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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, 2000
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 31816
P.O. BOX 627 (Zip Code)
MANCHESTER, GEORGIA
(Address of principal executive offices)
(Registrant's telephone number, including area code): (706) 846-3126
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 BOX) No (EMPTY BOX)
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. (EMPTY BOX)
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $2,725,775 on March 15, 2001, 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, 2001 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 2001 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
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PART I
1. Business.................................................... 1
2. Properties.................................................. 12
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 14
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters..................................... 14
6. Selected Financial Data..................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
8. Financial Statements and Supplementary Data................. 32
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III
10. Directors and Executive Officers of the Registrant.......... 33
11. Executive Compensation...................................... 33
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 33
13. Certain Relationships and Related Transactions.............. 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 33
SIGNATURES....................................................... 39
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PART I
ITEM 1. DESCRIPTION OF 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 used for kidney failure patients. 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.
BACKGROUND
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 and in 2000 to its
current configuration of approximately 60,000 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
"-- Acquisitions" below. Distribution of non-Company medical devices through
Stepic Corporation ("Stepic") and Columbia Vital Systems ("CVS") during 2000
comprised approximately 56% of the Company's revenue.
On October 9, 2000, the Company consummated the acquisition of certain
assets used in the manufacture and sale of medical devices by Ideas for
Medicine, Inc. ("IFM"), a wholly-owned subsidiary of CryoLife, Inc.
("CryoLife"). This acquisition effectively completed the acquisition by the
Company of the IFM product line which was acquired in September of 1998. In
addition to the purchase of assets, consisting primarily of inventory and
leasehold improvements, the Company also assumed control of IFM's approximately
30,000 square foot manufacturing facility in St. Petersburg, Florida and the 80
employees there. On March 30, 2001, the Company sold the IFM business to
Vascutech, Inc. See "-- Acquisitions" below.
RECENT DEVELOPMENTS
The Company maintains a $50 million amended and restated credit facility
(the "Credit Facility") with Bank of America, N.A., successor to Banc of America
Commercial Finance Corporation, formerly known as NationsCredit ("Bank of
America"), to be used for working capital purposes and to fund acquisitions. The
total balance outstanding under the Credit Facility was approximately $42.9
million and no funds were available for borrowing under the Credit Facility at
December 31, 2000, except as may be available under the sweep arrangement (see
below). The Company's 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 and Bank of America amended the Credit Facility on March 31, 1999, March
29, 2000, August 14, 2000 and March 30, 2001 to adjust certain of the financial
ratio covenants and increase the interest rate. The Company was in violation of
certain of these financial covenants as of December 31, 2000. The Company also
missed
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principal payments under the Credit Facility which were due on October 1, 2000
and January 1, 2001. In addition, the Company was in default for failure to
repay the Bridge Loan and related interest which were due on August 30, 2000.
The Company and Bank of America further amended the Credit Facility on June
6, 2000 to provide the Bridge Loan to the Company in the principal amount of
$900,000. The proceeds of the Bridge Loan were used to fund the Shareholder
Bridge Loan to Marshall B. Hunt, the Company's chairman, CEO and largest
shareholder. (See Notes 6 and 12 to the Company's consolidated financial
statements included in this Form 10-K). The Bridge Loan, the Shareholder Bridge
Loan, and related interest were due on August 30, 2000. As of December 31, 2000,
the Shareholder Bridge Loan was not paid to the Company, and the Company has not
paid the Bridge Loan and related interest. Due to the Company being unable to
pay the amount due under the Bridge Loan, it is in default under the Bridge Loan
and the Credit Facility.
As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Company's lockbox accounts are swept periodically into a Bank of America Account
and applied against the outstanding loan balance under the Credit Facility. The
Company periodically will apply to receive additional loans under the Working
Capital Loan in the Credit Facility to the extent such loan has been paid down
under the lockbox arrangement. There can be no assurance that Bank of America
will continue to loan the Company additional funds under the Credit Facility as
the outstanding loan is paid down periodically under the sweep arrangement and
the Company applies for additional loans.
On March 30, 2001, the Company and Bank of America entered into a
Forbearance Agreement relating to the Credit Facility. Under the terms of the
Forbearance Agreement, Bank of America has agreed that it will not foreclose on,
or institute legal action to collect, the debt outstanding under the Credit
Facility, including the Bridge Loan, until March 31, 2002, or until the earlier
termination of the Forbearance Agreement. Bank of America may terminate the
Forbearance Agreement prior to March 31, 2002, upon the occurrence of certain
events as described below.
