes that it has good relationships with each of its key suppliers,
as evidenced by the fact that Stepic has lost only one major product line in its
25-year history. See "Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward Looking Statements -- Dependence on Key
Suppliers."
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RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including
revenues, operating profit or loss and identifiable assets attributable to each
segment for fiscal year 1999 is presented in Note 16 of notes to consolidated
financial statements included herein and beginning on page F-31.
MANUFACTURING
At its Manchester, Georgia facility, the Company manufactures its dual
lumen dialysis catheters, Pheres-Flow(R), Infuse-a-Cath(R), and other
miscellaneous catheters, dialysis accessories and all vascular access ports
except the Triumph-1(R)line.
The Company's embolectomy and occlusion catheters, carotid shunts and
surgical instruments are produced at the IFM plant in Florida pursuant to a
manufacturing agreement. See "-- 1998 Acquisitions" above. All current models of
the Company's Triumph-1(R) port have been produced by ACT Medical pursuant to
two manufacturing agreements. One of the agreements expired December 31, 1999,
and the Company will continue to have ACT Medical produce the products covered
by such agreement on a purchase order basis or will produce such products at its
Manchester facility.
The Company has received certification as an ISO 9001 medical device
manufacturer for its Manchester facility. The Company also has obtained the
right to affix CE (Conformite Europeene) marking to its product lines
manufactured at its Manchester facility. CE marking is a European symbol of
conformance to strict product manufacturing and quality system standards. The CE
marking is also affixed to the Company's products manufactured at the IFM plant
and at ACT Medical.
While the Company believes it has a good relationship with each third
party that manufactures the Company's products, there can be no assurance that
such relationships will not deteriorate in the future. Deterioration in these
manufacturing relationships could cause the Company to experience interruptions
in its manufacturing and delivery processes and have a material adverse impact
on the Company's business, financial condition and results of operations.
Furthermore, when the manufacturing arrangements with these third parties
expire, the Company will have to make other manufacturing arrangements or
manufacture products at Company facilities. The failure to effectively plan for
the expiration of these agreements could also result in interruption of the
manufacturing and delivery processes for these products and have a material
adverse impact on the Company's business, financial condition and results of
operations. Should the Company be unable to revise the Manufacturing Agreement
with IFM to include acceptable terms or fail to continue to operate under the
verbal modification to the Manufacturing Agreement, then any liabilities
incurred as a result of the default could have a material adverse effect on the
Company's consolidated financial position and disrupt the Company's ability to
obtain and sell the Products.
GOVERNMENT REGULATION
As a manufacturer and distributor of medical devices, the Company is
subject to regulation by, among other governmental entities, the U.S. Food and
Drug Administration (the "FDA") and the corresponding agencies of the states and
foreign countries in which the Company sells its products. These regulations
govern the introduction of new medical devices, the observance of certain
standards with respect to the manufacture, testing and labeling of such devices,
the maintenance of certain records, the tracking of devices, and other matters.
These regulations may have a material impact on the Company. Recently, the FDA
has pursued a more rigorous enforcement program to ensure that regulated
businesses, like the Company's, comply with applicable laws and regulations. The
Company believes that it is in substantial compliance with such governmental
regulations.
All medical device manufacturing establishments are required to be
registered with FDA. Similarly, all categories of medical devices marketed by a
company in the United States are required to be listed. The Company must update
its establishment and listing information on an annual basis. FDA can take
regulatory action against a company that does not provide or update its
registration and listing information.
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Pursuant to the Food, Drug and Cosmetic Act ("FDC Act"), medical devices
intended for human use are classified into three categories, Classes I, II and
III, on the basis of the controls deemed necessary by the FDA to reasonably
assure their safety and effectiveness. Class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to good
manufacturing practice regulations) and Class II devices are subject to general
and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval ("PMA") from the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Class I devices, unless exempt, and Class II devices require premarket
notification clearance pursuant to Section 510(k) of the FDC Act. Class III
devices are required to have a PMA. Obtaining a PMA can take up to several years
or more and involve preclinical studies and clinical testing. In contrast, the
process of obtaining a 510(k) clearance typically requires the submission of
substantially less data and generally involves a shorter review period, although
obtaining a 510(k) clearance may involve the submission of a substantial volume
of data, including clinical data, and may require a substantial review period. A
510(k) premarket notification clearance indicates that the FDA agrees with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another medical device that has been previously
marketed but does not indicate that the product is safe and effective. A PMA
indicates that the FDA has approved as safe and effective a product to be
marketed for the uses described in the approved labeling.
In addition to requiring clearance or approval for new products, the FDA
may require clearance or approval prior to marketing products that are
modifications of existing products. The FDC Act provides that new 510(k)
clearances are required when, among other things, there is a major change or
modification in the intended use of the device or a change or modification to a
legally marketed device that could significantly affect its safety or
effectiveness. A manufacturer is expected to make the initial determination as
to whether a proposed change to a cleared device or to its intended use is of a
kind that would necessitate the filing of a new 510(k) notification. The Company
has made certain modifications to its cleared devices for which it has
determined that new 510(k) clearances are not required. The Company submitted
and obtained 510(k) approval for the peripheral placement of a MicroPort 2
version of the Vortex port. There can be no assurance, however, that the FDA
would concur with the Company's conclusion that a particular change does not
necessitate a new 510(k) application. If the FDA were to investigate and
disagree with the Company's determinations and conclude that one or more
implemented changes requires a new 510(k), the FDA could take regulatory actions
such as issuance of a warning letter or requiring that the Company cease
marketing modified devices until new 510(k) notifications are cleared.
In order to conduct clinical trials of an uncleared or unapproved
device, companies generally are required to comply with Investigational Device
Exemptions regulations ("IDE regulations"). For significant risk devices, the
IDE regulations require FDA approval before clinical study may begin. Devices
subject to the IDE regulations are subject to various restrictions imposed by
the FDA. In its approval letter for significant risk device IDE studies, the
agency may limit the number of patients that may be treated with the device
and/or the number of institutions at which the device may be used. Patients must
give informed consent to be treated with an investigational device. The
institutional review board of each institution where a study is being conducted
must also approve the clinical study. The device may not be advertised or
otherwise promoted. Unexpected adverse experiences must be reported to the FDA.
The company sponsoring the investigation must ensure that the investigation is
being conducted in accordance with the IDE regulations.
To date, the Company's products have received FDA marketing clearances
only through the 510(k) process. Certain future product applications, however,
could require approval through the PMA process. The Possis Graft, which the
Company exclusively distributes, received FDA approval through the PMA process.
In addition, future products may require approval of an IDE. There can be no
assurance that all necessary 510(k) clearances or PMA or IDE approvals will be
granted on a timely basis or at all. The FDA review process may delay the
Company's product introductions in the future. It is possible that delays in
receipt of or failure to receive any necessary clearance or approval could have
a material adverse effect on the Company.
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The Company is also required to register with the FDA as a device
manufacturer and to comply with the FDA's Good Manufacturing Practices under the
Quality System Regulations ("GMP/QSR"). These regulations require that the
Company manufacture its products and maintain its records in a prescribed manner
with respect to manufacturing, testing and control activities. Further, the
Company is required to comply with FDA requirements for labeling and promotion
of its products. For example, the FDA prohibits cleared or approved devices from
being marketed or promoted for uncleared or unapproved uses. The medical device
reporting regulation requires that the Company provide information to the FDA
whenever there is evidence to reasonably suggest that one of its devices may
have caused or contributed to a death or serious injury, or that there has
occurred a malfunction that would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur.
Medical device manufacturers and distributors are generally subject to
periodic inspections by the FDA. If the FDA determines that a company is not in
compliance with applicable laws and regulations, it can, among other things,
issue a warning letter apprising the company of violative conduct, detain or
seize products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the company, its officers or its employees. In
addition, clearances or approvals could be withdrawn in appropriate
circumstances. Failure to comply with regulatory requirements or any adverse
regulatory action could have a material adverse effect on the Company's
business, financial condition and results of operations.
Subsequent to an FDA inspection in 1996, the Company received a warning
letter from the FDA Atlanta District Office alleging, among other things, its
failure to report to the FDA certain malfunctions and adverse events that may be
associated with its devices as required by the agency's MDR regulations.
In response to this warning letter, the Company revised its MDR
procedure and submitted it with other corrective actions for review by the FDA.
The FDA responded that the corrective actions described by the Company appeared
to adequately address the agency's concerns. At the conclusion of a follow-up
inspection in 1997, the Company was advised of various inspectional observations
including its alleged failure to submit MDRs on 19 reportable events. The
Company responded to the inspectional observations in writing and at a meeting
with the FDA at the Atlanta District Office at which the interpretation of the
MDR regulations was discussed. The District submitted the question of the
interpretation of the regulations to FDA headquarters in Washington, D.C. On
March 10, 1998, the Company received a warning letter from the Atlanta District
Office reasserting its interpretation of the MDR regulations and alleging the
Company's failure to report 15 reportable events and violation of two current
GMP requirements. The Company responded to the warning letter pledging to submit
all substantive reports until it secures exemptions from the agency on the
submission of certain classes of reports and describing corrective action taken
on the alleged current GMP violations. The FDA conducted a subsequent inspection
between August 24 and September 15, 1998 which resulted in an FDA-483
(inspectional observations). The Company responded on October 15, 1998 to the
FDA-483, and the FDA replied that the Company's response appeared to address the
concerns raised during the inspection. In addition, on November 20, 1998, the
Company sent the FDA follow-up documentation on the FDA-483 response. Again, on
January 19, 1999, the FDA responded that the documentation appeared to address
the concerns raised in the inspection. The FDA audited the Company on September
9, 1999 and no FDA-483 was issued. On December 22, 1999 the FDA issued a letter
advising the Company that it currently had no outstanding regulatory issues
pending. The Company believes that it has implemented corrective actions that
achieve substantial compliance with FDA requirements, but there can be no
assurance that an FDA enforcement action will not ensue at a future time or will
not materially adversely affect the Company's business, results of operations
and financial condition.
The Company initiated a voluntary product recall of its dialysis and
central venous catheter kit product lines on September 1, 1999. All affected
customers and FDA were notified of the recall. The recall was initiated because
of small pinholes in the pouch in which the product is packaged. The recall
affected all kits manufactured since August 1994. Although approximately 140,000
ports were shipped during this time frame, product returns through December 31,
1999 were approximately 15,300 units. Because of the nature of the pinholes,
risk to the patient is expected to be minimal. No product complaints have been
registered to date for either pinholes or infection of the implant site that
could be attributed to the package being contaminated. The Company has revised
the process that generated the pinholes and is currently producing these product
lines for commercial distribution.
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Medical device laws and regulations are also in effect in many of the
countries in which the Company does business outside the United States. These
range from comprehensive device approval requirements for some or all of the
Company's medical device products to simple requests for product data or
certifications. The number and scope of these requirements are increasing.
Medical device laws and regulations are also in effect in many of the states in
which the Company does business. State and foreign medical device laws and
regulations may have a material impact on the Company. In addition,
international sales of certain medical devices manufactured in the United States
but not approved by the FDA for distribution in the United States are subject to
FDA export requirements, which require the Company to obtain documentation from
the medical device regulatory authority of such country stating that the sale of
the device is not in violation of that country's medical device laws. This
documentation is then submitted to the FDA with a request for a permit for
export to that country.
Federal, state and foreign laws and regulations regarding the
manufacture, sale and distribution of medical devices are subject to future
changes. For example, Congress recently enacted the Food and Drug Administration
Modernization Act of 1997, which included several significant amendments to the
prior law governing medical devices. Additionally, the FDA has recently made
significant changes to its GMP regulations and may make changes to other
regulations as well. The Company cannot predict what impact, if any, such
changes might have on its business; however, such changes could have a material
impact on the Company and its business, financial condition and results of
operations.
ANTI-KICKBACK STATUTE
Pursuant to 42 U.S.C. Section 1320a-7b(b) (the "Anti-Kickback Statute"),
the knowing and willful offer or receipt of any remuneration, directly or
indirectly, in cash or in kind, in exchange for or which is intended to induce
the purchase, lease or order of any good, facility, item or service for which
payment may be made in whole or in part under a federal healthcare program,
including Medicare and Medicaid, is prohibited. A violation of the Anti-Kickback
Statute is a felony, punishable by fine, imprisonment or exclusion from the
Medicare and Medicaid or other applicable federal healthcare programs. The
Anti-Kickback Statute has been interpreted broadly by courts and administrative
bodies. Certain regulations promulgated under the Anti-Kickback Statute (i.e.,
42 C.F.R. Section 1001.952(j)) provide that prohibited remuneration under the
Anti-Kickback Statute does not include any payment by a vendor of goods to a
group purchasing organization, as defined in the regulations, if certain
standards are met. The Company believes that the group purchasing organizations
with which it has purchasing agreements comply in all material respects with
such standards.
HEALTHCARE REFORM
In recent years, several comprehensive healthcare reform proposals were
introduced in the United States Congress. The intent of the proposals was,
generally, to expand healthcare coverage for the uninsured and reduce the growth
of total healthcare expenditures. While none of the proposals were adopted,
healthcare reform may again be addressed by the current United States Congress.
Certain states have made significant changes to their Medicaid programs and have
adopted various measures to expand coverage and limit costs.
Implementation of government healthcare reform and other efforts to
control costs may limit the price of, or the level at which reimbursement is
provided for, the Company's products. In addition, healthcare reform may
accelerate the growing trend toward involvement by hospital administrators,
purchasing managers and buying groups in purchasing decisions. This trend would
likely include increased emphasis on the cost-effectiveness of any treatment
regimen. These changes may also cause the marketplace in general to place
increased emphasis on the utilization of minimally invasive surgical procedures
and the delivery of more cost-effective medical therapies. Regardless of which
additional reform proposals, if any, are ultimately adopted, the trend toward
cost controls and the requirements of more efficient utilization of medical
therapies and procedures will continue and accelerate. The Company is unable at
this time to predict whether any such additional healthcare initiatives will be
enacted, the final form such reforms will take or when such reforms would be
implemented.
The Company's products are purchased principally by hospitals, hospital
networks and hospital buying groups. During the past several years, the major
third-party payors of hospital services (Medicare, Medicaid, private healthcare
indemnity insurance and managed care plans) have substantially revised their
payment methodologies to contain healthcare costs. These cost pressures are
leading to increased emphasis on the price and cost-effectiveness
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of any treatment regimen and medical device. In addition, third-party payors,
such as governmental programs, private indemnity insurance and managed care
plans which are billed by hospitals for such healthcare services, are
increasingly negotiating the prices charged for medical products and services
and may deny reimbursement if they determine that a device was not used in
accordance with cost-effective treatment methods as determined by the payor, was
experimental or was used for an unapproved application. There can be no
assurance that in the future, hospital purchasing decisions or third party
reimbursement levels will not adversely affect the profitability of the
Company's products.
INSURANCE
The Company maintains insurance in such amounts and against such risks
as it deems prudent, although no assurance can be given that such insurance will
be sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's business, financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.
PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company also relies upon trade secrets,
"know-how," continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
The Company currently owns numerous United States patents and patent
applications, as well as numerous foreign patents and patent applications, which
relate to aspects of the technology used in certain of the Company's products,
including the LifePort(R) family of vascular access ports, the Vortex(TM)
vascular access ports, the Infuse-a-Cath(R) family of central venous catheters
and the Bayonet locking system used in the LifePort(R) and in the Vortex Port
families of products. The Company also is a party to several license agreements
with third parties pursuant to which it has obtained, for varying terms, the
right to make, use and/or sell products that are covered under such license
agreements in consideration for royalty payments. Many of the Company's major
products, including its Circle C(R) acute and chronic catheters, its
Infuse-a-Cath(R) catheters, carotid shunt, and cholangiogram catheters are
subject to such license agreements. There can be no assurance that the Company
or its licensors have or will develop or obtain additional rights to products or
processes that are patentable, that patents will issue from any of the pending
patent applications filed by the Company or that claims allowed will be
sufficient to protect any technology that is licensed to the Company. In
addition, no assurances can be given that any patents issued or licensed to the
Company or other licensing arrangements will not be challenged, invalidated,
infringed or circumvented or that the rights granted thereunder will provide
competitive advantages for the Company's business or products. In such event the
business, results of operations and financial condition of the Company could be
materially adversely effected.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Although the
Company has not been a party to any material litigation to enforce intellectual
property rights held by the Company, or a party to any material litigation
seeking to enforce rights alleged to be held by others, future litigation may be
necessary to protect patents, trade secrets or "know-how" owned by the Company
or to defend the Company against claimed infringement of the rights of others
and to determine the scope and validity of the proprietary rights of the Company
and others. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions. Any such litigation could
result in substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
certain of its products, any of which could have a material adverse effect on
the business, results of operations and financial condition of the Company.
Accordingly, the Company may, in the future, be subject to legal actions
involving patent and other intellectual property claims.
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The Company relies upon trade secrets and proprietary technology for
protection of its confidential and proprietary information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or techniques or that third parties will not otherwise
gain access to the Company's trade secrets or disclose such technology.
The Company also relies upon trademarks and trade names for the
development and protection of brand loyalty and associated goodwill in
connection with its products. The Company's policy is to protect its trademarks,
trade names and associated goodwill by, among other methods, filing United
States and foreign trademark applications relating to its products and business.
The Company owns numerous United States and foreign trademark registrations and
applications. The Company also relies upon trademarks and trade names for which
it does not have pending trademark applications or existing registrations, but
in which the Company has substantial trademark rights. The Company's registered
and unregistered trademark rights relate to the majority of the Company's
products, including the Circle C(R), Infuse-a-Port(R), Triumph-1(R),
Infuse-a-Cath(R), LifePort(R), Pheres-Flow(R), Vortex(TM), Pruitt-Inhara(R) and
Reddick product lines. There can be no assurance that any registered or
unregistered trademarks or trade names of the Company will not be challenged,
canceled, infringed or circumvented, or be declared generic, or be declared
infringing on other third-party marks, or provide any competitive advantage to
the Company.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storage and disposal of
materials which are classified as hazardous. The Company believes that its
operations comply in all material respects with applicable environmental laws
and regulations. While the Company continues to make capital and operational
expenditures for protection of the environment, it does not anticipate that
those expenditures will have a material adverse effect on its business,
financial condition and results of operations.
RAW MATERIALS
The Company has arrangements with various suppliers to provide it with
the quantity of component parts necessary to assemble its products. Almost all
of the components and materials used in its assembly process are available from
a number of different suppliers, although certain components are purchased from
a limited number of sources. While the Company believes that there are
alternative and satisfactory sources for its components, a sudden disruption in
supply from one of the Company's existing suppliers could adversely affect the
Company's ability to deliver its products in a timely manner and could adversely
affect the Company's results of operations.
BACKLOG
Delivery lead times for the Company's products are very short at times
and, consequently, the Company routinely maintains an immaterial amount of order
backlog which is generally filled within 60 days of the order date. Management
currently believes that its backlog is not a reliable indicator of future
financial or operating performance.
RESEARCH AND PRODUCT DEVELOPMENT
From time to time the Company engages in limited research and
development activities. The principal focus of the Company's research and
development effort has been to identify and analyze the needs of vascular
surgeons, physicians and clinicians, and to develop products that address these
needs. The Company views proposals from physicians and other healthcare
professionals as an important source of potential research and development
projects. The Company believes that those end-users are often in the best
position to conceive of new products and to recommend ways to improve the
performance of existing products. Many of the Company's product improvements
have resulted from collaborative efforts with physicians and other healthcare
professionals or other medical device manufacturers.