The Forbearance Agreement modifies the payment terms of the debt
outstanding under the Credit Facility. The Company has agreed to pay any accrued
and unpaid interest on debt outstanding under the Credit Facility on the first
day of each month, commencing on April 1, 2001, and to repay $135,000 in
principal each month, beginning on May 15, 2001. The Company is required to make
an additional principal repayment on October 10, 2001, in an amount of the
greater of $150,000 or the gross proceeds to the Company of the second
installment payment pursuant to the sale of the IFM business. In addition, the
Company is required to prepay on the 90th day following the last day of each
fiscal year, beginning on March 30, 2001, an amount equal to the Company's
Excess Cash Flow (as defined in the Credit Agreement) for each fiscal year. The
Company has agreed to pay any accrued and unpaid interest on the Bridge Loan on
the first day of each month, commencing on April 1, 2001, and to repay $300,000
in principal on or before each of May 31 and August 31, 2001. The unpaid balance
of the Bridge Loan will be due on November 30, 2001. Interest will continue to
accrue on the principal balances of all debt outstanding under the Credit
Facility at the Bank of America prime rate plus 2.5%. Upon expiration or early
termination of the Forbearance Agreement, interest will accrue at the rate then
in effect plus 6%.
The Forbearance Agreement expires on March 31, 2002, but generally may be
terminated earlier by Bank of America if any of the following occur: (i) the
Company files for bankruptcy or an involuntary petition for bankruptcy is filed
against the Company; (ii) the Company fails to timely make any scheduled
principal or interest payment under the Credit Facility, as modified by the
Forbearance Agreement; (iii) the Company breaches any covenant in the
Forbearance Agreement; (iv) the Company violates the modified financial
covenants set out in the Forbearance Agreement relating to minimum net worth,
capital expenditures, and minimum EBITDA, and the specific ratios for debt
service coverage, leverage, interest coverage, and debt to capitalization; (v)
the Company fails to deliver on or prior to April 29, 2001 title to certain
personal assets of Marshall B. Hunt to secure the Bridge Loan; (vi) the Company
fails to deliver on or prior to April 29, 2001 a mortgage of all real property
owned by the Company to secure the revolver loan; (vii) the Company fails to
comply with any demands by Bank of America relating to borrowing base audits;
(viii) the Company fails to
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hire a new Chief Operating Officer by June 30, 2001; (ix) the Company fails to
cooperate with the operational review being conducted by the management
consulting firm; or (x) the Company uses the collateral under the Credit
Facility to repay subordinated debt, except as permitted by Bank of America.
Pursuant to the Forbearance Agreement, the Company will grant Bank of
America warrants to purchase 3% of the equity ownership of the Company. The
warrants will have a strike price of $0.05 per share and will be exercisable for
three years from the date of issuance. The warrants will contain antidilution
protection for issuance of shares at less than fair market value.
Upon the expiration or early termination of the Forbearance Agreement, if
the Company remains in default under the Credit Facility the debt outstanding
under the Credit Facility will become due and payable and Bank of America will
have the right to exercise all of its remedies under the Credit Facility. The
failure by the Company either to extend the forbearance period or refinance such
debt would have a material adverse effect on the Company's financial position,
liquidity and ability to pay its debts as they become due.
The Company has retained Osnos Associates, Inc., ("Osnos") a management
consulting firm, to assist the Company in improving cash flow and financial
controls, increasing operating efficiencies, reducing cost and expenses, and
restructuring its current senior indebtedness and to seek alternative sources of
either senior and/or subordinated debt or an equity investment. Pursuant to the
Company's agreement with Osnos the Company has paid Osnos approximately $120,000
per month from October 2000 through March 2001. Under the Forbearance Agreement
the Company is required to retain a management consulting firm through March
2001.
ACQUISITIONS
Vascular Access Products
IFM. On May 19, 1998, the Company acquired the vascular access port
product line of 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 for $15,000,000 in cash.
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"). 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 in several respects, including non-payment of
invoices from IFM to the Company within 45 days after invoice date, the
Company's failure to provide a production schedule at the end of the first six
months of the terms of the Manufacturing Agreement and on a monthly basis
thereafter, the Company's failure to provide packaging and labeling, and
non-payment of interest related to past due invoices.
On October 9, 2000, the Company acquired certain additional assets from
IFM, including inventory, leasehold improvements, and other fixed assets and
assumed IFM's lease for its 30,000 square foot manufacturing facility located in
St. Petersburg, Florida, pursuant to an asset purchase agreement dated October
9, 2000. In connection with the October 2000 asset purchase agreement, the
Manufacturing Agreement was terminated, and the Company has no further
obligation, after October 9, 2000, to purchase products from IFM. With such
termination, the above-described defaults were resolved. For a more detailed
description of the October 2000 acquisition by the Company, see the Company's
Form 8-K filed on October 24, 2000.
In consideration for the October 2000 acquisition, the Company agreed to
pay IFM approximately $6.0 million. Such purchase price is payable pursuant to a
promissory note (the "Note") in 22 equal monthly installments of principal and
interest of $140,000 and a $1 million payment upon the earlier of April 3, 2001,
or the closing of an equity financing, as described in the October 2000 asset
purchase agreement. The Note
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consists of a portion, equal to approximately $3.9 million, which bears interest
at 9% per year, and a non-interest bearing portion of approximately $2.1
million. If the $1 million payment under the Note is made when due, and no other
defaults exist under the Note, then $1 million of the non-interest bearing
portion of the Note will be forgiven. In addition, at such time as the principal
balance has been paid down to $1.145 million and assuming that there have been
no defaults under the Note, the remainder of the Note will be forgiven, and the
Note will be canceled.
In the fourth quarter of 2000, the Company recorded an impairment charge of
$12.1 million to write down the long-lived assets of IFM, primarily goodwill and
patents, to the fair value of its future cash flow.
On March 30, 2001, the Company completed the sale of the IFM business. The
consideration for the sale of the IFM business consisted of cash in the amount
of $2,250,500 at closing, assumption of approximately $5,600,000 (as of December
31, 2000) of debt under the Note issued in connection with the Company's October
2000 acquisition from IFM, and a second installment cash payment of $150,000, to
be paid six months from the closing date.
Medical Device Distribution
Effective October 15, 1998, the Company consummated the acquisition of the
outstanding stock of Stepic. The assets held by Stepic 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, and $2.3 million in December 2000.
The Company is obligated to pay $2.4 million in December of 2001, an amount
supported by a standby letter of credit. 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 this amount, $2.05 million was earned in 1999 and subsequently paid.
In 2000, an additional $1.2 million was earned. In December 2000, the Company
amended its purchase agreement with the Stepic shareholders so that this amount
could be paid, together with interest, over a period from December 2000 through
May 2001. Horizon has not made any payments under this amendment since January
of 2001, and subsequently, was sued by two of the three Stepic shareholders in
the United States District Court for the Southern District of New York. This
litigation was settled on March 30, 2001. See "Item 3. Legal Proceedings."
The Stepic acquisition, together with the Company's acquisition of CVS in
September 1998, allowed the Company to form a medical device distribution
business 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.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
Product Manufacturing and Sales
The Company manufactures and/or markets vascular access products including
implantable ports, hemodialysis catheters, central venous catheters, embolectomy
catheters, 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 $16.8 million, $15.9 million and
$17.6 million for 1998, 1999 and 2000 respectively. Specialty surgical product
(IFM) sales totaled $2.1 million for the period October 1 through December 31,
1998 and $7.7 million and $5.1 million in 1999 and 2000, respectively.
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The Company's lines of vascular access ports consist of the following
families of products: (i) Vortex(TM) (ii) LifePort(R); (iii) Triumph-1(R); (iv)
Infuse-a-Port(R); (v) OmegaPort(R); and (vi) TitanPort(TM).
The Company produces and markets hemodialysis and apheresis 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. The Company's catheters
are used primarily in hemodialysis and apheresis procedures. Catheter sales
totalled $5.7 million, $4.7 million and $3.8 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
The Company's catheters include the following families of products: (i)
single and dual lumen hemodialysis catheters; and (ii) Pheres-Flow(R) triple
lumen 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 55 full-time employees and 7 independent
specialty distributors employing over 60 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 20 active
distributors in Europe and approximately 50 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.
As a result of such efforts, in March 1998 the Company entered into a
purchasing agreement with Premier Purchasing Partners, L.P. ("Premier") 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. 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. 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. During the first two years under the warrant term (ending June 30,
2000), there was no vesting under the warrant. In February 1999, the Company
extended the term of the Premier Agreement to February 28, 2004 and added the
following products to the agreement: vascular access ports, port introducers and
Huber needles.
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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. 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 is also currently a party to group purchasing agreements with
AmeriNet, Inc., Health Services Corporation of America, VHA of Georgia, 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 1,250
SKUs from ten major product lines and distributes to over 1,000 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, $13.9 and $13.0 for 1998,
1999, and 2000, respectively; Ballard sales totaled $2.1 million, 7.7 million,
and $6.6 million in 1998, 1999, and 2000, respectively; Pall sales totaled $4
million, $8.4 million, and $6.6 million in 1998, 1999, and 2000, respectively.
(1998 sales figures are for the period from October 15, 1998 through December
31, 1998.) Stepic is among the top distributors 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 23 years and 15 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."
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including
revenues, gross profit and identifiable assets attributable to each segment for
fiscal year 2000 is presented in Note 17 of notes to consolidated financial
statements included herein and beginning on page F-26.