Research and development expenses accounted for $7,000 in 1997 (0.04%
of net sales), $412,000 in 1998 (1.1% of net sales), and the Company did not
incur material research and development expenses during 1999. The 1997 and 1998
amounts
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were used primarily to improve existing products and implement new technology to
produce these products. A portion of the 1998 amount resulted from unexpected
research and development expenses relating to products sold in the Asian
marketplace.
COMPETITION
The markets for the Company's product lines are highly competitive. The
Company faces substantial competition from a number of other manufacturers and
suppliers of vascular access ports, dialysis and apheresis catheters and related
ancillary products, including companies with more extensive research and
manufacturing capabilities and greater technical, financial and other resources.
In response to increased concerns about the rising costs of healthcare, United
States hospitals and physicians are placing increasing emphasis on
cost-effectiveness in the selection of products to perform medical procedures.
The Company believes that its products compete primarily on the basis of: (i)
product design, development and improvement; (ii) customer support; (iii) brand
loyalty; and (iv) price. The Company's competitors in the vascular access
products business include Bard Access Systems, a division of C.R. Bard, Inc.,
and Sims, a division of Smith Industries. In each of the product lines
represented by the Company's distribution business, the Company competes against
manufacturers selling directly to customers. Such manufacturers include Baxter
International Inc. and Abbott Laboratories.
EMPLOYEES
At December 31, 1999, the Company had approximately 192 full-time
employees.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices and
manufacturing and development center is located in Manchester, Georgia in a
45,000 square foot facility. The Company leases the Manchester facility and the
10.5 acre lot on which it is located from the Development Authority of the City
of Manchester (the "Manchester Development Authority") pursuant to two operating
leases which expire in 2010 (collectively, the "Manchester Leases") and under
which the Company pays monthly lease payments of approximately $9,500 in the
aggregate. The Company has an option to extend each of the Manchester Leases for
an additional five-year term and an option to purchase the facility and/or the
adjacent lot containing approximately nine acres. While the Company considers
the Manchester facility to be in good condition and adequate to meet the present
and foreseeable needs of the Company, a significant increase in demand or
production could render the Manchester facility inadequate.
The Company owns a 6,400 square foot office condominium located in
Atlanta, Georgia (the "Atlanta Office") which the Company utilizes for
administrative offices.
The Company occupies approximately 5,000 square feet of office space
and approximately 13,000 square feet of warehouse space in Long Island City, New
York for use in Stepic's distribution operation and warehousing of products
pursuant to a Transition Services Agreement. While the Company considers this
space to be in good condition and adequate to meet the present and foreseeable
needs of the Company, a significant increase in demand or inventory could render
the facilities inadequate.
ITEM 3. LEGAL PROCEEDINGS
On October 30, 1998 and December 7, 1998, shareholder suits were filed
against the Company, Marshall B. Hunt, William E. Peterson, Jr., Roy C. Mallady,
Charles E. Adair, and Mark A. Jewett. An amended consolidated complaint, filed
on March 8, 1999, added as a defendant Cordova Capital Partners LP -- Enhanced
Appreciation, one of the Company's institutional investors. The two lead
plaintiffs were Daniel E. Herlihy and Thomas L. O'Hara, Jr., and the other named
plaintiff was Jack Edery. The amended consolidated complaint was filed in the
U.S. District Court for the Northern District of Georgia (Atlanta Division) and
sought class certification and rescissory and/or
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compensatory damages as well as expenses of litigation. The complaint alleged
that the prospectus and registration statement used by the Company in connection
with the April 1998 initial public offering of the Company's common stock
contained material omissions and misstatements. On October 21, 1999, the United
States District Court for the Northern District of Georgia (Atlanta Division)
dismissed the consolidated shareholder class action lawsuits. In dismissing the
suits, the Court held that the plaintiffs failed to state an actionable claim of
material misrepresentation under the federal securities laws. The Court found
that the risks of which the plaintiffs complained, those associated with the
Company's transition of certain manufacturing operations to its Manchester,
Georgia facility, were specifically disclosed by the prospectus. The Court also
rejected plaintiffs' claim that the prospectus described certain unfavorable
events as mere risks, when in fact those events had already occurred. The Court
held that the prospectus contained ample and meaningful cautionary language
specifically directed to the substance of the alleged misstatements. The
plaintiffs subsequently filed an appeal with the United States Court of Appeals
for the Eleventh Circuit. At the plantiffs' request, the Court of Appeals
dismissed the appeal on December 13, 1999, formally concluding the case.
The Company also is a party from time to time to other actions arising
in the ordinary course of business which it deems immaterial. Although the
Company believes that it has defenses to the claims of liability or for damages
in the actions against it, there can be no assurance that additional lawsuits
will not be filed against the Company or its subsidiaries. Further, there can be
no assurance that the lawsuits will not have a disruptive effect upon the
operations of the business, that the defense of the lawsuits will not consume
the time and attention of the senior management of the Company and its
subsidiaries, or that the resolution of the lawsuits will not have a material
adverse effect on the operating results and financial condition of the Company.
The Company intends to vigorously defend or pursue each of the lawsuits.
The Company maintains insurance in such amounts and against such risks
as it deems prudent, although no assurance can be given that such insurance will
be sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's business, financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to shareholders of the Company for a
vote in the Fourth Quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock trades on The American Stock Exchange under
the symbol "HMP." Prior to November 9, 1999, the Company's Common Stock traded
on The NASDAQ Stock Market(R) under the symbol "HMPS." The following table sets
forth the high and low sales price of the Common Stock as reported on the NASDAQ
National Market System or The American Stock Exchange, as the case may be, for
the periods indicated.
CALENDAR YEAR 1998 HIGH LOW
------------------ ---- ---
Second Quarter (April 15 through June 30)............. 17.13 9.00
Third Quarter ........................................ 13.38 5.38
Fourth Quarter ....................................... 5.75 1.75
CALENDAR YEAR 1999 HIGH LOW
------------------ ---- ---
First Quarter ........................................ 8.88 4.25
Second Quarter ....................................... 8.38 5.75
Third Quarter ........................................ 6.50 2.44
Fourth Quarter ....................................... 5.50 2.00
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As of March 15, 2000, there were 65 record holders of the Company's
Common Stock. On March 15, 2000, the last reported sales price of the Common
Stock on The American Stock Exchange was $3.00 per share.
The Company has not paid or declared any cash dividends on its capital
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. Accordingly,
the Company does not anticipate paying cash dividends on its common stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. The Company's credit agreement with its lenders currently prohibits
the payment of dividends on the Company's capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
On January 1, 1999, the Company amended its consulting and services
agreement with Healthcare Alliance, Inc., an affiliate of Robert J. Simmons, a
director of the Company. The Company granted Healthcare Alliance (i) an option
to purchase up to 1% of the Company's common stock if the Company achieves
certain amounts of incentive sales with certain group purchasing organizations,
and (ii) options to purchase 45,000 shares of common stock if the Company
achieves certain amounts of incremental sales revenue under the Company's group
purchasing agreement with Premier Purchasing Partners, L. P. A principal of
Healthcare Alliance is a director of the Company and thus this issuance to
Healthcare Alliance was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the "Section
4(2) Exemption").
In April 1998 Cordova Ventures, L.P. -- Enhanced Appreciation
("Cordova") exercised certain anti-dilution rights relating to a warrant (and
the shares issued pursuant thereto) to purchase 15,550 shares of the Company's
Class A Common Stock for $.001 per share, for a nominal purchase price. Cordova
is an accredited investor, and thus this issuance to Cordova was made pursuant
to the Section 4(2) Exemption.
On July 15, 1997, the Company issued to Banc of America Commercial
Finance Corporation, formerly known as NationsCredit Commercial Corporation
("Banc of America"), a warrant to purchase 765,000 shares of Common Stock.
Concurrently with the consummation of the Offering on April 20, 1998, the
Company issued to Banc of America 765,000 shares of Common Stock upon exercise
of warrants to purchase such stock for an aggregate amount of $765. Banc of
America is an accredited investor, and thus this issuance to Banc of America was
made in reliance on the Section 4(2) Exemption.
On March 20, 1998, the Company issued to Premier Purchasing Partners,
L.P. a warrant to purchase up to 500,000 shares of Common Stock, subject to
certain vesting requirements. The Company granted the warrant to Premier in
partial consideration for Premier executing a purchasing agreement with the
Company. See Item 1. "Business -- Description of Business by Industry Segment."
The right to purchase shares of common stock under the warrant vests annually in
increments of 100,000 shares only upon the achievement of certain specified
minimum annual sales and/or minimum cumulative sales of the Company's products
to participating Premier shareholders. Premier is an accredited investor, and
thus this issuance to Premier was made in reliance on the Section 4(2)
Exemption.
All of the foregoing issuances were conducted without an underwriter or
placement agent.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for each
of the five years ended December 31, 1999 are derived from, and are qualified by
reference to the consolidated financial statements, including the notes thereto,
of the Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto of the
Company included elsewhere in this Form 10-K.
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YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales ........................................ $ 5,003 $ 7,052 $ 15,798 $ 39,399 $ 75,371
Cost of goods sold ............................... 2,227 2,997 6,273 19,933 48,011
------- ------- -------- --------- ---------
Gross profit ..................................... 2,776 4,055 9,525 19,466 27,360
Selling, general and administrative expenses ..... 2,921 4,560 6,476 13,597 20,147
------- ------- -------- --------- ---------
Operating income (loss) .......................... (145) (505) 3,049 5,869 7,213
Interest expense, net ............................ (242) (733) (3,971) (3,103) (4,140)
Accretion of value of put warrant repurchase
obligation(1) .................................. -- -- (8,000) -- --
Other income ..................................... -- 54 70 46 99
------- ------- -------- --------- ---------
Income (loss) before income taxes and
extraordinary items ............................ (387) (1,184) (8,852) 2,812 3,172
Income tax benefit (expense) ..................... 7 -- (320) (1,781) (1,507)
Effect of conversion to C corporation status ..... (7) -- -- -- --
Extraordinary gain on early extinguishment of
put feature(1) ................................. -- -- -- 1,100 --
Extraordinary losses on early
extinguishments of debt ......................... (70) -- -- (83) --
------- ------- -------- --------- ---------
Net income (loss) ................................ $ (457) $(1,184 $ (9,172) $ 2,048 $ 1,665
======= ======= ======== ========= =========
Net income (loss) per share before
extraordinary items-- basic and diluted ......... $ (.04) $ (.13) $ (.97) $ .08 $ .12
Net income (loss) per share -- basic and
diluted ........................................ $ (.05) $ (.13) $ (.97) $ .17 $ .12
Weighted average common shares
outstanding -- basic ........................... 9,144 9,419 9,419 12,187 13,366
Weighted average common shares
outstanding-- diluted .......................... 9,144 9,419 9,419 12,412 13,373
BALANCE SHEET DATA (end of year):
Cash and cash equivalents ........................ $ 394 $ 218 $ 2,894 $ 6,232 $ 1,991
Working capital .................................. 1,500 1,018 6,842 28,767 29,927
Total assets ..................................... 6,894 6,176 31,577 104,637 102,397
Long-term debt, net of current maturities ........ 4,907 5,053 23,971 47,074 44,999
Total shareholders' (deficit) equity ............. (1,024) (1,916) (11,150) 41,431 43,069
- ----------
(1) See Note 9 to the Company's consolidated financial statements for a
discussion of these items.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto appearing
elsewhere herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Statements
regarding future events and developments and the Company's future performance,
as well as management's expectations, beliefs, plans, estimates or projections
relating to the future, are forward-looking statements within the meaning of
these laws. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected. Such risks and uncertainties include, among others, the Company's
limited manufacturing experience, the inability to efficiently manufacture
different products and to integrate newly acquired products with existing
products, the possible failure to successfully commence the manufacturing of new
products, the possible failure to maintain or increase production volumes of new
or existing products in a timely or cost-effective manner, the possible failure
to maintain compliance with applicable licensing or regulatory requirements, the
inability to successfully integrate acquired operations and products or to
realize anticipated synergies and economies of scale from acquired operations,
the
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dependence on patents, trademarks, licenses and proprietary rights, the
Company's potential exposure to product liability, the possible inadequacy of
the Company's cash flow from operations and cash available from external
financing, the inability to introduce new products, the Company's reliance on a
few large customers, the Company's dependence on key personnel, the fact that
the Company is subject to control by certain shareholders, the Company's
ability to address Year 2000 problems, pricing pressure related to healthcare
reform and managed care and other healthcare provider organizations, the
possible failure to comply with applicable federal, state or foreign laws or
regulations, limitations on third-party reimbursement, the highly competitive
and fragmented nature of the medical devices industry, deterioration in general
economic conditions and the Company's ability to pay its indebtedness.
Management believes that these forward-looking statements are reasonable;
however, you should not place undue reliance on such statements. These
statements are based on current expectations and speak only as of the date of
such statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risk and
uncertainties listed above, and other factors that you may wish to consider, is
contained below in this Item under the sections entitled "Year 2000 Disclosure"
and "Risk Factors."
BACKGROUND
The Company is a specialty medical device company focused on
manufacturing and/or marketing vascular products. The Company's oncology
product lines include implantable vascular ports, tunneled catheters and stem
cell transplant catheters used primarily in cancer treatment protocols. The
Company has a complete line of acute and chronic dialysis catheters and
immediate access hemodialysis grafts used for kidney failure patients, as well
as balloon technology products for embolectomy catheters and carotid shunts
used for endarterectomy procedures. In addition, the Company distributes
certain specialty devices used primarily in general and emergency surgery,
radiology, anesthesiology, respiratory therapy, blood filtration and critical
care settings. The Company was incorporated and began its operations in
February 1990 as a distributor of medical devices and began to distribute
vascular access devices in 1990. In November 1992, the Company entered into a
collaborative effort with a leading heart valve manufacturer to design and
develop a new line of vascular access ports for the Company. This new line of
ports, the Triumph-1(R) line, was introduced in September 1994. The Company
continues to market the Triumph-1(R) line of vascular access ports. In May
1995, the Company began to distribute the NeoStar Medical(R) line of
hemodialysis catheters. In March 1996, the Company began construction of a
20,000 square foot manufacturing, distribution and administrative facility in
Manchester, Georgia. The Company began manufacturing the NeoStar Medical(R)
product line at this facility in October 1996 and expanded this facility in
1998 to approximately 45,000 square feet. In July 1997, the Company acquired
the port business of Strato(R)/Infusaid(TM). The primary product lines obtained
in the Strato(R)/Infusaid(TM) acquisition included the LifePort(R) and
Infuse-a-Port(R) vascular access ports, and the Infuse-a-Cath(R) line of
catheters. In 1998, the Company made additional product acquisitions and
acquired the CVS and Stepic medical device distribution businesses. See Item 1.
"Business -- 1998 Acquisitions" above. Distribution of non-Company medical
devices through Stepic and CVS currently comprises approximately 54.1% of the
Company's revenue.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
contained in the Company's consolidated statements of operations expressed as a
percentage of net sales:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------- ------- -------
Net sales .................................................. 100.0% 100.0% 100.0%
Cost of goods sold ......................................... 39.7 50.6 63.7
------- ------- -------
Gross profit ............................................... 60.3 49.4 36.3
Selling, general and administrative expense ................ 41.0 34.5 26.7
------- ------- -------
Operating income (loss) .................................. 19.3 14.9 9.6
Other income (expense)
Interest expense, net .................................... (25.1) (7.9) (5.5)
Accretion of value of put warrant repurchase
obligation ............................................ (50.6) -- --
Other income ............................................. 0.4 0.1 0.1
------- ------- -------
Income (loss) before income taxes and extraordinary
item ..................................................... (56.0) 7.1 4.2
Income tax expense ......................................... (2.0) (4.5) (2.0)
Extraordinary gain on early extinguishment of put
feature .................................................. -- 2.8 --
Extraordinary loss on early extinguishment of debt ......... -- (0.2) --
------- ------- -------
Net income (loss) .......................................... (58.0)% 5.2% 2.2%
======= ======= =======
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Net Sales. Net sales increased 91.4% to $75.4 million in 1999 from
$39.4 million in 1998. Approximately $39.5 million of this increase is
attributable to owning Stepic, CVS and IFM for a full year in 1999. The
increase was also attributable to the introduction of the Perma Seal Dialysis
Graft, which the Company began marketing in February 1999 and which represented
approximately $1.5 million in revenue in 1999. The 1999 net sales on a segment
basis resulted in net sales of $32.7 million from the manufacturing segment and
$45.9 million from the distribution segment before intersegment eliminations.
The 1998 net sales on a segment basis resulted in net sales of $27.6 million
from the manufacturing segment and $12.0 million from the distribution segment
before intersegment eliminations.
Gross Profit. Gross profit increased 40.5% to $27.4 million in 1999,
from $19.5 million in 1998. Gross margin decreased to 36.3% in 1999, from 49.4%
in 1998. The decrease in gross margin is primarily the result of owning Stepic
and CVS, the distribution segment, a full year in 1999, which produces a
significantly lower gross margin than the manufacturing segment. The decrease
is also due to 1999 sales to Group Purchasing Organizations ("GPOs"), resulting
in reduced sales prices. The 1999 gross profit on a segment basis is gross
profit of $17.6 million or 53.8% from the manufacturing segment and $9.9
million or 21.6% from the distribution segment, before intersegment
eliminations. The 1998 gross profit on a segment basis resulted in gross profit
of $16.4 million or 59.3% from the manufacturing segment and $3.1 million or
25.8% from the distribution segment before intersegment eliminations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased $6.5 million or 48.1% to $20.1 million
in 1999 from $13.6 million in 1998. The increase was mostly attributable to
owning Stepic and CVS a full year in 1999, which represented $4.6 million of
the increase. In addition, the increase was due to higher amortization expense
from owning Norfolk and IFM a full year in 1999 as well as higher salaries
expense, marketing expenses, and GPO administrative fees in 1999. SG&A expenses
decreased as a percentage of net sales to 26.7% in 1999 from 34.5% in 1998 due
to revenue growth in 1999.
Interest Expense. Interest expense, net of interest income, increased
approximately $1.0 million or 33.4% from $3.1 million in 1998 to $4.1 million
in 1999. Excluding the effects of the accelerated amortization of debt issue
costs and debt discount related to the Banc of America debt and warrant in 1998
of $1.4 million (more fully discussed in Note 9 to the Company's consolidated
financial statements included elsewhere in this Form 10-K),
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interest expense increased approximately $2.4 million in 1999. The increase is
due to higher debt outstanding during all of 1999 of approximately $51 million
versus 1998 debt outstanding of approximately $28 million during 3.5 months of
1998 and approximately $50 million, resulting from the 1998 acquisitions, which
was outstanding only a short time during 1998.
Accretion of Value of Put Warrant Repurchase Obligation. This item
represented a one-time charge of $8 million in 1997 as a result of the
estimated increase in the original $3 million value assigned to the Banc of
America Warrant, which included a put feature. The put feature was rescinded by
Banc of America in January 1998 which resulted in an extraordinary gain of $1.1
million and a reclassification of $9.9 million from a put warrant repurchase
obligation liability to additional paid-in capital. This transaction is more
fully described in Note 9 to the Company's consolidated financial statements
contained elsewhere in this Form 10-K.
Extraordinary Items. During 1998, the Company incurred extraordinary
net losses of approximately $83,000, net of applicable income tax benefit of
approximately $53,300, associated with the early extinguishment of certain
debt, which the Company repaid using proceeds from the IPO. In addition, as
discussed previously, the Company recorded an extraordinary gain of $1.1
million in 1998 due to the rescission of a put feature associated with the Banc
of America Warrant that was issued in 1997. These transactions are more fully
described in Notes 6 and 9 to the Company's consolidated financial statements
contained elsewhere in this Form 10-K. There were no extraordinary items in
1999.
Income Taxes. Income tax expense decreased approximately $274,000 or
15.4% from an approximate $1.8 million in 1998 to approximately $1.5 million in
1999. The decrease in expense is attributable to non-tax deductible interest
expense in 1998.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net Sales. Net sales increased 149.4% to $39.4 million in 1998 from
$15.8 million in 1997. Approximately $21.8 million of this increase is
attributable to the 1998 acquisitions of Norfolk, IFM, CVS and Stepic ("the
1998 Acquisitions") and the effect of owning Strato for a full year in 1998
versus five and a half months in 1997. If the Company's sales were compared on
a "same store" basis, i.e., excluding the sales increase resulting from the
1998 Acquisitions and owning Strato a full year in 1998, sales revenue
increased approximately $1.83 million or 12%. This increase, which is
attributable primarily to increased volume in hemodialysis and triple lumen
catheter sales, is largely due to an expanded sales force. The 1998 net sales
on a segment basis resulted in net sales of $27.6 million from the
manufacturing segment and $12 million from the distribution segment before
intersegment eliminations. There were no distribution segment sales in 1997.
Gross Profit. Gross profit increased 104.4% to $19.5 million in 1998,
from $9.5 million in 1997. Gross margin decreased to 49.4% in 1998 from 60.3%
in 1997. The decrease in gross margin is primarily the result of the
acquisition of CVS and Stepic, the distribution segment of the business, which
produces a significantly lower profit margin on products manufactured by
companies other than Horizon. Excluding the 1998 acquisitions and the five and
a half month effect of the Strato acquisition, gross profit on a "same store"
basis increased from 60.3% or $9.5 million in 1997 to 63.1% or $11.1 million in
1998. This increase is primarily attributable to improved production
efficiencies at the Manchester facility. The increase is also due to increased
sales and the effect of increased volume of higher margin catheter products as
part of the overall sales mix. The 1998 gross margin on a segment basis
resulted in gross profit of $16.4 million or 59.3% from the manufacturing
segment and $3.1 million or 25.8% from the distribution segment before
intersegment eliminations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (S,G & A) increased $7.1 million or 110% to $13.6
million in 1998 from $6.5 million in 1997. Approximately $3.6 million of this
increase is due to the expenses incurred in operating the businesses acquired
in the 1998 Acquisitions and the additional five and a half months of owning
Strato. On a "same store" basis, SG&A costs increased $3.5 million. The
increase was partly attributable to a consultant fee of $657,000 paid in
relation to the Premier agreement, which was the fair market value of stock
issued to Premier pursuant to the agreement. Additionally, the increase is due
to increased research and development fees and increased compensation expenses
associated with the expansion
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of the sales force and the development of an adequate infrastructure to manage
the rapid growth through acquisitions. SG&A expenses decreased as a percentage
of net sales to 34.5% in 1998 from 41.0% in 1997 due to substantial revenue
growth in 1998.
Interest Expense. Interest expense, net of interest income, decreased
approximately $868,000 or 22% from $4 million in 1997 to $3.1 million in 1998.
Excluding the effects of the accelerated amortization of debt issue costs and
debt discount related to the Banc of America debt and warrant (more fully
discussed in Note 9 to the Company's consolidated financial statements included
elsewhere in this Form 10-K), interest expense decreased approximately $133,000
in 1998. The accelerated amortization was approximately $1.4 million in 1998
compared to $2.3 million in 1997. The decrease is due primarily to the improved
cash position of the Company for much of 1998 as a result of the Initial Public
Offering (the "IPO") proceeds. See also "-- Liquidity and Capital Resources"
below.
Accretion of Value of Put Warrant Repurchase Obligation. This item
represented a charge of $8 million in 1997 as a result of the estimated
increase in the original $3 million value assigned to the Banc of America
Warrant, which included a put feature. The put feature was rescinded by Banc of
America in January 1998 which resulted in an extraordinary gain of $1.1 million
and a reclassification of $9.9 million from a put warrant repurchase obligation
liability to additional paid-in capital. This transaction is more fully
described in Note 9 to the Company's consolidated financial statements
contained elsewhere in this Form 10-K.
Extraordinary Items. During 1998, the Company incurred extraordinary
net losses of approximately $83,000, net of applicable income tax benefit of
approximately $53,300, associated with the early extinguishment of certain
debt, which the Company repaid using proceeds from the IPO. In addition, as
discussed previously, the Company recorded an extraordinary gain of $1.1
million in 1998 due to the rescission of a put feature associated with the Banc
of America Warrant that was issued in 1997. These transactions are more fully
described in Notes 6 and 9 to the Company's consolidated financial statements
contained elsewhere in this Form 10-K.
Income Taxes. Income tax expense increased approximately $1.5 million
or 457% from an approximate $320,000 in 1997 to approximately $1.8 million in
1998. The increase in expense is attributable to increased pre-tax income and
the full year impact of the non-deductible goodwill amortization expense
related to the Strato acquisition. It should be noted that the 1997 expense was
also lower due to the utilization of net operating loss carryforwards for which
there previously had been a full valuation allowance. These carryforwards were
fully utilized in 1997.
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QUARTERLY RESULTS
The following table sets forth quarterly statement of operations data for
1998 and 1999. This quarterly information is unaudited but has been prepared on
a basis consistent with the Company's audited financial statements presented
elsewhere herein and, in the Company's opinion, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
The Company restated its interim condensed consolidated financial statements for
the three and six months ended June 30, 1999 and the three and nine months ended
September 30, 1999. The restatement was necessary due to errors in inventory
valuation and recognition of cost of goods sold discovered during the fourth
quarter relating to previous periods. The adjustment resulted in the following
changes shown on the table below for the three months ended June 30 and
September 30, 1999.
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ............................................. $ 6,709 $ 6,859 $ 8,064 $ 17,767
Costs of good sold .................................... 2,534 2,500 3,485 11,414
--------- --------- --------- ---------
Gross profit .......................................... 4,175 4,359 4,579 6,353
Selling, general and administrative expenses .......... 2,963 2,439 3,244 4,951
--------- --------- --------- ---------
Operating income ...................................... 1,212 1,920 1,335 1,402
Interest expense, net ................................. (1,942) (299) (30) (832)
Other income .......................................... 11 11 11 13
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item ................................................ (719) 1,632 1,316 583
Income tax expense .................................... (209) (681) (576) (314)
--------- --------- --------- ---------
Income (loss) before extraordinary items .............. (928) 951 740 269
Extraordinary gain on early extinguishment of put
feature ............................................. 1,100 -- -- --
Extraordinary losses on early extinguishments of
debt, net of income tax benefit of $53,330 .......... -- (83) -- --
--------- --------- --------- ---------
Net income ............................................ $ 172 $ 868 $ 740 $ 269
========= ========= ========= =========
Net income (loss) per share before extraordinary
item -- basic and diluted ........................... $ (.10) $ .08 $ .06 $ .02
========= ========= ========= =========
Net income per share-- basic and diluted .............. $ .02 $ .07 $ .06 $ .02
========= ========= ========= =========
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- ------------------------ ------------------------ ------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ...................................... 19,441 18,878 18,878 18,842 18,841 18,210
Costs of good sold ............................. 12,056 11,476 11,727 11,489 11,937 12,290
------- ------- ------- ------- ------- -------
Gross profit ................................... 7,385 7,402 7,151 7,353 6,904 5,920
Selling, general and administrative expenses ... 4,843 4,850 4,850 5,401 5,401 5,054
------- ------- ------- ------- ------- -------
Operating income ............................... 2,542 2,552 2,301 1,952 1,503 866
------- ------- ------- ------- ------- -------
Interest expense, net .......................... (912) (1,044) (1,044) (1,057) (1,057) (1,127)
Other income ................................... 12 43 43 16 16 28
------- ------- ------- ------- ------- -------
Income (loss) before income taxes .............. 1,642 1,551 1,300 911 462 (233)
Income tax expense ............................. (703) (665) (557) (430) (218) (28)
------- ------- ------- ------- ------- -------
Net income ..................................... 939 886 743 481 244 (261)
======= ======= ======= ======= ======= =======
Net income per share - basic and diluted ....... 0.07 0.07 0.06 0.04 0.02 (0.02)
======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
requirements, capital expenditures for its existing facility and to fund new
business acquisitions. Historically, the Company has used cash generated by
operations, bank financing, and, in 1998, proceeds from its public equity
offering to fund its capital requirements. Additionally, the Company requires
capital to finance accounts receivable and inventory. The Company's working
capital requirements vary from period to period depending on its production
volume, the timing of shipments and the payment terms offered to its customers.
Net cash provided by (used in) operations was approximately ($2.4 million)
in 1999, as compared with approximately $2.7 million and ($733,370) in 1997 and
1998, respectively. The decrease in cash from operations during 1999 was
primarily the result of an increase in accounts receivable and inventory levels
as well as the
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reduction of accounts payable and income taxes payable. The Company granted
extended payment terms to several of its larger distributors in 1999, which in
conjunction with increased sales volume, contributed to the increase in
accounts receivable.
Net cash used in investing activities was approximately $1.9 million during
1999, as compared with approximately $20.4 million and $38.1 million in 1997 and
1998, respectively. Substantially all of the investing activities in 1999 were
for additional cash paid for acquisitions and for capital expenditures. Cash
paid for acquisitions was approximately $19.5 million and $36.1 million during
1997 and 1998, respectively.
The Company has established a capital expenditure budget in 2000 of
approximately $1.2 million, primarily for leasehold improvements and
manufacturing and office equipment.
Net cash provided by financing activities was $26,779 in 1999, as compared
with approximately $20.4 million and $42.2 million in 1997 and 1998,
respectively. Financing activities in 1999 include $2,906,000 provided by
additional borrowings under the Company's credit facility to fund operations
and approximately $2,879,221 used for principal payments on long-term debt. In
1998, the proceeds from the Company's initial public offering were used to
repay the Company's existing debt of approximately $25 million that was
outstanding, purchase the Company's office in Atlanta, Georgia, and fund the
acquisition of Norfolk. In 1997, the borrowings of $23.5 million were used to
fund business expansion through the acquisition of Strato, to retire
approximately $1.7 million of existing debt and to purchase warrants issued in
connection with a previous debt agreement for a price of $400,000.
As previously noted, the Company's previous credit facility and certain
other indebtedness were repaid during 1998 with proceeds from the IPO as was
required by the respective agreements. On May 26, 1998, the Company entered into
a $50 million amended and restated credit facility (the "New Credit Facility")
with Banc of America to be used for working capital purposes and to fund future
acquisitions. The New Credit Facility bears interest at a rate to be selected by
the Company from certain options defined in the agreement. At December 31, 1999,
the Company's interest rate was 9.5152%, compared with 8.1701% at December 31,
1998. Portions of the amounts outstanding under the New Credit Facility are
payable in 16 quarterly installments beginning October 1, 2000 in amounts
representing 6.25% of the principal amounts outstanding on the payment due
dates. The remaining portion is due on the date of the expiration of the New
Credit Facility, which is July 1, 2004. The total balance outstanding under the
New Credit Facility was approximately $45.0 million and no funds were available
for borrowing under the New Credit Facility at December 31, 1999. In addition,
the Company had outstanding standby letters of credit at December 31, 1999 of
approximately $4.8 million, which collateralize the Company's obligations to
third parties in connection with its 1998 acquisitions. The Company's New Credit
Facility contains certain restrictive covenants that require a minimum net worth
and EBITDA as well as specific ratios such as total debt service coverage,
leverage, interest coverage and debt to capitalization. The covenants also place
limitations on capital expenditures, other borrowings, operating lease
arrangements, and affiliate transactions. The Company is in compliance with or
has received appropriate waivers of these covenants as of the date of this
filing. The New Credit Facility is described more fully in Note 6 of the
consolidated financial statements of the Company included elsewhere in this Form
10-K. The Company and Banc of America amended the New Credit Facility on March
31, 1999 and March 29, 2000, to adjust certain of the financial ratio covenants
and increase the interest rate.
The Company is currently negotiating with various lenders to refinance the
existing senior indebtedness and to provide new subordinate debt or equity
investment, which, together with its cash flows from operations, the Company
believes will be sufficient to satisfy its future working capital and capital
expenditure requirements.
IMPACT OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of the Company's operations for the periods discussed have not
been significantly affected by inflation or foreign currency fluctuations. The
New Credit Facility costs result primarily from interest and principal and are
not affected by inflation. Further, although the Company often sells products
on a fixed cost basis, the average time between the receipt of any order and
delivery is generally only a few days. While the Company has not historically
been adversely affected by increases in the cost of raw materials and
components, several GPO agreements to which the Company is a party limit the
Company's ability to raise prices. Thus, future increases in the cost of raw
materials and components could adversely affect the Company's business,
financial condition and results
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23
of operations. This could change in situations in which the Company is
producing against a substantial backlog and may not be able to pass on higher
costs to customers. In addition, interest on a portion of the Company's debt is
variable (approximately $11.1 million is subject to an interest rate cap) and
therefore may increase with inflation.
The Company makes all sales of foreign customers in U.S. dollars. Thus,
notwithstanding fluctuation of foreign currency exchange rates, the Company's
profit margin for any purchase order is not subject to change due to exchange
rate fluctuations after the time the order is placed.
YEAR 2000 DISCLOSURE
The Company previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action. The Company's efforts included replacing
and testing four basic aspects of its business operations: internal information
technology ("IT") systems, including sales order processing, contract
management, financial systems and service management; internal non-IT systems,
including office equipment and test equipment products; building
infrastructure, including heating and cooling systems, security systems, water,
gas and electric; and material third-party relationships. Management believes
the Company has completed all of the activities within its control to ensure
that the Company's systems are Year 2000 compliant, and the Company has
experienced no interruptions to normal operations due to the start of the Year
2000.
The Company's Year 2000 readiness costs were not material and were incurred
and recorded as normal operating costs. The Company funded these costs through
funds generated from operations and such costs were generally not incremental
to existing IT budgets; internal resources were re-deployed and timetables for
implementation of replacement systems were accelerated. The Company does not
currently expect to apply any further funds to address Year 2000 issues.
As of March 29, 2000, the Company has not experienced any material
disruptions of its internal computer systems or software applications, and has
not experienced any problems with the computer systems or software applications
of its third party venders, suppliers or service providers. The Company will
continue to monitor these third parties to determine the impact, if any, on the
business of the Company and the actions the Company must take, if any, in the
event of non-compliance by any of these third parties. Based upon the Company's
assessment of compliance by third parties, there appears to be no material
business risk posed by any such noncompliance. Moreover, the Company generally
believes that the vendors that supply products to the Company for resale are
responsible for the products' Year 2000 functionality.
Although the Company's Year 2000 rollover did not present any material
business disruption, there are some remaining Year 2000-related risks,
including risks due to the fact that the Year 2000 is a leap year. These risks
include potential product supply issues and other non-operational issues.
Management believes that appropriate action has been taken to address these
remaining Year 2000 issues and contingency plans are in place to minimize the
financial impact to the Company. Management, however, cannot be certain that
Year 2000 issues will not have a material adverse impact on the Company, since
the evaluation process is not yet complete and it is early in the Year 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. Changes in such fair value are required to be recognized
immediately in net income (loss) to the extent the derivatives are not effective
as hedges. In September 1999, the Financial Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an amendment to delay the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of SFAS No. 133 as amended by SFAS No. 137 to have
a material impact on the consolidated financial statements.
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RISK FACTORS
Limited Manufacturing Experience
The Company's success will depend in part on its ability to manufacture its
products in compliance with international and domestic standards such as ISO
9001, the FDA's Good Manufacturing Practices ("GMP") regulations and other
applicable licensing and regulatory requirements in sufficient quantities and
on a timely basis, while maintaining product quality and acceptable
manufacturing costs. The Company has historically outsourced the manufacturing
of most of its product lines to third parties while remaining responsible for
that work. In the fourth quarter of 1996, the Company transitioned the
manufacturing of its Circle C(R) and Pheres-Flow(TM) specialty catheter product
lines into its manufacturing facility in Manchester, Georgia. During 1998, the
Company transitioned the manufacturing of its LifePort(TM), Infuse-a-Port(R)
and Infuse-a-Cath(R) product lines to the Manchester facility from a facility
in Norwood, Massachusetts. During 1999, the Company transitioned the
manufacturing of the Vortex(TM), TitanPort(TM) and OmegaPort(R) product lines
to the Manchester facility from Norfolk Medical. The Company has undergone and
expects to continue to undergo regular GMP inspections in connection with the
manufacture of its products at the Company's facilities. The Company's success
will depend, among other things, on its ability to efficiently manufacture
different products and to integrate newly acquired products with existing
products. The Company's failure to successfully commence the manufacturing of
new products, to maintain or increase production volumes of new or existing
products in a timely or cost-effective manner or to maintain compliance with
ISO 9001, the CE Mark requirements, GMP regulations or other applicable
licensing or regulatory requirements could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company has limited experience in managing the manufacturing process for the
IFM product line. If the Company should assume or acquire manufacturing
responsibility for that product line, the Company's success will depend on,
among other things, successfully acquiring current plant management and
successfully producing the IFM product line.
Management of Growth; Risks Associated with Acquisitions
The rapid growth experienced by the Company to date has placed, and could
continue to place, significant demands on the Company's management, operational
and financial resources. From time to time, the Company may pursue additional
strategic acquisitions of complementary businesses, products or technologies as
a means of expanding its existing product lines and distribution channels. As
the medical devices industry continues to consolidate, the Company expects to
face increasing competition from other companies for available acquisition
opportunities. There can be no assurance that suitable acquisition candidates
will be available, that financing for such acquisitions will be obtainable on
terms acceptable to the Company or that such acquisitions will be successfully
completed. Acquisitions entail numerous risks, including (i) the potential
inability to successfully integrate acquired operations and products or to
realize anticipated synergies, economies of scale or other value, (ii)
diversion of management's attention, (iii) responsibility for undiscovered or
contingent liabilities and (iv) loss of key employees of acquired operations.
The relocation of manufacturing operations for acquired product lines to the
Company's manufacturing facility in Manchester, Georgia may also result in
interruptions in production and back orders. No assurance can be given that the
Company will not incur problems in integrating any future acquisition and there
can be no assurance that any future acquisition will increase the Company's
profitability. Further, the Company's results of operations in fiscal quarters
immediately following a material acquisition may be materially adversely
affected while the Company integrates the acquired business into its existing
operations. Any such problems could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
future acquisitions by the Company may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time charges and the
creation of goodwill or other intangible assets that could result in
significant amortization expense.
Manufacturing Relationships
While the Company believes it has a good relationship with each third party
that manufactures the Company's products, there can be no assurance that such
relationships will not deteriorate in the future. Deterioration in these
manufacturing relationships could cause the Company to experience interruptions
in its manufacturing and delivery processes and have a material adverse impact
on the Company's business, financial condition and results of operations.
Furthermore, when the manufacturing arrangements with these third parties
expire, the Company will
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have to make other manufacturing arrangements or manufacture products at
Company facilities. The failure to effectively plan for the expiration of these
agreements could also result in interruption of the manufacturing and delivery
processes for these products and have a material adverse impact on the
Company's business, financial condition and results of operations.