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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 were produced at its IFM plant in St. Petersburg, Florida
prior to the sale of such product lines on March 30, 2001. See "-- 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 has and 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 and St. Petersburg facilities. The Company also
has obtained the right to affix CE (Conformite Europeene) marking to its product
lines manufactured at both facilities. 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 ACT Medical.
While the Company believes it has a good relationship with each third party
manufacturer that supplies the Company's products, there can be no assurance
that such relationship 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.
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. The FDA pursues a
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 pursuant to FDA's regulations. FDA can
take regulatory action against a company that does not provide or update its
registration and listing information.
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).
Some Class I devices and most Class II devices require premarket
notification (510(k)) clearance pursuant to Section 510(k) of the FDC Act. Class
III devices are required to have a premarket approval application (PMA).
Obtaining a PMA can take up to several years or more and involve preclinical
studies and
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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 in
terms of safety and effectiveness 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. FDA Regulations provide 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. 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 of an IDE before a clinical study may
begin. 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. Device
studies subject to the IDE regulations are subject to various restrictions
imposed by the FDA. 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. 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.
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,
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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, it is possible that clearances or approvals could be
withdrawn in certain 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.
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
catheters were shipped during this time frame, product returns through December
31, 2000 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. The Company is in the process of terminating
this recall. There were no new recalls in 2000.
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 cleared or approved by the FDA for distribution in the United States are
subject to FDA export requirements and policies, including a policy whereby the
Company provides a statement to FDA certifying that the product to be exported
meets certain criteria and FDA issues a certificate to facilitate device export.
Federal, state and foreign laws and regulations regarding the manufacture,
sale and distribution of medical devices are subject to future changes. For
example, Congress 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 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
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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 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
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, 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
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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.
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), and Vortex(TM) 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.
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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 $412,000 in 1998 (1.1% of
net sales). The Company did not incur material research and development expenses
during 1999 and 2000. The 1998 amount was 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 Smiths Group plc. 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, 2000, the Company had approximately 251 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
60,000 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 three
operating leases which expire in 2010 (collectively, the "Manchester Leases")
and under which the Company pays monthly lease payments of approximately $15,800
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.
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In conjunction with its October 2000 acquisition of IFM, the Company
assumed IFM's lease for its manufacturing facility in St. Petersburg, Florida.
This facility is 30,000 square feet and is situated on 8.5 acres within the city
limits. The lease expires December 31, 2007. In connection with the sale of IFM
business on March 30, 2001, the purchaser assumed all of the Company's rights
and obligations under the lease.
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 leases approximately 2,000 square feet of office space and
approximately 11,000 square feet of warehouse space in Hicksville, New York for
use in Stepic's distribution operation and warehousing of products pursuant to a
an operating lease which expires in 2003 and under which the Company pays
monthly lease payments of approximately $8,300. 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 December 11, 1998, the Company entered into a multi-year distribution
agreement with Possis Medical, Inc. ("Possis") 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 for allowing the dialysis clinician to access
the patient the same day as the graft is implanted. In January 2001, Possis
filed suit in United States District Court for the District of Minnesota for
alleged breach of this agreement. The Company has asserted a counterclaim in
which the Company alleges that as a result of problems with the Perma-Seal
graft, Possis has breached this agreement. The Company contends in its
counterclaim it would not have entered into the distribution agreement but for
the material misrepresentations made by Possis to the Company about the
Perma-Seal graft. Possis has filed a motion to amend its complaint, but the
Court has not ruled upon the motion.
In 2000, the former Stepic shareholders earned an additional $1.2 million
pursuant to the terms of the October 15, 1998 stock purchase agreement. In
December 2000, the Company and the former Stepic shareholders amended the Stepic
purchase agreement so that this additional amount could be paid, together with
interest, over a period from December 2000 through May 2001. The Company has not
made any payments under this amendment since January of 2001. On February 14,
2001, two of the former Stepic shareholders, Steven Picheny and Howard Fuchs,
filed suit against the Company in the United States District Court for the
Southern District of New York for breach of the amended agreement for failure to
make the scheduled payments. (See "Item 1. Description of
Business -- Acquisitions.") The Company settled the lawsuit on March 30, 2001,
by agreeing with the two former Stepic shareholders (i) to pay all accrued
interest through March 30, 2001, (ii) to make payments of $9,400 and accrued
interest on a monthly basis from April 1, 2001 through February 10, 2002, and
(iii) to pay the remaining balance of such additional amount on or before
February 10, 2002.
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
could materially and adversely affect the Company's business, financial
condition and results of operations.
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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 2000.