The Company is in default under its Manufacturing Agreement with IFM. See
Item 1. "Business - 1998 Acquisitions" above. Should the Company be unable to
revise the Manufacturing Agreement to include acceptable terms or fail to
continue to operate under the verbal modification to the Manufacturing
Agreement, then any liabilities incurred as a result of the default could have a
material adverse effect on the Company's consolidated financial position and
disrupt the Company's ability to obtain and sell the Products.
Dependence on Patents, Trademarks, Licenses and Proprietary Rights
The Company believes that its competitive position and success has
depended, in part, on and will continue to depend on the ability of the Company
and its licensors to obtain patent protection for its products, to defend
patents once obtained, to preserve its trade secrets and to operate without
infringing upon patents and proprietary rights held by third parties, both in
the United States and in foreign countries. The Company's policy is to protect
its proprietary position by, among other methods, filing United States and
foreign patent applications relating to technology, inventions and improvements
that are important to the development of its business. The Company owns
numerous United States and foreign patents and United States and foreign patent
applications. The Company also is a party to license agreements with third
parties pursuant to which it has obtained, for varying terms, the right to
make, use and/or sell products that are covered under such license agreement in
consideration for royalty payments. Many of the Company's major products are
subject to such license agreements. There can be no assurance that the Company
or its licensors have or will develop or obtain additional rights to products
or processes that are patentable, that patents will issue from any of the
pending patent applications filed by the Company or that claims allowed will be
sufficient to protect any technology that is licensed to the Company. In
addition, no assurances can be given that any patents issued or licensed to the
Company or other licensing arrangements will not be challenged, invalidated,
infringed or circumvented or that the rights granted thereunder will provide
competitive advantages for the Company's business or products. In such event
the business, results of operations and financial condition of the Company
could be materially adversely affected.
A number of medical device companies, physicians and others have filed
patent applications or received patents to technologies that are similar to
technologies owned or licensed by the Company. There can be no assurance that
the Company is aware of all patents or patent applications that may materially
affect the Company's ability to make, use or sell its products. United States
patent applications are confidential while pending in the United States Patent
and Trademark Office ("PTO"), and patent applications filed in foreign
countries are often first published six or more months after filing. Any
conflicts resulting from third-party patent applications and patents could
significantly reduce the coverage of the patents owned or licensed by the
Company and limit the ability of the Company or its licensors to obtain
meaningful patent protection. If patents are issued to other companies that
contain competitive or conflicting claims, the Company may be required to
obtain licenses to those patents or to develop or obtain alternative
technology. There can be no assurance that the Company would not be delayed or
prevented from pursuing the development or commercialization of its products,
which could have a material adverse effect on the Company.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Although the
Company has not been a party to any material litigation to enforce any
intellectual property rights held by the Company, or a party to any material
litigation seeking to enforce any rights alleged to be held by others, future
litigation may be necessary to protect patents, trade secrets, copyrights or
"know-how" owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of the Company and others. The validity and breadth of
claims covered in medical technology patents involve complex legal and factual
questions for which important legal principles are unresolved. Any such
litigation could result in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using certain of its products, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
the Company's trade secrets.
The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. The Company's policy is to protect its trademarks, trade names and
associated goodwill by, among other methods, filing United States and foreign
trademark applications relating to its products and business. The Company owns
numerous United States and foreign trademark registrations and applications.
The Company also relies upon trademarks and trade names for which it does not
have pending trademark applications or existing registrations, but in which the
Company has substantial trademark rights. The Company's registered and
unregistered trademark rights relate to the majority of the Company's products.
There can be no assurance that any registered or unregistered trademarks or
trade names of the Company will not be challenged, canceled, infringed,
circumvented, or be declared generic or infringing of other third-party marks
or provide any competitive advantage to the Company.
Potential Product Liability
Because its products are intended to be used in healthcare settings on
patients who are physiologically unstable and may be seriously or critically
ill, the Company's business exposes it to potential product liability risks
which are inherent in the medical devices industry. In addition, many of the
medical devices manufactured and sold by the Company are designed to be
implanted in the human body for extended periods of time. Component failures,
manufacturing flaws, design defects or inadequate disclosure of product-related
risks with respect to these or other products manufactured or sold by the
Company could result in injury to, or death of, a patient. The occurrence of
such a problem could result in product liability claims and/or a recall of,
safety alert relating to, or other FDA or private civil action affecting one or
more of the Company's products or responsible officials. The Company maintains
product liability insurance coverage in amounts that it deems sufficient for its
business. There can be no assurance, however, that such coverage will be
available with respect to or sufficient to satisfy all claims made against the
Company or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls in the future, regardless of their ultimate outcome, could result in
costly litigation and could have a material adverse effect on the Company's
business, results of operations and financial condition. In September 1999, the
Company initiated a voluntary product recall of its dialysis and central venous
catheter kit product lines due to small pinholes in the product packaging.
Although the recall covers products manufactured since 1994, product returns
through December 31, 1999 were approximately 15,300 units. No product complaints
have been received to date for either pinholes in the packaging or infection of
the implant site that could be attributed to the packaging being contaminated.
The product recall will remain open with FDA until the reconciliation to
shipments has been completed and a recall termination request has been approved.
Future Capital Requirements
There can be no assurance that the Company's cash flow from operations and
cash available from external financing will be sufficient to meet the Company's
future cash flow needs, in which case the Company would need to obtain
additional financing. The Company currently has no availability of funds under
the New Credit Facility. Any additional financing could involve issuances of
debt or issuances of equity securities which would be dilutive to the Company's
stockholders, and any debt facilities could contain covenants that may affect
the Company's operations, including its ability to make future acquisitions.
Adequate additional funds, whether from the financial markets or from other
sources, may not be available on a timely basis, on terms acceptable to the
Company or at all. Insufficient funds may cause the Company difficulty in
financing its accounts receivables and inventory and may result in delay or
abandonment of some or all of the Company's product acquisition, licensing,
marketing or research and development programs or opportunities, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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New Product Introductions
Although the vascular access product industry has not experienced rapid
technological change historically, as the Company's existing products become
more mature, the importance of developing or acquiring, manufacturing and
introducing new products that address the needs of its customers will increase.
The development or acquisition of any such products will entail considerable
time and expense, including acquisition costs, research and development costs,
and the time and expense required to obtain necessary regulatory approvals,
which approvals are not assured, and any of which could adversely affect the
business, results of operations or financial condition of the Company. There
can be no assurance that such development activities will yield products that
can be commercialized profitably or that any product acquisition can be
consummated on commercially reasonable terms or at all. To date, substantially
all of the Company's products have been developed in conjunction with third
parties or acquired as a result of acquisitions consummated by the Company. The
inability of the Company to develop or acquire new products to supplement the
Company's existing product lines could have an adverse impact on the Company's
ability to fully implement its business strategy and further develop its
operation.
Customer Concentration
The Company's net sales to its three largest customers accounted for 14%,
7% and 7% of total sales during 1997, 1998 and 1999, respectively. The loss of,
or significant curtailments of purchases by, any of the Company's significant
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.
Dependence on Key Suppliers
The Company purchases raw materials and components for use in manufacturing
its products from many different suppliers. There can be no assurance that the
Company will be able to maintain its existing supplier relationships or secure
additional suppliers as needed. In addition, Stepic has generated 64% of its
sales through distribution of products of three major manufacturers. See Item
1. "Business -- Description of Business by Industry Segment -- Product
Distribution." The loss of a major supplier, the deterioration of the Company's
relationship with a major supplier, changes by a major supplier in the
specifications of the components used in the Company's products, or the failure
of the Company to establish good relationships with major new suppliers could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Dependence on Key Personnel
The Company's success is substantially dependent on the performance,
contributions and expertise of its executive officers and key employees. The
Company's success to date has been significantly dependent on the contributions
of Marshall B. Hunt, its Chairman and Chief Executive Officer, and William E.
Peterson, Jr., its President, each of whom is party to an employment agreement
with the Company and on each of whom the Company maintains key man life
insurance in the amount of $1 million. The Company is wholly dependent on
certain key employees to manage its distribution business. The Company is also
dependent on its ability to attract, retain and motivate additional personnel.
The loss of the services of any of its executive officers or other key employees
or the Company's inability to attract, retain or motivate the necessary
personnel could have a material adverse effect on the Company's business,
results of operations and financial condition.
Control by Certain Shareholders
Marshall B. Hunt, William E. Peterson, Jr., and Roy C. Mallady, Jr.
collectively own more than 50% of the Company's outstanding common stock. These
shareholders, if they were to act together, would have the power to elect all
of the members of the Company's Board of Directors, amend the Amended and
Restated Articles of Incorporation of the Company (the "Articles") and the
Amended and Restated Bylaws of the Company (the "Bylaws") and effect or
preclude fundamental corporate transactions involving the Company, including
the acceptance or rejection of proposals relating to a merger of the Company or
the acquisition of the Company by another entity. Accordingly, these
shareholders are able to exert significant influence over the Company,
including the ability to control decisions on matters on which shareholders are
entitled to vote.
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Year 2000 Issues
The year 2000 could result in challenges related to the Company's computer
software, accounting records and relationships with suppliers and customers.
Management of the Company is monitoring possible year 2000 issues and is seeking
to avoid any problems. As of March 29, 2000 the Company has not incurred
material year 2000 issues which remain unresolved nor has the Company incurred
material costs with respect to assessing and remediating year 2000 problems.
However, there can be no assurance that the Company has identified all year 2000
problems in its computer systems or those of its customers, vendors or resellers
in advance of their occurrence or that the Company will be able to successfully
remedy any problems that are discovered. The expenses of the Company's efforts
to identify and address such problems, or the expenses or liabilities to which
the Company may become subject as a result of such problems, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The revenue stream and financial stability of existing
customers may be adversely impacted by year 2000 problems, which could cause
fluctuations in the Company's revenue. In addition, failure of the Company to
identify and remedy year 2000 problems could put the Company at a competitive
disadvantage relative to companies that have corrected such problems.
Healthcare Reform/Pricing Pressure
The healthcare industry in the United States continues to experience
change. In recent years, several healthcare reform proposals have been
formulated by members of Congress. In addition, state legislatures periodically
consider healthcare reform proposals. Federal, state and local government
representatives will, in all likelihood, continue to review and assess
alternative healthcare delivery systems and payment methodologies, and ongoing
public debate of these issues can be expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement
by both government and third-party payors to persons providing medical
services. In particular, the healthcare industry is experiencing market-driven
reforms from forces within the industry that are exerting pressure on
healthcare companies to reduce healthcare costs. Managed care and other
healthcare provider organizations have grown substantially in terms of the
percentage of the population in the United States that receives medical
benefits through such organizations and in terms of the influence and control
that they are able to exert over an increasingly large portion of the
healthcare industry. Managed care organizations are continuing to consolidate
and grow, increasing the ability of these organizations to influence the
practices and pricing involved in the purchase of medical devices, including
certain of the products sold by the Company, which is expected to exert
downward pressure on product margins. Both short- and long-term cost
containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on the Company's business, results of
operations and financial condition.
Government Regulation
The Company's products and operations are subject to extensive regulation
by numerous governmental authorities, including, but not limited to, the FDA
and state and foreign governmental authorities. In particular, the Company must
obtain specific clearance or approval from the FDA before it can market new
products or certain modified products in the United States. The FDA administers
the FDC Act. Under the FDC Act, medical devices must receive FDA clearance
through the Section 510(k) notification process ("510(k)") or the more lengthy
PMA process before they can be sold in the United States. To obtain 510(k)
marketing clearance, a company must show that a new product is "substantially
equivalent" to a product already legally marketed and which does not require a
PMA. Therefore, it is not always necessary to prove the safety and
effectiveness of the new product in order to obtain 510(k) clearance for such
product. To obtain a PMA, a company must submit extensive data, including
clinical trial data, to prove the safety, effectiveness and clinical utility of
its products. FDA regulations also require companies to adhere to certain
GMP's, which include testing, quality control, storage, and documentation
procedures. Compliance with applicable regulatory requirements is monitored
through periodic site inspections by the FDA. The process of obtaining such
clearances or approvals can be time-consuming and expensive, and there can be
no assurance that all clearances or approvals sought by the Company will be
granted or that FDA review will not involve delays adversely affecting the
marketing and sale of the Company's products. In addition, the Company is
required to comply with FDA requirements for labeling and promotion of its
products. The Federal Trade Commission also regulates most device advertising.
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In addition, international regulatory bodies often establish varying
regulations governing product testing and licensing standards, manufacturing
compliance (e.g., compliance with ISO 9001 standards), packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. The inability or failure of
the Company to comply with the varying regulations or the imposition of new
regulations could restrict the Company's ability to sell its products
internationally and thereby adversely affect the Company's business, results of
operations and financial condition.
Failure to comply with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement actions, including, but
not limited to, product seizures, injunctions, recalls, suspensions or
withdrawal of clearances or approvals, civil penalties and criminal
prosecutions against the Company or its responsible officials, any one or more
of which could have a material adverse effect on the Company's business,
results of operations and financial condition. Federal, state and foreign laws
and regulations regarding the manufacture and sale of medical devices are
subject to future changes, as are administrative interpretations of regulatory
agencies. No assurance can be given that such changes will not have a material
adverse effect on the Company's business, results of operations and financial
condition. From time to time, the Company has received Section FD-483 and
Warning Letters from the FDA regarding the Company's compliance with FDA
regulations. The Company has worked with the FDA to resolve these issues. There
can be no assurance the Company will not receive additional FD-483s or Warning
Letters in the future or that it will be able to reach an acceptable resolution
of the issues raised in such letters.
Limitations on Third-Party Reimbursement
In the United States, the Company's products are purchased primarily by
hospitals and medical clinics, which then bill various third-party payors, such
as Medicare, Medicaid and other government programs and private insurance
plans, for the healthcare services provided to patients. Government agencies,
private insurers and other payors determine whether to provide coverage for a
particular procedure and reimburse hospitals for medical treatment at a fixed
rate based on the diagnosis-related group ("DRG") established by the United
States Health Care Financing Administration ("HCFA"). The fixed rate of
reimbursement is based on the procedure performed and is unrelated to the
specific devices used in that procedure. If a procedure is not covered by a
DRG, payors may deny reimbursement. In addition, third-party payors may deny
reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication. Reimbursement of procedures implanting the Company's
vascular access ports and catheter products is currently covered under a DRG.
There can be no assurance that reimbursement for such implantation will
continue to be available, or that future reimbursement policies of third-party
payors will not adversely affect the Company's ability to sell its products on
a profitable basis. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, results of operations and financial
condition.
Competition
The medical devices industry is highly competitive and fragmented. The
Company currently competes with many companies in the development,
manufacturing and marketing of vascular access ports, dialysis and apheresis
catheters and related ancillary products and in the distribution of medical
devices. Some of these competitors have substantially greater capital
resources, management resources, research and development staffs, sales and
marketing organizations and experience in the medical devices industry than the
Company. These competitors may succeed in marketing their products more
effectively, pricing their products more competitively, or developing
technologies and products that are more effective than those sold or produced
by the Company or that would render some products offered by the Company
noncompetitive.
Factors Inhibiting Takeover
Certain provisions of the Articles and Bylaws may delay or prevent a
takeover attempt that a shareholder might consider in its best interest. Among
other things, these provisions establish certain advance notice procedures for
shareholder proposals to be considered at shareholders' meetings, provide for
the classification of the Board of Directors, provide that only the Board of
Directors or shareholders owning 70% or more of the outstanding Common Stock
may call special meetings of the shareholders and establish supermajority
voting requirements with
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respect to the amendment of certain provisions of the Articles and Bylaws. In
addition, the Board of Directors can authorize and issue shares of Preferred
Stock, no par value (the "Preferred Stock"), issuable in one or more series,
with voting or conversion rights that could adversely affect the voting or
other rights of holders of the Common Stock. The terms of the Preferred Stock
that might be issued could potentially prohibit the Company's consummation of
any merger, reorganization, sale of all or substantially all of its assets,
liquidation or other extraordinary corporate transaction without the approval
of the holders of the outstanding shares of such stock. Furthermore, certain
provisions of the Georgia Business Corporation Code may have the effect of
delaying or preventing a change in control of the Company.
Deterioration in General Economic Conditions
The sales of the products manufactured and distributed by the Company may
be adversely impacted by a deterioration in the general economic conditions in
the markets in which the Company's products are sold. Likewise, a deterioration
in general economic conditions could cause the Company's customers and/or third
party payors to choose cheaper methods of treatment not utilizing the Company's
products. A decline in the Company's sales attributable to these factors could
have a material adverse effect on the Company's business, results of operations
and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other companies, the Company is exposed to market risks relating to
fluctuations in interest rates. The Company's objective of financial risk
management is to minimize the negative impact of interest rate fluctuations on
the Company's earnings and cash flows.
To manage this risk, the Company has entered into an interest rate cap
agreement ("the Cap Agreement") with NationsBank, a major financial
institution, to minimize the risk of credit loss. The Company uses this Cap
Agreement to reduce risk by essentially creating offsetting market exposures.
The Cap Agreement is not held for trading purposes.
At December 31, 1999, the Company had approximately $45.0 million
outstanding under its New Credit Facility, which expires in July 2004. Amounts
outstanding under the New Credit Facility of approximately $11.1 million were
subject to the Cap Agreement, which expires in October 2002. The fair value of
the Cap Agreement, as determined by NationsBank, was $23 as of December 31,
1999. The Cap Agreement settles quarterly and the cap rate is 8.8%.
For more information on the Cap Agreement, see Notes 1 and 6 to the
Company's consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are listed under Item 14(a)
and appear beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers of the Company is
incorporated herein by reference to the information under the captions
"Directors Standing for Election," "Directors Continuing in Office," and
"Executive Officers and Key Employees" in the Company's Proxy Statement for the
2000 Annual Meeting of Shareholders. Information with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders.
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ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the information under the captions "How are Directors
Compensated?," "Executive Compensation Summary Table," "Employment Agreements,"
"Compensation Committee Interlocks and Insider Participation," "Option Grants
for Fiscal 1999" and "Option Exercises and Values for Fiscal 1999" in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the tabulation under the
caption "Stock Ownership" in the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Report of Independent Accountants..................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999.......... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.................................. F-3
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1997, 1998, and 1999............ F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999................................. F-5
Notes to Consolidated Financial Statements............................ F-6
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule.......... F-34
Schedule II -- Valuation and Qualifying Accounts........................... F-35
3. EXHIBITS
Included as exhibits are the items listed on the Exhibit Index below.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1 -- Amended and Restated Articles of Incorporation of
the Company, filed as Exhibit 3.1 to the
Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and
incorporated herein by reference.
3.2 -- Amended and Restated Bylaws of the Company,
filed as Exhibit 3.2 to the Registrant's Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
4.1 -- See Articles II, III, VII and IX of the
Amended and Restated Articles of Incorporation
filed as Exhibit 3.1 and Articles I, VII, VIII
and IX of the Amended and Restated Bylaws filed
as Exhibit 3.2, filed as Exhibit 4.1 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
4.2 -- Specimen Common Stock Certificate, filed as
Exhibit 4.2 to the Registrant's Form S-1 dated
April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
4.3 -- Rights Agreement dated April 9, 1998 by and
between the Company and Tapir Investments
(Bahamas) Ltd., filed as Exhibit 4.3 to the
Registrant's Form 10-K dated March 31, 1999 (SEC
File No. 000-24025) and incorporated herein by
reference.
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10.1 -- Promissory Note dated September 28, 1995 made
by Marshall B. Hunt to the order of the Company
in the principal amount of $77,612.43, as amended
by Amendment to Promissory Note dated September
28, 1996, filed as Exhibit 10.1 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.2 -- Promissory Note dated September 28, 1995 made
by William E. Peterson, Jr. to the order of the
Company in the principal amount of $77,612.43, as
amended by Amendment to Promissory Note dated
September 28, 1996, filed as Exhibit 10.2 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.3 -- Promissory Note dated September 28, 1995 made
by Roy C. Mallady, Jr. to the order of the
Company in the principal amount of $77,612.43, as
amended by Amendment to Promissory Note dated
September 28, 1996, filed as Exhibit 10.3 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.4 -- Promissory Note dated October 12, 1995 made by
Marshall B. Hunt to the order of the Company in
the principal amount of $35,000.00, as amended by
Amendment to Promissory Note dated October 12,
1996, filed as Exhibit 10.4 to the Registrant's
Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.5 -- Promissory Note dated October 12, 1995 made by
William E. Peterson, Jr. to the order of the
Company in the principal amount of $35,000.00, as
amended by Amendment to Promissory Note dated
October 12, 1996, filed as Exhibit 10.5 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.6 -- Promissory note dated October 12, 1995 made by
Roy C. Mallady, Jr. to the order of the Company
in the principal amount of $35,000.00, as amended
by Amendment to Promissory Note dated October 12,
1996, filed as Exhibit 10.6 to the Registrant's
Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.7 -- Amended and Restated Credit Agreement dated as of
May 26, 1998 among the Company, the Lenders
referred to therein and Banc of America Commercial
Corporation, as Agent, filed as Exhibit 10.1 to
the Registrant's Form 10-Q dated May 29, 1998 (SEC
File No. 000-24025) and incorporated herein by
reference.
10.8 -- Second Amendment to Amended and Restated
Credit Agreement and Waiver dated as of March 31,
1999 among the Company, the Lenders referred to
therein and Banc of America Commercial
Corporation, as Agent, filed as Exhibit 10.1 to
the Registrant's Form 10-Q dated May 14, 1999
(SEC File No. 000-24025) and incorporated herein
by reference.
10.9 -- Lease Agreement dated as of July 1, 1996
between The Development Authority of the City of
Manchester and the Company, filed as Exhibit 10.9
to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein
by reference.
10.10 -- Amendment to Lease Agreement dated November 2, 1999
between The Development Authority of the City
of Manchester and the Company.
10.11 -- Lease Agreement dated as of August 29, 1997
between The Development Authority of the City of
Manchester and the Company, filed as Exhibit
10.10 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
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10.12 -- 1998 Stock Incentive Plan, filed as Exhibit
10.11 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.13 -- Stock Purchase Agreement dated June 20, 1997
among the Company, Pfizer, Inc., Arrow
International, Inc. and Strato(R)/Infusaid(TM)
Inc., as amended by Amendment to Purchase
Agreement, dated June 20, 1997, filed as Exhibit
10.14 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.14 -- Agreement dated January 13, 1995 between the
Company and ACT Medical, Inc., filed as Exhibit
10.21 to the Registrant's Form S-1 dated April 14,
1998 (SEC File No. 333-46349) and incorporated
herein by reference.
10.15 -- Horizon Plastic Ports: Term Sheet dated March
18, 1997, filed as Exhibit 10.22 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.16 -- Letter Agreement to Supply Agreement between
CarboMedics, Inc. and the Company, dated February
17, 1993, as amended, Development Agreement, dated
February 17, 1993, by and between CarboMedics,
Inc. and the Company, as amended, and Equity
Agreement, dated as of February 17, 1993, by and
between CarboMedics, Inc. and the Company, as
amended, filed as Exhibit 10.23 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.17 -- Agreement dated May 8, 1997 between the
Company and Robert Cohen, filed as Exhibit 10.24
to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein
by reference.
10.18 -- Consulting and Services Agreement dated
February 1, 1996 between the Company and
Healthcare Alliance, Inc. as amended, filed as
Exhibit 10.25 to the Registrant's Form S-1 dated
April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.19 -- Second Amended License Agreement dated January
1, 1995 between Dr. Sakharam D. Mahurkar and
NeoStar Medical(R) Technologies, filed as Exhibit
10.26 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.20 -- License Agreement dated July 1995 between Dr.
Sakharam D. Mahurkar and Strato(R)/Infusaid(TM)
Inc., filed as Exhibit 10.27 to the Registrant's
Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.21 -- Additional License Agreement dated January 1,
1997 between Dr. Sakharam D. Mahurkar and the
Company, filed as Exhibit 10.28 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.22 -- Atlanta Office Purchase Agreement, filed as
Exhibit 10.29 to the Registrant's Form S-1 dated
April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.23 -- Employment Agreement, dated as of April 3,
1998, between Marshall B. Hunt and the Company,
filed as Exhibit 10.30 to the Registrant's Form
S-1 dated April 14, 1998 (SEC File No. 333-46349)
and incorporated herein by reference.
10.24 -- Amendment, dated as of June 29, 1999, to the
Employment Agreement, dated as of April 3, 1998,
by and between the Company and Marshall B. Hunt,
filed as Exhibit 10.2 to the Registrant's Form
10-Q dated August 16, 1999 (SEC File No.
000-24025) and incorporated herein by reference.
32
35
10.25 -- Employment Agreement, dated as of April 3, 1998,
between William E. Peterson, Jr. and the Company,
filed as Exhibit 10.31 to the Registrant's Form
S-1 dated April 14, 1998 (SEC File No. 333-46349)
and incorporated herein by reference.
10.26 -- Amendment, dated as of June 29, 1999, to the
Employment Agreement, dated as of April 3, 1998,
by and between the Company and William E.
Peterson, Jr., filed as Exhibit 10.3 to the
Registrant's Form 10-Q dated August 16, 1999 (SEC
File No. 000-24025) and incorporated herein by
reference.
10.27 -- Premier Warrant, filed as Exhibit 10.32 to the
Registrant's Form S-1 dated April 14, 1998 (SEC
File No. 333-46349) and incorporated herein by
reference.
10.28 -- Premier Group Purchasing Agreement, filed as
Exhibit 10.33 to the Registrant's Form S-1 dated
April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.29 -- Amendment Number 1 to Premier Group Purchase
Agreement dated March 1, 1999, filed as Exhibit
10.25 to the Registrant's Form 10-K dated March
31, 1999 (SEC File No. 000-24025) and incorporated
herein by reference.
10.30 -- Asset Purchase Agreement, by and among the
Company and Norfolk Medical Products, Inc. and
Michael J. Dalton dated June 2, 1998, filed as
Exhibit 2 to the Registrant's Form 8-K dated June
16, 1998 (SEC File No. 000-24025) and
incorporated herein by reference.
10.31 -- Asset Purchase Agreement, by and among the
Company, Columbia Vital Systems, Inc., William C.
Huck and R. Gregory Huck dated September 21,
1998, filed as Exhibit 2 to the Registrant's Form
8-K dated October 5, 1998 (SEC File No.
000-24025) and incorporated herein by reference.
10.32 -- Asset Purchase Agreement, by and between Ideas
for Medicine, Inc. and the Company, dated
September 30, 1998, filed as Exhibit 2 to the
Registrant's Form 8-K dated October 14, 1998 (SEC
File No. 000-24025) and incorporated herein by
reference. Pursuant to Item 601(b) of Regulation
S-K, the Company has omitted certain Schedules
and Exhibits to the Asset Purchase Agreement (all
of which are listed therein) from this Exhibit.
10.33 -- Stock Purchase Agreement, by and among the
Company, Steven Picheny, Howard Fuchs, Christine
Selby and Stepic Corporation, effective October
15, 1998, filed as Exhibit 2 to the Registrant's
Form 8-K dated October 30, 1998 (SEC File No.
000-24025) and incorporated herein by reference.
Pursuant to Item 601(b) of Regulation S-K, the
Company has omitted certain Schedules and
Exhibits to the Stock Purchase Agreement(all of
which are listed therein) from this Exhibit.
10.34 -- Amendment One dated December 15, 1999 to the
Stock Purchase Agreement, by and among the
Company, Steven Picheny, Howard Fuchs, Christine
Selby and Stepic Corporation.
10.35 -- Manufacturing Agreement dated as of September
30, 1998 by and between the Company and Ideas for
Medicine, Inc., filed as Exhibit 10.30 to the
Registrant's Form 10-K dated March 31, 1999 (SEC
File No. 000-24025) and incorporated herein by
reference.
10.36 -- Consulting and Services Agreement dated
January 1, 1999 by and between the Company and
Healthcare Alliance, Inc., filed as Exhibit 10.31
to the Registrant's Form 10-K dated March 31,
1999 (SEC File No. 000-24025) and incorporated
herein by reference.
33
36
10.37 -- Employment Agreement, dated as of May 12,
1999, between Walter J. Fritschner and the
Company, filed as Exhibit 10.1 to the
Registrant's Form 10-Q dated August 16, 1999 (SEC
File No. 000-24025) and incorporated herein by
reference.
10.38 -- Severance and Bonus Agreement dated November
12, 1999 between the Company and Michael A.
Crouch, filed as Exhibit 10.1 to the Registrant's
Form 10-Q dated November 15, 1999 (SEC File No.
000-24025) and incorporated herein by reference.
10.39 -- Severance and Bonus Agreement dated November
12, 1999 between the Company and Frank D.
DeBartola, filed as Exhibit 10.2 to the
Registrant's Form 10-Q dated November 15, 1999
(SEC File No. 000-24025) and incorporated herein
by reference.
10.40 -- Severance and Bonus Agreement dated November
12, 1999 between the Company and L. Bruce Maloy,
filed as Exhibit 10.3 to the Registrant's Form
10-Q dated November 15, 1999 (SEC File No.
000-24025) and incorporated herein by reference.
10.41 -- Severance and Bonus Agreement dated November
12, 1999 between the Company and Robert Singer,
filed as Exhibit 10.4 to the Registrant's Form
10-Q dated November 15, 1999 (SEC File No.
000-24025) and incorporated herein by reference.
10.42 -- Employment Agreement dated as of December 15,
1999 between Robert M. Dodge and the Company.
10.43 -- Lease Agreement dated August 17, 1998 between
HP Aviation, Inc. and the Company
10.44 -- Agreement dated December 22, 1998 between Marshall
B. Hunt and William E. Peterson, Jr. and the Company
21.1 -- Subsidiaries of the Company, filed as Exhibit 27.1
to the Registrant's Form 10-K dated March 31, 1999
(SEC File No. 000-24025) and incorporated herein
by reference.
27.1 -- Financial Data Schedule (for SEC filing purposes only)
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
34
37
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
29, 1999.
HORIZON MEDICAL PRODUCTS, INC.
By: /s/ MARSHALL B. HUNT
---------------------------
Marshall B. Hunt
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARSHALL B. HUNT Chairman, Chief Executive Officer March 29, 2000
---------------------------------------- and Director (Principal Executive Officer)
Marshall B. Hunt
/s/ WILLIAM E. PETERSON, JR. President and Director March 29, 2000
----------------------------------------
William E. Peterson, Jr.
/s/ ROBERT M. DODGE Chief Financial Officer (Principal Financial March 29, 2000
---------------------------------------- and Principal Accounting Officer)
Robert M. Dodge
/s/ ROBERT COHEN Director March 29, 2000
----------------------------------------
Robert Cohen
/s/ LYNN R. DETLOR Director March 29, 2000
----------------------------------------
Lynn R. Detlor
/s/ ROBERT J. SIMMONS Director March 29, 2000
----------------------------------------
Robert J. Simmons
/s/ A. GORDON TUNSTALL Director March 29, 2000
----------------------------------------
A. Gordon Tunstall
35
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Horizon Medical Products, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, shareholders' equity, and cash flows
present fairly, in all material respects, the consolidated financial position
of Horizon Medical Products, Inc. and subsidiaries (the "Company") at December
31, 1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Birmingham, Alabama /s/ PricewaterhouseCoopers, LLP
February 28, 2000, except for Note 6
as to which the date is March 29, 2000
F-1
39
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
1998 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,232,215 $ 1,991,427
Accounts receivable - trade (net of allowance for doubtful accounts of
$685,512 and $1,031,751 in 1998 and 1999, respectively) 16,925,487 18,091,455
Inventories 19,358,423 19,647,250
Prepaid expenses and other current assets 1,636,779 1,262,611
Income tax receivable 953,055
Deferred taxes 582,346 1,246,439
------------- -------------
Total current assets 44,735,250 43,192,237
Property and equipment, net 4,043,200 3,683,446
Intangible assets, net 55,494,414 55,259,193
Deferred taxes 116,970
Other assets 247,279 262,596
------------- -------------
Total assets $ 104,637,113 $ 102,397,472
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 9,775,420 $ 5,861,935
Accrued salaries and commissions 257,341 203,415
Accrued royalties 127,375 172,073
Accrued interest 318,476 450,560
Other accrued expenses 1,413,216 820,227
Income taxes payable 1,343,473
Current portion of long-term debt 2,733,138 5,757,196
------------- -------------
Total current liabilities 15,968,439 13,265,406
Long-term debt, net of current portion 47,073,716 44,998,709
Other liabilities 164,152 157,282
Deferred taxes 907,079
------------- -------------
Total liabilities 63,206,307 59,328,476
------------- -------------
Commitments and contingent liabilities (Notes 9, 12, 13, and 15)
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, none
issued and outstanding in 1998 and 1999
Common stock, $.001 par value per share; 50,000,000 shares authorized, 13,366,278
shares issued and outstanding in 1998 and 1999 13,366 13,366
Additional paid-in capital 51,826,125 51,826,125
Shareholders' notes receivable (425,553) (452,581)
Accumulated deficit (9,983,132) (8,317,914)
------------- -------------
Total shareholders' equity 41,430,806 43,068,996
------------- -------------
Total liabilities and shareholders' equity $ 104,637,113 $ 102,397,472
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
40
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
1997 1998 1999
------------- ------------- -------------
Net sales $ 15,798,123 $ 39,399,361 $ 75,370,657
Cost of goods sold 6,273,418 19,932,953 48,010,817
------------- ------------- -------------
Gross profit 9,524,705 19,466,408 27,359,840
Selling, general and administrative expenses 6,475,827 13,597,097 20,146,901
------------- ------------- -------------
Operating income 3,048,878 5,869,311 7,212,939
------------- ------------- -------------
Other income (expense):
Interest expense (3,970,734) (3,103,222) (4,140,134)
Accretion of value of put warrant repurchase
obligation (Note 9) (8,000,000)
Other income 69,727 46,262 99,038
------------- ------------- -------------
(11,901,007) (3,056,960) (4,041,096)
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary items (8,852,129) 2,812,351 3,171,843
Provision for income taxes 319,831 1,780,649 1,506,625
------------- ------------- -------------
Income (loss) before extraordinary items (9,171,960) 1,031,702 1,665,218
Extraordinary gain on early extinguishment of
put feature (Note 9) 1,100,000
Extraordinary losses on early extinguishments of
debt, net of income tax benefit of $53,330
(Notes 6 and 13) (83,414)
------------- ------------- -------------
Net income (loss) $ (9,171,960) $ 2,048,288 $ 1,665,218
============= ============= =============
Net income (loss) per share before extraordinary
items - basic and diluted $ (.97) $ .08 $ .12
============= ============= =============
Net income (loss) per share - basic and diluted $ (.97) $ .17 $ .12
============= ============= =============
Weighted average common shares outstanding-basic 9,419,450 12,187,070 13,366,278
============= ============= =============
Weighted average common shares outstanding-diluted 9,419,450 12,412,394 13,372,571
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
41
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Number Additional Shareholders'
of Common Paid-In Notes Accumulated
Shares Stock Capital Receivable Deficit Total
---------- ----- --------- ------------ ------------ ------------
Balance, December 31, 1996 101,919 $ 102 $ 915,088 $ (371,497) $ (2,459,460) $ (1,915,767)
Net increase in shareholders' notes
receivable (27,028) (27,028)
Repurchase of stock warrants (Note 6) (400,000) (400,000)
Contributed services (Note 12) 365,000 365,000
Net loss (9,171,960) (9,171,960)
Issuance of shares to effect a stock split
(Note 8) 9,317,531 9,317 (9,317)
---------- ------- ----------- ------------ ------------ ------------
Balance December 31, 1997 9,419,450 9,419 1,270,771 (398,525) (12,031,420) (11,149,755)
Issuance of common stock 3,120,950 3,121 39,907,591 39,910,712
Net increase in shareholders' notes
receivable (27,028) (27,028)
Contributed services (Note 12) 91,250 91,250
Consulting services (Note 12) 45,328 45 657,211 657,256
Exercise of warrants (Note 9) 780,550 781 (698) 83
Extinguishment of put feature (Note 9) 9,900,000 9,900,000
Net income 2,048,288 2,048,288
---------- ------- ----------- ------------ ------------ ------------
Balance, December 31, 1998 13,366,278 13,366 51,826,125 (425,553) (9,983,132) 41,430,806
Net increase in shareholders' notes
receivable (27,028) (27,028)
Net income 1,665,218 1,665,218
---------- ------- ----------- ------------ ------------ ------------
Balance, December 31, 1999 13,366,278 $13,366 $51,826,125 $ (452,581) $ (8,317,914) $ 43,068,996
========== ======= =========== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
42
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (9,171,960) $ 2,048,288 $ 1,665,218
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Loss on disposal of fixed assets 4,750
Extraordinary losses on early extinguishments of debt 136,744
Extraordinary gain on early extinguishment of put feature (1,100,000)
Depreciation 199,450 487,674 766,063
Amortization 1,009,180 1,787,964 2,907,011
Amortization of discount 2,160,153 1,266,319
Accretion of value of put warrant repurchase obligation 8,000,000
Deferred income taxes, net change (90,299) 200,330 359,956
Non-cash officer compensation 365,000 91,250
Non-cash consulting expense 657,256
Non-cash increase in notes receivable - shareholders (27,028) (27,028) (27,028)
(Increase) decrease in operating assets, net:
Accounts receivable - trade (947,075) (4,436,228) (1,165,968)
Inventories 183,557 (4,718,470) (440,172)
Prepaid expenses and other assets (205,585) 1,221,005 474,344
Income tax receivable (953,055)
Increase (decrease) in operating liabilities:
Accounts payable - trade 858,734 5,201,530 (3,913,485)
Income taxes payable 409,726 933,747 (1,343,473)
Accrued expenses and other liabilities (49,569) (4,483,751) (748,230)
------------- ------------- -------------
Net cash provided by (used in) operating activities 2,694,284 (733,370) (2,414,069)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (899,563) (1,845,561) (369,339)
Change in other nonoperating assets, net (120,666) (84,159)
Payment for acquisitions, net of cash acquired (19,500,000) (36,120,798) (1,400,000)
------------- ------------- -------------
Net cash used in investing activities (20,399,563) (38,087,025) (1,853,498)
------------- ------------- -------------
Cash flows from financing activities:
Debt issue costs (674,750) (293,916)
Cash overdraft (31,637)
Proceeds from issuance of long-term debt 23,500,000 41,812,039 2,906,000
Principal payments on long-term debt (2,012,163) (27,305,465) (2,879,221)
Payment of acquired debt (10,000,000)
Payment of non-compete and consulting agreements (1,964,767)
Proceeds from issuance of common stock 39,910,712
Proceeds from exercise of warrants 83
Payment for warrants (400,000)
------------- ------------- -------------
Net cash provided by financing activities 20,381,450 42,158,686 26,779
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,676,171 3,338,291 (4,240,788)
Cash and cash equivalents, beginning of year 217,753 2,893,924 6,232,215
------------- ------------- -------------
Cash and cash equivalents, end of year $ 2,893,924 $ 6,232,215 $ 1,991,427
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,739,992 $ 1,335,405 $ 4,001,207
============= ============= =============
Cash paid for taxes $ 587,019 $ 3,536,799
============= =============
See Notes 14 and 15 for additional supplemental disclosures of cash flow
information.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
43
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
1. DESCRIPTION OF BUSINESS
Horizon Medical Products, Inc. and subsidiaries (the "Company"),
headquartered in Manchester, Georgia, is a specialty medical device
company focused on manufacturing and marketing vascular access
products and the distribution of specialty medical products. The
Company manufactures, markets and distributes four product categories:
(i) implantable vascular access ports, tunneled catheters and stem
cell transplant catheters, which are used primarily in cancer
treatment protocols for the infusion of highly concentrated toxic
medications (such as chemotherapy agents, antibiotics or analgesics)
and blood samplings; (ii) acute and chronic hemodialysis catheters,
which are used primarily in treatments of patients suffering from
renal failure; (iii) embolectomy catheters and carotid shunts,
utilizing the Company's balloon technology for endarectomy procedures;
and (iv) specialty devices used primarily in general and emergency
surgery, radiology, anesthesiology, respiratory therapy, blood
filtration and critical care.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies utilized
in the consolidated financial statements which were prepared in
accordance with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
and notes thereto include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
REVENUE RECOGNITION - Revenue from product sales is recognized upon
shipment to customers. Provisions for discounts, rebates to customers,
returns and other adjustments are provided for in the period the
related sales are recorded.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less at the
time of purchase to be cash equivalents.