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 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
CALENDAR YEAR 2000 HIGH LOW
- ------------------ ----- ------
First Quarter............................................... 4.875 2.25
Second Quarter.............................................. 2.625 1.8125
Third Quarter............................................... 2.875 0.8125
Fourth Quarter.............................................. 1.125 0.0625
As of March 15, 2001, there were 65 record holders of the Company's common
stock. On March 15, 2001, the last reported sales price of the common stock on
The American Stock Exchange was $0.70 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. 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
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Company's Class A Common Stock for $.001 per share. 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 Bank of America, a warrant to
purchase 765,000 shares of common stock. Concurrently with the consummation of
the Company's initial public offering on April 20, 1998, the Company issued to
Bank of America 765,000 shares of Common Stock upon exercise of warrants to
purchase such stock for an aggregate amount of $765. Bank of America is an
accredited investor, and thus this issuance to Bank of America was made in
reliance on the Section 4(2) Exemption.
On March 20, 1998, the Company issued to Premier 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.
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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, 2000 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 related Notes thereto
of the Company included elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net sales..................................... $ 7,052 $15,798 $ 39,399 $ 75,371 $ 63,335
Cost of good sold............................. 2,997 6,273 19,933 48,011 46,722
------- ------- -------- -------- --------
Gross profit.................................. 4,055 9,525 19,466 27,360 16,613
Selling, general and administrative
expenses.................................... 4,560 6,476 13,597 20,147 20,094
Impairment charge............................. 12,086
------- ------- -------- -------- --------
Income (loss) from operations................. (505) 3,049 5,869 7,213 (15,567)
Interest expense, net......................... (733) (3,971) (3,103) (4,140) (5,297)
Accretion of value of put warrant repurchase
obligation.................................. (8,000)
Other income.................................. 54 70 46 99 32
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items......................... (1,184) (8,852) 2,812 3,172 (20,832)
Income tax provision (benefit)................ 320 1,781 1,507 (1,071)
------- ------- -------- -------- --------
Income (loss) before extraordinary items...... (1,184) (9,172) 1,031 1,665 (19,761)
Extraordinary gain on early extinguishment of
put feature (1)............................. 1,100
Extraordinary losses on early extinguishments
of debt, net................................ (83)
------- ------- -------- -------- --------
Net income (loss)................... $(1,184) $(9,172) $ 2,048 $ 1,665 $(19,761)
======= ======= ======== ======== ========
Net income (loss) per share before
extraordinary items -- basis and diluted.... $ (.13) $ (.97) $ .08 $ .12 $ (1.48)
======= ======= ======== ======== ========
Net income (loss) per share -- basic and
diluted..................................... $ (.13) $ (.97) $ .17 $ .12 $ (1.48)
======= ======= ======== ======== ========
Weighted average common shares outstanding --
basic....................................... $ 9,419 $ 9,419 $ 12,187 $ 13,366 $ 13,366
Weighted average common shares outstanding --
diluted..................................... $ 9,419 $ 9,419 $ 12,412 $ 13,373 $ 13,366
Balance Sheet Data (end of year):
Cash and cash equivalents..................... $ 218 $ 2,894 $ 6,232 $ 1,991 $ 538
Working capital............................... $ 1,018 $ 6,842 $ 28,767 $ 29,927 $ 15,259
Total assets.................................. $ 6,176 $31,577 $104,637 $102,397 $ 86,038
Long-term debt, net of current maturities..... $ 5,053 $23,971 $ 47,074 $ 44,999 $ 40,598
Total shareholders (deficit) equity........... $(1,916) $(11,150) $ 41,431 $ 43,069 $ 22,332
- ---------------
(1) See Note 9 to the Company's consolidated financial statements for a
discussion of this item.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 possible
inadequacy of the Company's cash flow from operations and cash available from
external financing, 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 dependence on patents,
trademarks, licenses and proprietary rights, the Company's potential exposure to
product liability, 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, 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 section entitled "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 used for kidney failure
patients. 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. 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 and in 2000 to its
current
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configuration of approximately 60,000 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. Distribution
of non-Company medical devices through Stepic and CVS during 2000 comprised
approximately 56% of the Company's revenue.
On October 9, 2000, the Company consummated the acquisition of certain
assets used in the manufacture and sale of medical devices by IFM, a
wholly-owned subsidiary of CryoLife. This acquisition effectively completed the
acquisition by the Company of the IFM product line which was acquired in
September of 1998. In addition to the purchase of assets, consisting primarily
of inventory and leasehold improvements, the Company also assumed control of
IFM's approximately 30,000 square foot manufacturing facility in St. Petersburg,
Florida and the 80 employees there. The IFM product line was sold to Vascutech,
Inc. on March 30, 2001, and Vascutech assumed control of such facility. See
"Item 1. Description of Business -- Acquisitions."