INVENTORIES - Purchased finished goods are stated at the lower of cost
or market using the specific identification method for determining
cost. Raw materials, work in process, and manufactured ports and
catheters are stated at the lower of average cost or market using the
first-in, first-out method for determining costs.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost,
less accumulated depreciation. Expenditures for repairs and
maintenance are charged to expense as incurred; betterments that
materially prolong the lives of the assets are capitalized. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts, and the related gain or
loss on such dispositions is recognized currently. Depreciation is
calculated using the straight-line method or double declining balance
method over the estimated useful lives of the property and equipment.
The lives of the assets range from five to seven years for equipment,
five to ten years for improvements, and primarily 31.5
F-6
44
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
years for buildings. Property and equipment acquired under capital
lease agreements are carried at cost, less accumulated depreciation.
These assets are depreciated in a manner consistent with the Company's
depreciation policy for purchased assets.
INTANGIBLE ASSETS - Goodwill, the excess of purchase price over the
fair value of net assets acquired in purchase transactions, is being
amortized on a straight-line basis over periods ranging from 15 to 30
years. Amounts paid or accrued for non-compete and consulting
agreements are amortized using the straight-line method over the term
of the agreements. Patents are amortized on a straight-line basis over
the remaining lives of the related patents at the date of acquisition,
which range from 12 to 15 years. Debt issuance costs are amortized
using the straight-line method, which approximates the effective
interest method, over the estimated term of the related debt issues.
LONG-LIVED ASSETS - The Company evaluates long-lived assets and
certain identifiable intangibles held and used by an entity for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. This
evaluation is based on undiscounted future projected cash flows of the
asset or asset group. If an impairment exists, the amount of such
impairment is calculated based on the estimated fair value of the
assets. Fair value is generally determined by discounting future
projected cash flows of the asset or asset group under review.
In accordance with Accounting Principles Board Opinion ("APB") No. 17,
Intangible Assets, the recoverability of goodwill not identified with
assets subject to an impairment loss is reviewed for impairment, on an
acquisition by acquisition basis, whenever events or changes in
circumstances indicate that it may not be recoverable. If such an
event occurred, the Company would prepare projections of future
discounted cash flows for the applicable acquisition. The Company
believes this discounted cash flow approach approximates fair market
value. There were no such losses recognized during the years ended
December 31, 1997, 1998 and 1999.
RESEARCH AND DEVELOPMENT - Research and development costs are charged
to expense as incurred and were approximately $7,000, $412,000, and $0
in 1997, 1998 and 1999, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes interest rate
cap agreements to limit the impact of increases in interest rates on
its floating rate debt. The differential is accrued as interest rates
change and recognized over the life of the cap as adjustments to
interest expense.
INCOME TAXES - The Company accounts for income taxes under Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year
end.
F-7
45
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
The amounts recognized are based on enacted tax rates in effect in the
years in which the differences are expected to reverse. The Company's
deferred tax assets and liabilities relate primarily to differences in
the book and tax bases of allowances for doubtful accounts, inventory
and inventory reserves, property and equipment, and intangible assets.
STOCK-BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to account for its stock-based
compensation plans using the intrinsic value method prescribed by APB
No. 25, Accounting for Stock Issued to Employees. Under the provisions
of APB No. 25, compensation cost for stock options issued to employees
is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the amount an employee
must pay to acquire the stock. An award to employees which requires or
can compel the Company to settle such award in cash (such as stock
appreciation rights) is accounted for as a liability. The amount of the
liability for such an award is measured each period based on the
settlement value with changes in such value recorded as compensation
cost over the service period.
Stock based transactions with other than employees are measured at fair
value and are reported as expense or an exchange of assets, as
appropriate, under the provisions of SFAS No. 123.
EARNINGS PER SHARE - The calculation of basic earnings per share only
takes into consideration income (loss) available to common shareholders
and the weighted average of shares outstanding during the period, while
diluted earnings per share takes into effect the impact of all
additional common shares that would have been outstanding if all
potential common shares related to options, warrants, and convertible
securities had been issued, as long as their effect is dilutive.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to previous
years' consolidated financial statements to make them comparable to the
current year presentation. These reclassifications had no impact on
previously reported net (loss) income or shareholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires all
derivatives to be measured at fair value and recognized as either assets
or liabilities on the balance sheet. Changes in such fair value are
required to be recognized immediately in net income to the extent the
derivatives are not effective as hedges. In September 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -
F-8
46
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Deferral of the Effective Date of FASB Statement No. 133, an amendment
to delay the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company does not expect the adoption of SFAS
No. 133 as amended by SFAS No. 137 to have a material impact on the
consolidated financial statements.
3. INVENTORIES
A summary of inventories at December 31 is as follows:
1998 1999
------------- -------------
Raw materials $ 5,336,210 $ 5,551,390
Work in process 1,984,133 3,943,563
Finished goods 12,797,898 11,260,057
------------- -------------
20,118,241 20,755,010
Less inventory reserves 759,818 1,107,760
------------- -------------
$ 19,358,423 $ 19,647,250
============= =============
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 is as follows:
1998 1999
------------- -------------
Building and improvements $ 1,965,874 $ 2,088,198
Office equipment 1,781,841 1,661,225
Plant equipment 1,101,991 1,433,536
Transportation equipment 75,305 145,287
------------- -------------
4,925,011 5,328,246
Less accumulated depreciation 881,811 1,644,800
------------- -------------
$ 4,043,200 $ 3,683,446
============= =============
As of December 31, 1998 and 1999, the Company had capitalized computer
software costs of approximately $133,500 and $149,000, respectively.
Depreciation expense associated with capitalized costs was approximately
$1,000, $26,700 and $55,000 in 1997, 1998 and 1999, respectively.
F-9
47
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
5. INTANGIBLE ASSETS
A summary of intangible assets at December 31 is as follows:
1998 1999
Goodwill $47,168,853 $49,590,643
Patents 8,284,656 8,284,656
Non-compete and consulting agreements 1,850,592 2,100,592
Debt issuance costs 297,917 297,917
Other 449,286 449,286
----------- -----------
58,051,304 60,723,094
Less accumulated amortization 2,556,890 5,463,901
----------- -----------
$55,494,414 $55,259,193
=========== ===========
The expected amortization charges related to these intangibles are as
follows:
2000 $ 2,838,995
2001 2,716,981
2002 2,660,458
2003 2,400,439
2004 2,371,791
Thereafter 42,270,529
-----------
$55,259,193
===========
6. LONG-TERM DEBT
In connection with the acquisition of Strato/Infusaid Inc. ("Strato")
discussed in Note 15, the Company entered into a $26.5 million Credit
Facility with Banc of America Commercial Finance Corporation, formerly
known as NationsCredit Commercial Corporation, ("Banc of America"), on July
15, 1997 (the "Credit Facility"). In addition to the acquisition of Strato,
the Company used proceeds from the Credit Facility to retire existing debt
and to purchase the warrants issued in connection with a previous debt
agreement (the "Sirrom Note") from Sirrom thereby terminating all of
Sirrom's rights under the warrants. This purchase resulted in a direct
charge to the Company's accumulated deficit. Banc of America also
effectively purchased the $1,500,000 Sirrom Note from Sirrom. The Sirrom
Note bore interest at the rate of 13.75% per annum and was to mature
September 25, 2000.
In conjunction with the financing, the Company issued a warrant to Banc of
America to acquire shares of non-voting Class B common stock of the
Company, which then represented 15% of the outstanding common shares of the
Company. The number of shares subject to such warrant was to be reduced as
follows: (1) to 7.5% of the outstanding common shares of the Company on a
fully diluted basis in the event the Company completed an initial public
F-10
48
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
offering for its shares prior to January 1, 1999 (where the net proceeds to
the Company were in excess of $25 million) or achieved minimum earnings
before interest, taxes, depreciation, and amortization ("EBITDA") of not
less than $10 million for its 1998 fiscal year. The warrant, which included
a put feature (see Note 9), was exercisable at $.0l per share pursuant to
the warrant agreement and was to expire on July 15, 2007.
In April 1998, all amounts outstanding under the Company's Credit Facility
and the Sirrom Note were paid off with the proceeds from the Company's
initial public offering ("IPO") of its common stock (see Note 8). As a
result, the Company recorded an extraordinary loss on the early
extinguishment of debt of $15,711, net of income tax benefit of $10,045.
Banc of America exercised its warrants immediately prior to the IPO and
sold the related shares in the offering as well.
The Company entered into a new $50 million amended and restated credit
facility (the "New Credit Facility") with Banc of America on May 26, 1998
to be used for working capital purposes (the "Working Capital Loans") and
to fund future acquisitions (the "Acquisition Loans"). The New Credit
Facility provides a sublimit of $10 million as it relates to the Working
Capital Loans. The Working Capital Loans and the Acquisition Loans are
collectively referred to herein as the Revolving Credit Loans. The
availability of funds under the Acquisition Loans terminates on May 26,
2000, and the New Credit Facility expires on July 1, 2004. In addition, the
Company had outstanding standby letters of credit of $7,682,110 and
$4,800,000 at December 31, 1998 and 1999, respectively. These letters of
credit, which have terms through January 2002, collateralize the Company's
obligations to third parties in connection with acquisitions.
Amounts outstanding under the Acquisition Loans are payable in 16 quarterly
installments beginning October 1, 2000 in amounts representing 6.25% of the
principal amounts outstanding on the payment due dates. Amounts outstanding
under the Working Capital Loans are due on July 1, 2004. As of December 31,
1998 and 1999, $5,000,000 and $5,500,000, respectively, were outstanding
under the Working Capital Loans and $37,037,039 and $39,476,264,
respectively, were outstanding under the Acquisition Loans.
Subject to certain limitations, amounts outstanding under the Revolving
Credit Loans may be prepaid at the Company's option. Further, amounts
outstanding under the Revolving Credit Loans are mandatorily prepayable
annually in an amount equal to 50% of the Excess Cash Flow for such year,
as defined in the agreement, beginning with fiscal year December 31, 2000,
as well as upon the occurrence of certain other events as defined in the
Agreement.
Through June 30, 1999, the New Credit Facility bore interest, at the option
of the Company, at the Index Rate, as defined in the agreement, plus 3.25%;
adjusted LIBOR, as defined in the agreement, plus 3.25%; or Bank of
America, N.A.'s prime rate plus .5%. At December 31, 1998, the Company's
interest rate was based on the Index Rate with a resulting interest rate of
8.1701%. Effective July 1, 1999, the New Credit Facility bears interest, at
the option of the Company, at the Index Rate plus an applicable margin
ranging from 3.50% to 4.00%; adjusted LIBOR plus an applicable margin
ranging from 3.50% to 4.00%; or Bank of America, N.A.'s
F-11
49
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
prime rate plus an applicable margin ranging from 0.75% to 1.25%. The
applicable margin applied is based on the Company's leverage ratio, as
defined in the agreement. At December 31, 1999, the Company's interest rate
was based on the Index Rate with a resulting rate of 9.5152%.
The Company has entered into an interest rate cap agreement with Banc of
America. The Company utilizes the interest rate cap agreement to limit the
impact of increases in interest rates on its floating rate debt. The
interest rate cap agreement entitles the Company to receive from Banc of
America the amounts, if any, by which the floating rate, as defined in the
agreement, exceeds the strike rates (or cap rates) stated in the agreement.
At December 31, 1998 and 1999, the Company had an interest rate cap with a
notional amount of $13,312,500 and $11,062,500, respectively. Under this
agreement, the interest rate on the notional amount is capped at 8.8%. The
agreement matures in October 2002. The Company has received no payments
from Banc of America under the agreement during 1998 and 1999.
The New Credit Facility calls for an unused commitment fee payable
quarterly, in arrears, at a rate of .375%, as well as a letter of credit
fee payable quarterly, in arrears, at a rate of 2%. Both fees are based on
a defined calculation in the agreement. In addition, the New Credit
Facility requires an administrative fee in the amount of $30,000 to be paid
annually.
The Company's New Credit Facility contains certain restrictive covenants
that require minimum net worth and EBITDA thresholds as well as specific
ratios such as total debt service coverage, leverage, interest coverage and
debt to capitalization. The covenants also place limitations on capital
expenditures, other borrowings, operating lease arrangements, and affiliate
transactions. The Company is in compliance with or has received appropriate
waivers of these covenants.
On March 29, 2000, the New Credit Facility was amended to adjust
certain of the financial ratio covenants and increase the Company's
interest rate one-half of one-percent.
The Company's obligations under the New Credit Facility are collateralized
by liens on substantially all of the Company's assets, including inventory,
accounts receivable and general intangibles as well as a pledge of the
stock of the Company's subsidiaries. The Company's obligations under the
New Credit Facility are also guaranteed individually by each of the
Company's subsidiaries (the "Guarantees"). The obligations of such
subsidiaries under the Guarantees are collateralized by liens on
substantially all of their respective assets, including inventory, accounts
receivable and general intangibles.
F-12
50
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
At December 31, long-term debt consists of the following:
1998 1999
New Credit Facility, including acquisition obligations supported by
letters of credit $49,237,039 $49,776,264
Note payable for the purchase of IFM requiring monthly payments of
approximately $26,780 through November 1999, including interest at 9% 302,034
Obligation for the purchase of CVS, due in September 2000 225,000 225,000
Notes payable for the additional Stepic purchase payment, bearing
interest at a fixed rate of 11%, interest and principal payable
through April 2000 633,464
Note payable, bearing interest at a fixed rate of 7.9%, interest and principal
payable monthly through May 2000 5,514 1,433
Note payable, bearing interest at a fixed rate of 8.25%, interest and principal
payable monthly through June 2004 27,947
Note payable, bearing interest at a fixed rate of 0.90%, interest and principal
payable monthly through January 2003 19,464
Miscellaneous capital lease obligations for office equipment, requiring monthly
payments ranging from $133 to $2,729, bearing interest at rates
from 7.65% to 9.25%, and maturing at various dates through 2004
These obligations are collateralized by equipment with a net book value of
approximately $89,000 and $110,000 at December 31, 1998 and 1999,
respectively 37,267 72,333
----------- -----------
49,806,854 50,755,905
Less current portion 2,733,138 5,757,196
----------- -----------
$47,073,716 $44,998,709
=========== ===========
Future maturities of long-term debt are as follows:
2000 $ 5,757,196
2001 14,497,814
2002 11,708,654
2003 11,379,155
2004 7,413,086
-----------
$50,755,905
===========
F-13
51
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
7. INCOME TAXES
The components of the provision (benefit) for incomes taxes consist of the
following:
1997 1998 1999
Current:
Federal $ 681,209 $1,301,484 $ 732,556
State 102,237 278,835 251,427
--------- ---------- ----------
783,446 1,580,319 983,983
Deferred tax (benefit) expense (90,299) 200,330 522,642
--------- ---------- ----------
693,147 1,780,649 1,506,625
Change in valuation allowance (373,316)
--------- ---------- ----------
Provision for income taxes before
extraordinary items 319,831 1,780,649 1,506,625
Income tax benefit of extraordinary items (53,330)
--------- ---------- ----------
Total $ 319,831 $1,727,319 $1,506,625
========= ========== ==========
Deferred tax assets and liabilities at December 31, 1998 and 1999 are
comprised of the following:
1998 1999
Deferred tax assets:
Allowance for doubtful accounts and returns $ 225,129 $ 433,748
Inventory and inventory reserve 357,217 812,691
Intangible assets 289,934
--------- ----------
Total gross deferred tax assets 872,280 1,246,439
Deferred tax liabilities:
Intangible assets (798,008)
Property and equipment (172,964) (109,071)
--------- ----------
Net deferred tax asset $ 699,316 $ 339,360
========= ==========
No valuation allowance has been recorded against the deferred tax assets at
December 31, 1998 and 1999 as the Company believes that it is more likely
than not that all of the net deferred tax assets will be realized through
carrybacks to years in which it paid tax or through future taxable income.
F-14
52
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
The provision for income taxes differs from the amount which would be
computed by applying the federal statutory rate of 34% to income (loss)
before income taxes and extraordinary items as indicated below:
1997 1998 1999
Income tax provision (benefit) at statutory federal income
tax rate $(3,009,724) $ 956,199 $1,078,426
Increase (decrease) resulting from:
Non-deductible meals and entertainment expense 28,698 39,282 38,110
State income taxes 64,353 208,052 253,952
Non-deductible interest and accretion of put warrant
repurchase obligation 3,343,333 396,667
Non-deductible amortization of goodwill 59,985 136,309 136,137
Non-deductible officer compensation 124,100 31,025
Change in valuation allowance (373,316)
Other, net 82,402 13,115
----------- ---------- ----------
Provision for income taxes before extraordinary items $ 319,831 $1,780,649 $1,506,625
=========== ========== ==========
8. COMMON AND PREFERRED STOCK
The Company sold 3,120,950 shares of common stock for $14.50 per share in
April 1998 in connection with the IPO of its common stock. In anticipation
of the IPO, the Company's Board of Directors increased the number of
authorized common shares to 50,000,000. In addition, immediately prior to
the IPO, the Company effected an approximate 92.42-for-one stock split. The
par value of the common stock remained unchanged. All share and per share
amounts herein reflect the stock split.
The Company has 5,000,000 shares of preferred stock authorized for
issuance. The preferences, powers, and rights of the preferred stock are to
be determined by the Company's Board of Directors. None of these shares is
issued and outstanding.
9. COMMON STOCK WARRANTS
As discussed in Note 6, in connection with the Credit Facility, the Company
issued a warrant to Banc of America to acquire shares of non-voting Class B
common stock, representing 15% of outstanding shares. This percentage
reduced to 7.5% under certain conditions including completion of an initial
public offering by the Company prior to January 1, 1999, whereby the net
proceeds were in excess of $25 million. The warrant also contained a put
feature that allowed the holder to put the warrant to the Company for cash
at an amount calculated as the greater of several financial tests and at
dates which varied as to actions of the Company, the earliest of which was
repayment of the associated debt or July 15, 2001. Further, the related
warrant contained antidilution provisions. Banc of America exercised all of
its warrants immediately prior to the IPO and sold the related shares in
the offering. As a result, there are no remaining outstanding warrants with
Banc of America.
F-15
53
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
The Company recorded the estimated value of the warrant with the put
feature on July 15, 1997 of $3,000,000 as a discount to the related debt
and as a put warrant repurchase obligation. Subsequent to issuance of the
warrant, the Company's operations and other factors indicated that an
initial public offering of stock could be pursued, and the Company began
intense efforts to accomplish such an offering. The Company and its
prospective underwriters anticipated a public offering in April 1998. A
portion of the proceeds were to be used to pay off the Credit Facility as
required by the credit agreement upon successful completion of an initial
public offering. Additionally, the integration of Strato, medical device
market trends, and potential access to the public capital markets led
management to believe the estimated value of the put warrants had
increased. Therefore, the value assigned to such put warrant was recorded
at $11,000,000 at December 31, 1997. The change in value from the date of
issue of $8,000,000 was recorded as non-cash expense for the accretion of
value of put warrant repurchase obligation in the accompanying consolidated
statement of operations for the year ended December 31, 1997. Additionally,
due to the expected date of debt repayment of April 1998, the debt discount
established at issue date and the associated debt issue costs were
amortized over a nine month period beginning July 15, 1997. This
amortization resulted in charges to interest expense of approximately
$2,300,000 and $1,447,000 in 1997 and 1998, respectively, resulting in an
effective rate of interest on the underlying debt of approximately 31%
(exclusive of the $8,000,000 put warrant charges).
Effective January 29, 1998, Banc of America and the Company amended the
warrant agreement such that Banc of America's right to put the warrant to
the Company for cash was rescinded. This rescission constituted a
forgiveness of the put obligation estimated at $1,100,000 which was
recorded as an extraordinary gain at the date of rescission, and the net
recorded value of the warrant of $9,900,000 was reclassed to additional
paid-in capital.
In connection with the Premier Purchasing Partners, L.P. ("Premier")
Agreement discussed in Note 12, the Company entered into a related warrant
agreement during 1998 with Premier (the "Warrant Agreement") pursuant to
which the Company has granted Premier a warrant to acquire up to 500,000
shares of the Company's common stock for $14.50 per share. Shares of common
stock issuable under such warrant will vest annually in increments of
100,000 only upon the achievement of certain specified minimum annual sales
(the "Minimum Annual Sales Targets") and/or minimum cumulative sales (the
"Cumulative Sales Targets") of the Company's products to participating
Premier hospitals. The vesting of the warrant will automatically accelerate
in any given year in the event that both the Minimum Annual Sales Targets
and Cumulative Sales Targets with respect to such year are achieved. The
right to purchase shares of the Company's common stock under the Warrant
Agreement vesting at the end of the first year of the Warrant Agreement
(June 30, 1999) if earned, will become exercisable on the third anniversary
of such date. Rights vesting in subsequent years will become exercisable
one year after their respective vesting dates. All unexercised warrants
will expire on the fifth anniversary of their respective vesting dates. No
warrants were earned during the first year of the Warrant Agreement, and
none of these warrants are vested or exercisable as of December 31, 1999.
The Company will record the estimated fair value of the warrant and related
expense as the warrant is earned, as previously discussed, in accordance
with SFAS No. 123.
F-16
54
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
10. STOCK-BASED COMPENSATION
Pursuant to the Company's 1995 Stock Appreciation Rights ("SAR") Plan, the
Company granted SARs to eligible employees and eligible sales
representatives based on their achievement of certain performance targets.
Upon consummation of the Company's IPO, 99,600 SARs were outstanding. At
that time, (i) all outstanding SARs were canceled, (ii) options to purchase
shares of the Company's common stock (the "SAR Conversion Options") were
granted to holders of SARs who were employed by the Company, and (iii) cash
compensation equal to one dollar was due to be paid for each SAR held by
persons who were no longer employed by the Company upon the Company's IPO
as defined in the SAR Plan. In connection with the IPO, 84,100 SAR
Conversion Options were granted and none of the remaining 15,500 units were
eligible for payment. The SAR Conversion Options will become exercisable in
increments of 25% per year over four years beginning one year from the date
of issue at an exercise price of $14.50.
Transactions under the SAR Plan are summarized as follows for the years
ended December 31:
1997 1998
Outstanding, beginning of year $ 40,900 $ 99,600
Granted (at $1.00 per unit) 64,200
Canceled (5,500) (99,600)
-------- --------
$ 99,600 $ --
======== ========
The cumulative expense recorded by the Company with respect to the SAR Plan
through December 31, 1997 was approximately $35,000.
In conjunction with the Company's IPO, options for 144,100 shares of common
stock, including the 84,100 SAR Conversion Options, were granted at $14.50
per share. The options generally become exercisable over periods ranging
from three to four years, except for 10,000 options granted that vested
immediately, and expire ten years from the grant date.
During 1998, the Company's Board of Directors approved the Stock Incentive
Plan for key employees and outside directors (the "Incentive Plan") which
provides for the grant of incentive stock options, restricted stock, stock
appreciation rights, or a combination thereof, as determined by the
Compensation Committee of the Board of Directors. Only non-incentive stock
options may be granted to outside directors under the Incentive Plan. Under
the Incentive Plan, 500,000 shares of the Company's common stock have been
reserved for issuance. Options under the Incentive Plan provide for the
purchase of the Company's common stock at not less than the fair market
value on the date the option is granted.
F-17
55
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Transactions under the Incentive Plan are summarized as follows:
WEIGHTED
RANGE OF AVERAGE
NUMBER OF EXERCISE EXERCISE
OPTIONS PRICES PRICE
------- ------ -----
Options outstanding, January 1, 1998
Granted 196,700 $1.875-$15.50 $ 13.80
Canceled (11,850) $1.875-$14.625 $ 9.97
-------
Options outstanding, December 31, 1998 184,850 $1.875-$15.50 $ 14.04
Granted 269,275 $2.688-$7.00 $ 4.808
Canceled (92,850) $1.875-$14.625 $ 6.33
-------
Options outstanding, December 31, 1999 361,275 $1.875-$15.50 $ 9.14
=======
The weighted average fair value of options granted during 1998 and 1999 was
$12.38 and $3.63, respectively.
The following table summarizes information about options outstanding at
December 31, 1999.
OPTIONS OUTSTANDING
---------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
$14.500 143,575 8.67 46,727
$15.500 10,000 8.67 3,333
$14.625 5,000 8.67 1,250
$13.750 10,100 8.58 2,525
$9.250 5,000 8.33 1,250
$1.875 4,000 8.17 1,000
$7.000 30,000 9.04
$7.375 5,000 9.07
$6.250 15,600 9.14
$4.063 22,500 9.67
$4.500 25,500 9.82 5,000
$3.375 30,000 9.92
$2.750 5,000 9.96
$2.688 50,000 9.97
------- -------
361,275 61,085
======= =======
F-18
56
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
The Company applies APB No. 25 and related interpretations in accounting
for awards under its Incentive Plan. Accordingly, no compensation expense
has been recognized for its Incentive Plan. Had compensation expense for
the Company's Incentive Plan been determined based on the fair value at the
grant dates for awards under the Incentive Plan consistent with the method
of SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1998 1999
Net income:
As reported $2,048,288 $1,665,218
Pro forma $1,798,423 $1,235,470
Net income per share - basic and diluted:
As reported $ 0.17 $ 0.12
Pro forma $ 0.15 $ 0.09
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options
granted have different vesting periods and additional awards may be made
each year.
The Company elected to use the Black-Scholes pricing model to calculate the
fair values of the options awarded, which are included in the pro forma
results above. The following weighted average assumptions were used to
derive the fair values:
1998 1999
Dividend yield 0.0% 0.0%
Expected life (years) 7 7
Expected volatility 114.00% 97.10%
Risk free interest rate 5.54% 5.15%
F-19
57
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
11. EARNINGS (LOSS) PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the years ended December 31, 1997, 1998, and 1999 is as
follows:
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
NET LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- -----------
EPS - basic and diluted $ (9,171,960) 9,419,450 $ (0.97)
=============== =============== ===========
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- -----------
EPS - basic $ 2,048,288 12,187,070 $ 0.17
Effect of dilutive common shares:
Stock options 225,241
Warrants 83
--------------- --------------- -----------
EPS diluted $ 2,048,288 12,412,394 $ 0.17
============== =============== ===========
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- -----------
EPS - basic $ 1,665,218 13,366,278 $ 0.12
Effect of dilutive common shares:
Stock options 6,293
-------------- ------------- -----------
EPS diluted $ 1,665,218 13,372,571 $ 0.12
============== ============= ===========
The EPS impact of the extraordinary items for the year ended December
31, 1998 was approximately $.09.
The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the
period, as if exercised, by the average common share market price during
the period. The average common share market price used in the above
calculation was $7.94 and $5.09 for the years ended December 31, 1998 and
1999, respectively.
Stock options to purchase shares of common stock at prices greater than
the average market price of the common shares during that period are
considered antidilutive. During the years ended December 31, 1998 and
1999, respectively, there were 180,350 options expiring in 2008 with
exercise prices ranging from $9.25 to $15.50 and 228,275 options expiring
in 2008 and 2009 with exercise prices ranging from $5.75 to $15.50,
outstanding but were not included in the
F-20
58
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
computation of diluted EPS because the exercise price of the options was
greater than the average market price of the common shares in the
respective fiscal year. There were no options outstanding for the year
ended December 31, 1997.
The Company had warrants to purchase common stock outstanding in 1997.
Warrants outstanding at December 31, 1997 (see Notes 6 and 9) were
convertible to an estimated 765,000 shares (335,762 on a weighted average
basis). Additionally, if included in the diluted EPS calculation,
$8,000,000 would have been added to the numerator as expenses recorded in
1997 associated with the warrants. These calculations would also result
in an antidilutive effect and, therefore, are excluded. Also as of
December 31, 1997, a shareholder (Cordova) had antidilutive rights which
called for a constant 1.99% ownership. Both the warrants (as discussed in
Note 9) and Cordova's antidilution rights that were outstanding at
December 31, 1997 were terminated in connection with the Company's IPO.
12. RELATED-PARTY TRANSACTIONS
The Company and Cardiac Medical, Inc. ("CMI") were related parties due to
common stock ownership by certain officers and shareholders. The Company
and CMI shared office space and certain administrative employees. The
Company recorded expenses of $50,000 during 1997 related to these shared
services. During 1998, the Company purchased from CMI the portion of the
shared office space owned by CMI, as well as certain furnishings and
equipment for approximately $584,000. CMI previously guaranteed the
Sirrom Note; however, on July 15, 1997, in connection with the Credit
Facility, Banc of America effectively purchased the Sirrom Note, and
CMI's guarantee with respect thereto was terminated.
The development of the Company's Manchester, Georgia facility was
financed with approximately $705,000 in proceeds of an industrial
development revenue bond issued by the Manchester Development Authority
for the benefit of the Company. In connection with, and as a condition to
such bond financing, the Company entered into an operating lease with the
Manchester Development Authority. All payments due on the bonds have been
and continue to be guaranteed, jointly and severally, by CMI and the
former majority shareholders of the Company.
The Company has unsecured loans to the former majority shareholders in
the form of notes receivable in the amount of $337,837, plus accrued
interest receivable of $87,716 and $114,744 at December 31, 1998 and
1999, respectively. The notes require annual payments of interest at 8%
beginning on September 28, 1997 and are due September 2000 through
October 2000. The Company recognized interest income of $27,028 during
each of the three years in the period ending December 31, 1999 related to
the notes. The notes and related accrued interest are recorded as
contra-equity in the consolidated balance sheets.
Prior to April 1998, the CEO and the President of the Company did not
draw a salary or other form of compensation from the Company. Estimated
fair value compensation for 1997 and for the period January 1998 through
March 1998 of $365,000 and $91,250, respectively, has been
F-21
59
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
recorded in the consolidated financial statements of the Company
with a corresponding credit to additional paid-in capital.
The CEO and President of the Company each own a 50% interest in the
capital stock of HP Aviation, Inc., an entity that provides the use of an
airplane to the Company. During 1998 and 1999, the Company paid HP
Aviation, Inc. approximately $38,900 and $104,100, respectively, for use
of the airplane. In addition, the CEO and President of the Company each
own a 50% interest in real estate property that is used by the Company
for various management related functions. During 1998 and 1999, the
Company paid these officers approximately $17,300 and $18,850,
respectively, for use of the real estate property.
On January 1, 1999, the Company amended its Consulting and Services
Agreement with Healthcare Alliance (the "Alliance Agreement"), an
affiliate of one of the Company's directors. The Alliance Agreement
provides for (i) the payment to Healthcare Alliance of an annual
consulting fee of $36,000; (ii) the payment to Healthcare Alliance of an
annual performance incentive fee equal to 5% of any annual sales increase
achieved by the Company that results from Healthcare Alliance's efforts;
and (iii) the grant of options to purchase up to 1% of the Company's
outstanding common stock, which will vest and become exercisable by
Healthcare Alliance only if it procures group purchasing agreements with
certain Group Purchasing Organizations ("GPOs") and the Company achieves
certain levels of incremental sales revenue under its agreement with the
particular GPO. Any options granted under provision (iii) will have an
exercise price equal to the closing stock price of the Company's common
stock on the effective date of the purchasing agreement. The Company
incurred expense of $36,000 related to the annual consulting fee under
the Alliance Agreement during each of the three years in the period ended
December 31, 1999. In addition, the Company incurred incentive fees of
approximately $45,300 during 1999 based on incremental annual sales
achieved by the Company resulting from Healthcare Alliance's efforts.
There were no incentive fee amounts paid during the years ended December
31, 1997 or 1998, nor were there any grants of Company stock options
during the years ended December 31, 1997, 1998, or 1999 related to
provision (iii) of the Alliance Agreement.
In addition, under the amended agreement, the Company has granted an
option to Healthcare Alliance for the purchase of 45,000 shares of common
stock of the Company. Such options will become vested and exercisable by
Healthcare Alliance only if the Company achieves certain amounts of
incremental sales revenue under the Company's group purchasing agreement
with Premier Purchasing Partners, L P., (the "Premier Agreement" - see
below). The exercise price for these shares shall be the closing stock
price of the Company's common stock on the day that the options vest. The
options are exercisable for a period of five years upon vesting. None of
the 45,000 options have vested as of December 31, 1999. The Alliance
Agreement terminates on December 31, 2001. During 1998, the Company
issued 45,328 shares of the Company's common stock to Healthcare Alliance
in connection with the signing of the Premier Agreement. The Company
recognized consulting expense of approximately $657,300 related to this
transaction based on the fair value of the Company's stock of $14.50 per
share at the time of issuance.
F-22
60
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
As discussed above and in Note 9, in 1998, the Company entered into an
agreement with Premier, in which a warrant to purchase up to 500,000
shares of common stock was granted, subject to certain vesting
requirements. One of the Company's board members served as president of
Premier until December 1999.
On May 8, 1997, the Company entered into an agreement (the "Agreement")
with a director of the Company (the "Director") in which the Director was
to provide acquisition consulting and related services to the Company.
The Director receives a fee (the "General Consulting Fee") equal to 2.5%
of the acquisition purchase price (i) payable by the Company with respect
to a company acquired by the Company or (ii) payable to the Company or
its shareholders in the event the Company is acquired. Such General
Consulting Fee was conditioned upon, and was not payable until, there had
occurred an initial public offering of the Company's capital stock or
substantially all of the Company's business or outstanding shares of
capital stock was acquired. Such General Consulting Fee was payable, at
the Director's option, (i) in shares of the Company's common stock after
an initial public offering; (ii) by the Company's issuance to the
Director of warrants or options to purchase, at a nominal exercise price,
that number of shares of common stock (valued at the IPO) which equaled
the General Consulting Fee; (iii) in shares of an acquiring company, in
the event the Company was acquired; or (iv) in cash. The Agreement also
provided for payment to the Director for his services in connection with
the Strato acquisition of $375,000 (the "Consulting Fee"). The Consulting
Fee was payable upon the initial public offering at the option of the
Director, in shares of the Company's stock or warrants or options to
purchase, at a nominal exercise price, that number of shares of the
common stock (valued at the initial public offering price) which equaled
$375,000. The Agreement also provides for payment of $250,000 (the
"Second Consulting Fee") to the Director for services provided in
connection with a second strategic venture. The Second Consulting Fee is
payable upon the completion of the second strategic venture and is
payable in warrants or options to purchase, at a nominal exercise price,
that number of shares of the Company's stock (valued at the initial
public offering price) which equals $250,000. As of December 31, 1997,
1998, and 1999, no amounts have been earned by the Director relating to
the Second Consulting Fee. Both the Consulting Fee and the Second
Consulting Fee are to be in lieu of, and not in addition to, the General
Consulting Fee.
An affiliate of one of the Directors of the Company provided consulting
services to the Company in 1997, 1998, and 1999, which were expensed in
the amounts of approximately $235,700, $40,600, and $77,300,
respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Non-compete and consulting agreements related to the 1995 acquisition of
Neostar Medical Technologies, Inc. ("Neostar") were paid in full during
1998 with proceeds from the Company's IPO. The total amount required to
be paid was $1,876,078 per the terms of the non-compete and consulting
agreements. The Company recorded an extraordinary loss on the early
extinguishment of debt of $67,703, net of income tax benefit of $43,285
due to this repayment.
F-23
61
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
The Company leases its facility and certain equipment under operating
lease agreements expiring in various years through 2010. Rent expense
under various operating leases was approximately $85,000, $180,000, and
$217,000 during the years ended December 31, 1997, 1998 and 1999,
respectively. Approximate minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one
year are as follows:
2000 185,600
2001 154,600
2002 152,000
2003 128,300
2004 115,400
Thereafter 520,200
-----------
$ 1,256,100
===========
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position, results of operations, or
cash flows of the Company.
The Company is subject to numerous federal, state and local environmental
laws and regulations. Management believes that the Company is in material
compliance with such laws and regulations and that potential
environmental liabilities, if any, are not material to the consolidated
financial statements.
In September 1999, the Company identified a breach in the primary sterile
barrier of a dialysis catheter kit. Further inspection revealed the
breach was inherent in the packaging design, and the Company initiated a
voluntary product recall. The Food and Drug Administration has approved
the packaging rework procedures for the recalled kits, and product
manufacturing resumed with a modified package design. Management believes
the majority of the affected product has been returned. Expense
associated with the recall was approximately $148,000 during 1999.
The Company is party to license agreements with an individual (the
"Licensor") for the right to manufacture and sell dual lumen fistula
needles, dual lumen over-the-needle catheters, dual lumen chronic and
acute catheters, and other products covered by the Licensor's patents or
derived from the Licensor's confidential information. Payments under the
agreement vary, depending upon the purchaser, and range from 9% to 15% of
the Company's net sales of such licensed products. Such payments shall
continue until the expiration date of each corresponding licensed patent
right covering each product under the agreements. Payments under these
license agreements totaled approximately $249,000, $439,000, and $448,000
in 1997, 1998, and 1999, respectively.