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,
--------------------------
1998 1999 2000
------ ------ ------
Net sales................................................. 100.0% 100.0% 100.0%
Cost of goods sold........................................ 50.6 63.7 73.8
----- ----- -----
Gross profit.............................................. 49.4 36.3 26.2
Selling, general and administrative expenses.............. 34.5 26.7 31.7
Impairment charge......................................... 19.1
----- ----- -----
Income (loss) from operations............................. 14.9 9.6 (24.6)
Other income (expense)
Interest expense, net................................... (7.9) (5.5) (8.4)
Other income............................................ 0.1 0.1 0.0
----- ----- -----
Income (loss) before income taxes and extraordinary
items................................................... 7.1 4.2 (33.0)
Income tax provision (benefit)............................ 4.5 2.0 (1.7)
Extraordinary gain on early extinguishment of put
feature................................................. 2.8 -- --
Extraordinary losses on early extinguishments of debt..... (0.2) -- --
----- ----- -----
Net income (loss)......................................... 5.2% 2.2% (31.3)%
===== ===== =====
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
Net Sales. Net sales decreased 16.0% to $63.3 million in 2000 from $75.4
million in 1999. The decrease in manufacturing sales resulted from decreased
volume partially offset by increased average selling prices. The decrease was
the result of several factors including: non-recurring sales in 1999 resulting
from initial stocking orders to two of the Company's new distributors;
discontinuance of Perma-Seal graft (Possis) in 2000 due to the product's
performance; a decline in volume in its chronic hemodialysis catheter product
line as a result of its dated technology as compared to the market; a reduction
in international sales due to pricing constraints; and higher rebates granted to
customers in 2000 versus 1999. The decrease in distribution sales was the result
of changes at the manufacturer level in both technology and market place
conditions. The distribution segment also experienced price erosion as a result
of certain group purchasing organization agreements entered into by its
manufacturers. The 2000 net sales on a segment basis resulted in net sales of
$25.7 million from the manufacturing segment and $41.5 million from the
distribution segment before intersegment eliminations. 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.
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Gross Profit. Gross profit decreased 39.3% to $16.6 million in 2000, from
$27.4 million in 1999. Gross margin decreased to 26.2% in 2000, from 36.3% in
1999. The decrease in gross profit is primarily the result of the fourth quarter
inventory and other adjustments of approximately $5.2 million recorded as a
result of decisions made in the fourth quarter to deal with changing business
conditions. The Company reduced certain of its product offerings, abandoned
plans to rework product that does not meet specification and wrote off its
inventory valuation for the Possis graft line. The decrease is also due to
higher rebates granted to the Company's distributors in 2000 versus 1999. In
addition, distribution sales comprised a higher percentage of total sales in
2000 compared to 1999, which generates a much lower profit margin than
manufacturing sales. The 2000 gross profit on a segment basis is gross profit of
$8.3 million or 32.1% from the manufacturing segment and $8.6 million or 20.6%
from the distribution segment before intersegment eliminations. The 1999 gross
profit on a segment basis resulted in 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") decreased approximately $53,000 or less than 1%
in 2000 as compared to 1999. SG&A expenses increased as a percentage of net
sales to 31.7% in 2000 from 26.7% in 1999 primarily due to decreased sales.
Impairment Charge. During the fourth quarter of 2000, the Company recorded
a $12.1 million impairment charge related to the intangible assets of the
Company's IFM product line. This charge writes the IFM long-lived assets down to
the fair value of management's expected cash flows.
Interest Expense. Interest expense, net of interest income, increased
approximately $1.2 million or 27.9% from $4.1 million in 1999 to $5.3 million in
2000. The increase is due to an increase in interest rates as well as higher
debt outstanding during 2000 of approximately $52 million versus approximately
$51 million outstanding during 1999.
Income Taxes. During the year ended December 31, 2000, the Company
recorded an income tax benefit of approximately $1.1 million versus income tax
expense of approximately $1.5 million in 1999. The 2000 income tax benefit
consists of the federal and state benefits, adjusted for certain nondeductible
items, of approximately $8.7 million related to the $20.8 million pretax loss,
reduced by a valuation allowance on the Company's deferred tax assets of
approximately $7.6 million. The valuation allowance is deemed necessary due to
uncertainties indicated by the Company's taxable loss in 2000 and forecasted
taxable loss for 2001. The resulting $1.1 million benefit represents the refunds
available from net operating loss carrybacks offset by the valuation allowance
on deferred items arising in previous years. The 1999 income tax expense
represents the federal and state taxes on pretax income of approximately $3.2
million, adjusted for certain nondeductible items.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Net Sales. Net sales increased 91.3% 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
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22
gross profit of $16.4 million or 59.3% from the manufacturing segment and $3.1
million or 26.3% from the distribution segment before intersegment eliminations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased $6.5 million or 48.2% 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 accelerated amortization of debt issue costs and
debt discount related to the Bank of America debt and warrant in 1998 of $1.4
million, 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.