On March 18, 1997, the Company entered into an agreement with a vascular
access port manufacturer (the "Manufacturer") to allow for the eventual
transfer of the manufacturing
F-24
62
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
process of certain port models to the Company. The agreement requires
the Company to purchase a minimum of 3,500 ports each year through
2002. To the extent that purchases exceed 4,000 in one contract year,
such excess purchases may be applied to the following year's minimum
commitment. As of December 31, 1999, the Company had made excess port
purchases of approximately 7,900 units that were available to be
applied to future years' purchase commitments. As of December 31, 1999,
the Company has satisfied all criteria in the agreement to take over
the manufacture of the ports with the payment of a royalty to the
Manufacturer. Any royalty payments would be paid quarterly and will be
calculated as forty percent of the difference between the Company's
cost to manufacture the port and the Company's sales price, as defined
in the agreement, for each port sold by the Company. The percentage
used to calculate the royalty payments will decrease to 25% after the
first year of manufacture by the Company. When the Company takes over
manufacturing, the Company is required to buy the Manufacturer's
inventory of related parts and finished ports at the Manufacturer's
cost, including the Manufacturer's standard overhead charges.
On June 27, 1997, the Company entered into a distribution agreement with
an overseas distributor (the "Distributor") granting the Distributor
exclusive distribution rights for one of the Company's hemodialysis
catheter products in certain foreign territories. Under the agreement,
the Distributor has agreed to purchase, and the Company has agreed to
sell, a minimum number of units each year through May 2000. The agreement
also contains a renewal clause allowing the Company to extend the
agreement for an additional two years. The minimum commitments under the
extended term would be subject to negotiation three months prior to the
renewal date. In the event the Company and the Distributor cannot come to
an agreement on the minimum commitments, the minimum commitments will be
set at 105% of the commitment levels in year three for the first renewal
year and 105% of the commitment level in the first renewal year for the
second renewal year. As of December 31, 1999, neither company was in
compliance with the distribution agreement. However, management does not
believe there is any exposure as a result of these violations and is
currently negotiating new terms with the distributor.
In connection with the 1998 acquisition of IFM discussed in Note 15, the
Company assumed certain license agreements (the "IFM Licensors") for the
right to manufacture and sell certain medical instruments covered by the
IFM Licensors' patents or derived from the IFM Licensors' confidential
information. Payments under these agreements vary, depending on the
individual products produced, and range from 1% to 5% of the Company's
net sales of such licensed products. Such payments shall continue until
the expiration of a fixed 20-year term or the expiration date of each
corresponding licensed patent covering each product under the agreements.
Payments under the license agreements totaled approximately $106,000 in
1999. The Company made no payments under these license agreements during
1998.
Additionally, the Company has entered into a long-term manufacturing
agreement (the "Manufacturing Agreement") with the seller of IFM (the
"Seller"). The Manufacturing Agreement provides for the Seller to supply,
and the Company to purchase, certain minimum levels of the Seller's
products for a term of four years. The Manufacturing Agreement requires
that the annual sales of the products to the Company shall equal at least
$6,000,000 during
F-25
63
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
each 12-month period under this Manufacturing Agreement. The
Manufacturing Agreement is cancelable at the option of the Seller if the
Company fails to meet the quotas required under the Manufacturing
Agreement.
On June 22, 1999, IFM notified the Company that the Company was in breach
of the Manufacturing Agreement. IFM notified the Company that the Company
was in violation of the payment provision contained in the Manufacturing
Agreement, which calls for the Company to pay amounts due to IFM within
45 days of the date of each invoice. The total accounts payable due to
IFM under the Manufacturing Agreement at December 31, 1999 was
approximately $1,101,500. Additionally, IFM notified the Company that the
Company was in violation of the Manufacturing Agreement due to the
nonpayment of interest related to such past due accounts payable. In
addition, IFM notified the Company that the Company was in breach for
failing to provide a production schedule at the end of the first six
month term of the Manufacturing Agreement and on a monthly basis
thereafter. Finally, IFM notified the Company that the Company was in
breach for the failure to provide packaging and labeling. The Company is
in default under the Manufacturing Agreement. As a result, IFM may
terminate the Manufacturing Agreement and may be entitled to receive an
amount equal to (i) the direct costs incurred by IFM for all purchase
orders committed for raw materials and components, (ii) the direct and
indirect costs incurred by IFM for six months after such termination for
labor utilized in the manufacture of the products, and (iii) the fixed
facility costs incurred by IFM in connection with the manufacture of the
products for the remainder of the term of the Manufacturing Agreement.
The Company has continued to indicate to IFM that it will not be able to
meet the minimum purchase requirements outlined in the Manufacturing
Agreement. The Company is currently in negotiations with IFM to purchase
the existing inventory, fixed assets, and leasehold improvements. The
Company would assume responsibility for the plan and manufacturing of the
IFM product line. The parties are currently operating under a verbal
modification to the Manufacturing Agreement. Should the Company be unable
to revise the Manufacturing Agreement to include acceptable terms or fail
to continue to operate under the verbal modification to the Manufacturing
Agreement, then any liabilities incurred as a result of the default could
have a material adverse effect on the Company's consolidated financial
position and disrupt the Company's ability to obtain and sell the related
products.
On December 11, 1998, the Company entered into a long-term distribution
agreement (the "Distribution Agreement") with a medical devices
manufacturer. The Distribution Agreement provides for the distributor to
supply, and the Company to purchase, certain minimum levels of vascular
grafts for an initial term of three years. The Distribution Agreement may
be automatically extended up to two additional years upon the achievement
of annual minimum purchase targets as defined in the Distribution
Agreement. The Distribution Agreement requires the Company to purchase a
minimum of 4,500 units, 6,300 units and 8,800 units in the first 3 years,
respectively, following December 11, 1998. The Distribution Agreement is
cancelable at the option of the distributor if the Company fails to meet
the quotas required under the Distribution Agreement.
F-26
64
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
The Company has entered into various distribution agreements under which
the Company has guaranteed certain gross margin percentages to the
distributors. As a result of these guarantees, the Company has accrued
approximately $287,000 as of December 31, 1999 related to amounts to be
rebated to the various distributors.
The Company is party to numerous agreements which contain provisions
regarding change in control, as defined by the agreements, or the
acquisition of the Company by a third party. These provisions could
result in additional payments being required by the Company should
these events occur.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following represent noncash activities for the years ended
December 31:
1997 1998 1999
Short-term debt issued for certain prepaid insurance
coverage $ 161,719 $ 115,493
Increase to goodwill related to purchase price
allocation $ 351,104 $ 286,797
Note issued for purchase of transportation
equipment $ 11,641 $ 54,955
Increase to property and equipment and accounts
payable $ 101,460
Issuance of non-compete agreement $ 250,000
Note issued for capital lease of office equipment $ 67,765
Note issued for additional Stepic purchase payment $ 650,834
Discount recorded on credit facility $3,000,000
Increase to additional paid-in capital for:
Contributed services $ 365,000 $ 91,250
Consulting services $ 657,256
Extinguishment of put feature of warrant $ 9,900,000
Change in value of put warrant $8,000,000 $(1,100,000)
Increase in notes receivable - shareholders $ 27,028 $ 27,028 $ 27,028
F-27
65
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
15. ACQUISITIONS
On July 15, 1997, the Company acquired the vascular access products (the
"Port Business") of Strato located in Norwood, Massachusetts, for a
purchase price of $19,500,000. The Company has accounted for the
acquisition under the purchase method of accounting. The estimated fair
values of assets acquired and liabilities assumed in the Strato
acquisition are as follows:
Accounts receivable, net $ 1,813,863
Inventories 4,434,204
Other current assets 101,775
Property and equipment 758,356
Intangibles and other assets 13,183,033
Deferred income tax asset 734,082
Accounts payable and accrued expenses (1,525,313)
------------
Purchase price $ 19,500,000
============
On May 19, 1998, the Company completed the purchase of certain assets
used in the manufacture and sale of the port product line of Ideas for
Medicine, Inc. (the "IFM Port Line"), a wholly-owned subsidiary of
CryoLife, Inc., for $100,000 in cash and a note payable in the amount of
$482,110 (which is supported by a standby letter of credit) that was paid
in November 1999. The acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has
been allocated to the net assets of IFM based on their estimated fair
values at the date of acquisition. Operating results of IFM since May 19,
1998 are included in the Company's consolidated financial statements.
On June 2, 1998, the Company completed the purchase of certain assets
used in the human vascular access business of Norfolk Medical Products,
Inc. ("Norfolk") for $9,300,000. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase
price has been allocated to the net assets of Norfolk based on their
estimated fair values at the date of acquisition. Operating results of
Norfolk since June 2, 1998 are included in the Company's consolidated
financial statements.
Effective September 1, 1998, the Company completed the purchase of the
net assets of Columbia Vital Systems, Inc. ("CVS") for $4 million in cash
and a payable for $225,000 due in September 2000. In addition, the
purchase agreement provides for an increase in the purchase price of up
to $4 million if CVS meets certain criteria over a two year period. Any
additional payments made will be accounted for as additional costs of
acquired assets and amortized over the remaining life of the assets. As
of December 31, 1999, none of these criteria have been met. The
acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
net assets of CVS based upon their estimated fair values at the date of
acquisition. Operating results of CVS since September 1, 1998 are
included in the Company's consolidated financial statements.
F-28
66
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
On September 30, 1998, the Company purchased assets, equipment and
certain product lines (other than ports) from IFM, a wholly-owned
subsidiary of CryoLife, Inc., for $15 million in cash. The acquisition
has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the net assets of
IFM based on their estimated fair values at the date of acquisition.
Operating results of IFM since September 30, 1998 are included in the
Company's consolidated financial statements. In connection with the
acquisition, the Company and IFM entered into a Manufacturing Agreement
pursuant to which IFM agreed to manufacture various purchased products
for the Company (see Note 13).
Effective October 15, 1998, the Company completed the purchase of the
outstanding stock of Stepic Corporation ("Stepic") for $8 million in cash
and contingent payments of up to $12 million over a three year period
based upon the successful achievement of certain specified future
earnings targets by Stepic. The Company determined that $7.2 million of
this contingent payment was probable of payment and recorded this amount
at the acquisition date. Any additional amounts earned will be accounted
for as additional costs of acquired assets and amortized over the
remaining life of the assets.
During the twelve months ended December 31, 1999, the Company recorded
additional purchase price of approximately $2.1 million, representing the
Company's additional earned contingent payment for the first anniversary
year ended October 31, 1999 discussed above. The contingent payment was
due December 15, 1999 and $1.4 million was paid on that date by the
Company with general company funds. The Company issued notes
payable for the remaining balance to the previous stockholders of Stepic
of approximately $651,000 to be paid through April 2000. At
December 31, 1998 and 1999, $7.2 million and $4.8 million, respectively,
of the contingent payments were supported by standby letters of credit
(see Note 6). The schedule below has been adjusted to include the
additional $2.1 million purchase price for the Stepic acquisition. The
acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
net assets of Stepic based upon their estimated fair values at the date
of acquisition.
F-29
67
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
The estimated fair values of assets acquired and liabilities assumed in
each of the 1998 acquisitions are as follows:
IFM PORT
LINE NORFOLK CVS IFM STEPIC
----------- ----------- ---------- ---------- ------------
Cash $ 279,202
Accounts receivable, net 8,878,486
Inventories $ 26,146 $ 714,075 $1,658,025 $ 825,253 6,361,697
Other current assets 2,211,269
Deferred income taxes 45,200
Property and equipment 91,000 5,000 19,024 228,781
Intangibles 703,478 8,872,112 2,659,349 14,234,320 16,292,168
Other assets 4,000
Accounts payable (2,847,495)
Accrued expenses (147,514) (422,387) (97,374) (78,597) (4,157,274)
Long-term debt (10,000,000)
----------- ---------- ----------- ----------- -----------
Purchase price $ 582,110 $9,300,000 $4,225,000 $15,000,000 $17,250,834
=========== ========== ========== =========== ===========
The following unaudited pro forma summary for the year ended December 31,
1998 combines the results of the Company with the acquisitions of
Norfolk, IFM, CVS, and Stepic as if the acquisitions had occurred at the
beginning of 1998. Certain adjustments, including interest expense on the
acquisition debt, amortization of intangible assets, and income tax
effects, have been made to reflect the impact of the purchase
transactions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made at the beginning of 1998, or of
results which may occur in the future.
PRO FORMA
1998
(UNAUDITED)
IN THOUSANDS,
EXCEPT PER SHARE
----------------
Sales $ 82,753
Net income before extraordinary items $ 667
Net income $ 1,684
Net income per share before extraordinary items $ .05
Net income per share - basic and diluted $ .14
Pro forma earnings per share-basic for the year ended December 31, 1998
is calculated by dividing pro forma net income by the basic weighted
average shares outstanding of 12,187,070. Pro forma earnings per
share-diluted for the year ended December 31, 1998 is calculated by
dividing pro forma net income by the diluted weighted average shares
outstanding of 12,412,394.
F-30
68
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
16. SEGMENT INFORMATION AND MAJOR CUSTOMERS
As of December 31, 1999, the Company operates two reportable segments,
manufacturing and distribution. The manufacturing segment includes
products manufactured by the Company, as well as products manufactured by
third parties on behalf of the Company through manufacturing and supply
agreements. Prior to the acquisitions of CVS and Stepic in 1998
(discussed in Note 15), the Company only operated the manufacturing
segment. Thus, segment information for 1997 is not included in the tables
below.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies" (see Note 1) to the
extent that such policies affect the reported segment information. The
Company evaluates the performance of its segments based on gross profit;
therefore, selling, general, and administrative costs, as well as
research and development, interest income/expense, and provision for
income taxes, are reported on an entity-wide basis only.
The table below presents information about the reported sales (which
include intersegment revenues), gross profit (which include intersegment
gross profit) and identifiable assets of the Company's segments as of and
for the years ended December 31, 1998 and 1999.
1998 1999
-------------------------------------------------------------------------------------------
GROSS IDENTIFIABLE GROSS IDENTIFIABLE
SALES PROFIT ASSETS SALES PROFIT ASSETS
------------ ------------- ---------------- -------------- --------------- --------------
Manufacturing $ 27,584,756 $ 16,359,469 $ 65,360,263 $ 32,660,880 $17,568,526 $ 63,964,482
Distribution 12,020,468 3,156,939 40,049,107 45,883,836 9,888,249 37,922,265
------------ ------------ ------------ ------------ ----------- ------------
$ 39,605,224 $ 19,516,408 $105,409,370 $ 78,544,716 $27,456,775 $101,886,747
============ ============ ============ ============ =========== ============
A reconciliation of total segment sales to total consolidated sales and
of total segment gross profit to total consolidated gross profit of the
Company for the years ended December 31, 1998 and 1999 is as follows:
1998 1999
Total segment sales $ 39,605,224 $ 78,544,716
Elimination of intersegment sales (205,863) (3,174,059)
------------- -------------
Consolidated sales $ 39,399,361 $ 75,370,657
============= =============
1998 1999
Total segment gross profit $ 19,516,408 $ 27,456,775
Elimination of intersegment gross profit (50,000) (96,935)
------------- -------------
Consolidated gross profit $ 19,466,408 $ 27,359,840
============= =============
F-31
69
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
A reconciliation of total segment assets to total consolidated assets
of the Company as of December 31, 1998 and 1999 is as follows:
1998 1999
Total segment assets $ 105,409,370 $101,886,747
Elimination of intersegment receivables (1,471,573) (735,714)
Assets not allocated to segments 699,316 1,246,439
------------- ------------
Consolidated assets $ 104,637,113 $102,397,472
============= ============
The Company's operations are located in the United States. Thus, all of
the Company's assets are located domestically. Sales information by
geographic area for the years ended December 31, 1998 and 1999 is as
follows:
1997 1998 1999
United States $ 13,144,972 $ 35,665,412 $ 71,103,033
Foreign 2,653,151 3,733,949 4,267,624
------------ ------------ ------------
Consolidated net sales $ 15,798,123 $ 39,399,361 $ 75,370,657
============ ============ ============
No single country outside of the United States is significant to the
Company's consolidated revenues. Sales to the Company's three largest
customers amounted to approximately 14%, 7%, and 7% of total sales during
the years ended December 31, 1997, 1998, and 1999, respectively. At
December 31, 1998 and 1999, 17%, and 16%, respectively, of the accounts
receivable balance consisted of amounts due from the Company's three
largest customers.
17. FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- --------------- -------------
Accounts receivable - trade, net $16,925,487 $16,925,487 $18,091,455 $18,091,455
Accounts payable - trade $ 9,775,420 $ 9,775,420 $ 5,861,935 $ 5,861,935
Interest rate cap agreement $ 151 $ 23
Long-term debt $49,806,854 $49,806,854 $50,755,914 $50,755,914
Off-balance sheet financial instruments:
Letters of credit $ 7,682,110 $ 7,682,110 $ 4,800,000 $ 4,800,000
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70
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
- --------------------------------------------------------------------------------
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amount reported for the long-
term debt approximates fair value because primarily all of the underlying
instruments are at variable interest rates which reprice frequently. The
fair value of the interest rate cap agreement is estimated based on
valuations received from Bank of America. The standby letters of credit
reflect fair value as a condition of their underlying purpose and are
subject to fees competitively determined in the marketplace. The fair
value of these standby letters of credit approximates contract values.
18. DEFINED CONTRIBUTION BENEFIT PLAN
The Company maintains a 401(k) profit sharing plan (the "Plan")
that covers essentially all of the Company's employees. Employees are
eligible to participate in the Plan after completing one year of service
and attaining the age of 21. Participants in the Plan can contribute up
to 15% of their annual salary during the plan year. The Company's
contributions to the Plan, which are based principally on a percentage of
the participant's annual base salary, are discretionary and determined on
an annual basis by the Board of Directors. The Company made no
contributions to the Plan during the years ended December 31, 1997, 1998
and 1999.
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71
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders
Horizon Medical Products, Inc. and Subsidiaries
Our audits of the consolidated financial statements referred to in our report
dated February 28, 2000, except for Note 6 as to which the date is March 29,
2000 appearing in this Annual Report on Form 10-K of Horizon Medical Products,
Inc. and subsidiaries also included an audit of the financial statement
schedule listed in Item 14 of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
February 28, 2000
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72
SCHEDULE II
HORIZON MEDICAL PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
ADDITIONS
----------------------
BEGINNING CHARGED TO COSTS AND ENDING
BALANCE EXPENSES OTHER(1) DEDUCTIONS BALANCE
--------- ---------- --------- ---------- ----------
Year ended December 31, 1997;
Allowance for returns and doubtful accounts $ 6,997 $ 58,018 $453,322 $210,098 $ 308,239
Inventory Reserve $ 0 $125,000 $350,051 $225,118 $ 249,933
Year ended December 31, 1998;
Allowance for returns and doubtful accounts $308,239 $475,926 $150,000 $248,653 $ 685,512
Inventory Reserve $249,933 $367,919 $351,104 $209,138 $ 759,818
Year ended December 31, 1999;
Allowance for returns and doubtful accounts $685,512 $585,496 - $239,257 $1,031,751
Inventory Reserve $759,818 $467,942 - $120,000 $1,107,760
(1) Other consists of allowances and reserves acquired through
acquisitions.
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