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 extinguishments of certain
debt, which the Company repaid using proceeds from the IPO. In addition, the
Company recorded an extraordinary gain of $1.1 million in 1998 due to the
rescission of a put feature associated with the Bank of America warrant that was
issued in 1997. These transactions are more fully described in Notes 6, 9 and 13
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.
QUARTERLY RESULTS
The following tables set forth quarterly statement of operations data for
1999 and 2000. 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.
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.......................................... $19,441 $18,878 $18,841 $18,211
Cost of good sold.................................. 12,056 11,727 11,937 12,291
------- ------- ------- -------
Gross profit....................................... 7,385 7,151 6,904 5,920
Selling, general and administrative expenses....... 4,843 4,850 5,401 5,053
------- ------- ------- -------
Income from operations............................. 2,542 2,301 1,503 867
------- ------- ------- -------
Interest expense, net.............................. (912) (1,044) (1,057) (1,127)
Other income....................................... 12 43 16 28
------- ------- ------- -------
Income (loss) before income taxes.................. 1,642 1,300 462 (232)
Income tax provision............................... 703 557 218 29
------- ------- ------- -------
Net income (loss).................................. $ 939 $ 743 $ 244 $ (261)
======= ======= ======= =======
Net income (loss) per share -- basic and diluted... $ 0.07 $ 0.06 $ 0.02 $ (0.01)
======= ======= ======= =======
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THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.......................................... $17,099 $16,365 $16,115 $ 13,756
Cost of good sold.................................. 11,060 11,261 10,576 13,825
------- ------- ------- --------
Gross profit....................................... 6,039 5,104 5,539 (69)
Selling, general and administrative expenses....... 4,677 4,715 5,023 5,679
Impairment charge.................................. 12,086
------- ------- ------- --------
Income (loss) from operations...................... 1,362 389 516 (17,834)
------- ------- ------- --------
Interest expense, net.............................. (1,171) (1,330) (1,464) (1,332)
Other income (expense)............................. 46 28 (56) 14
------- ------- ------- --------
Income (loss) before income taxes.................. 237 (913) (1,004) (19,152)
Income tax provision (benefit)..................... 154 (296) (303) (626)
------- ------- ------- --------
Net income (loss).................................. $ 83 $ (617) $ (701) $(18,526)
======= ======= ======= ========
Net income (loss) per share -- basic and diluted... $ 0.01 $ (0.05) $ (0.05) $ (1.39)
======= ======= ======= ========
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
requirements and capital expenditures for its existing facility. 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 $4.9 million in 2000, as
compared with ($733,370) and ($2.4 million) in 1998 and 1999, respectively. The
increase in cash from operations during 2000 was primarily the result of
decreases in accounts receivable and inventory levels. In addition, there were
lower income taxes paid in 2000 as well as lower reductions in accounts payable
and accrued expenses in 2000 as compared to both 1999 and 1998. During the
period ended December 31, 2000, the Company restructured the terms of
outstanding accounts receivable of approximately $2.5 million due from two of
the Company's largest distributors. As a result of the restructuring, the
outstanding balances will be collected over a period of approximately twelve
months, beginning August 2000.
Net cash used in investing activities was $1.3 million during 2000, as
compared with $38.1 million and $1.9 million in 1998 and 1999, respectively. The
investing activities for 2000 consist of capital expenditures and a loan to the
Company's CEO (See Notes 6 and 12 to the Company's Consolidated Financial
Statements included elsewhere in this Form 10-K). Substantially all of the
investing activities in 1998 and 1999 were for cash paid for acquisitions and
capital expenditures. Cash paid for acquisitions was $36.1 million and $1.4
million during 1998 and 1999, respectively.
The Company has established a capital expenditure budget in 2001 of
$500,000, primarily for leasehold improvements and manufacturing and office
equipment.
Net cash provided by (used in) financing activities was ($5.0 million) in
2000, as compared with $42.2 million and $26,779 in 1998 and 1999, respectively.
Financing activities in 2000 primarily included principal payments on
outstanding debt attributable to depository funds of approximately $25 million
applied against the working capital loan under the Company's Credit Facility
pursuant to the Company's new sweep arrangement with Bank of America (see
below). These payments were partially offset by cash proceeds issued to the
Company of approximately $19.8 million from Bank of America under the same sweep
arrangement and $900,000 to fund a loan to the Company's CEO (See Notes 6 and 12
to the Company's Consolidated Financial Statements included elsewhere in this
Form 10-K). Financing activities in 1999 include $2.9 million provided by
additional borrowings under the Company's Credit Facility to fund operations and
$2.9 million
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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, purchase the Company's office in Atlanta, Georgia,
and fund the acquisition of Norfolk.
As discussed more fully in Note 6 of the Company's consolidated financial
statements included elsewhere in this Form 10-K, the Company maintains a $50
million amended and restated credit facility with Bank of America to be used for
working capital purposes and to fund future acquisitions. The Credit Facility
bears interest at a rate to be selected by the Company from certain options
defined in the agreement. At December 31, 2000, the Company's interest rate was
11.0062% compared with 8.1701% and 9.5152% at December 31, 1998 and 1999,
respectively. Portions of the amounts outstanding under the 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 Credit
Facility, which is July 1, 2004. The total balance outstanding under the Credit
Facility was approximately $42.9 million and no funds were available for
borrowing under the Credit Facility at December 31, 2000, except as may be
available under the sweep arrangement (see below). In addition, the Company had
outstanding standby letters of credit at December 31, 2000 of approximately $2.5
million, which collateralize the Company's obligations to third parties in
connection with its 1998 acquisitions. The Company's Credit Facility contains
certain restrictive covenants that require a minimum net worth, cash flow from
operations 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 and Bank of America
amended the Credit Facility on March 31, 1999, March 29, 2000, and August 14,
2000 to adjust certain of the financial ratio covenants and increase the
interest rate. The Company is in violation of certain of these financial
covenants as of December 31, 2000.
The Company and Bank of America further amended the Credit Facility on June
6, 2000 to provide the Bridge Loan to the Company in the principal amount of
$900,000. The proceeds of the Bridge Loan were used to fund the Shareholder
Bridge Loan to Marshall B. Hunt, the Company's chairman, CEO and largest
shareholder. (See Notes 6 and 12 to the Company's consolidated financial
statements included in this Form 10-K). The Bridge Loan, the Shareholder Bridge
Loan, and related interest were due on August 30, 2000. As of December 31, 2000,
the Shareholder Bridge Loan was not paid to the Company, and the Company has not
paid the Bridge Loan and related interest. Due to the Company being unable to
pay the amount due under the Bridge Loan, it is in default under the Bridge Loan
and the Credit Facility.
As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Company's lockbox accounts are swept periodically into a Bank of America account
and applied against the outstanding loan balance under the Credit Facility. The
financial institutions which hold such accounts have been notified by Bank of
America that such lockbox arrangements have been instituted, and the Company's
as well as its subsidiaries' right to withdraw, transfer or pay funds from the
accounts has been terminated. The Company periodically will apply to receive
additional loans under the Working Capital Loan in the Credit Facility to the
extent such loan has been paid down under the lockbox arrangement. There can be
no assurance that Bank of America will continue to loan the Company additional
funds under the Credit Facility as the outstanding loan is paid down
periodically under the sweep arrangement and the Company applies for additional
loans. The failure of the Company to obtain additional loans from Bank of
America as the Company applies for such loans will have a material adverse
effect on the Company's business, results of operations, consolidated financial
condition, liquidity and ability to pay its debts as they become due.
As described above, as of December 31, 2000, the Company is in default of
the Credit Facility as a result of non-compliance under certain financial
covenants. In addition, the Company is also in default of its Credit Facility as
a result of not making its principal payments of approximately $2.5 million due
October 1, 2000 and January 1, 2001 and for failure to repay the Bridge Loan and
related interest which were due on August 30, 2000.
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On March 30, 2001, the Company and Bank of America entered into a
Forbearance Agreement relating to the Credit Facility. Under the terms of the
Forbearance Agreement, Bank of America has agreed that it will not foreclose on,
or institute legal action to collect, the debt outstanding under the Credit
Facility, including the Bridge Loan, until March 31, 2002, or until the earlier
termination of the Forbearance Agreement. Bank of America may terminate the
Forbearance Agreement prior to March 31, 2002, upon the occurrence of certain
events as described below.
The Forbearance Agreement modifies the payment terms of the debt
outstanding under the Credit Facility. The Company has agreed to pay any accrued
and unpaid interest on the debt outstanding under the Credit Facility on the
first day of each month, commencing on April 1, 2001, and to repay $135,000 in
principal each month, beginning on May 15, 2001. The Company is required to make
an additional principal repayment on October 10, 2001, in an amount of the
quarter of $150,000 or the gross proceeds to the Company of the second
installment payment pursuant to the sale of the IFM business. In addition, the
Company is required to prepay on the 90th day following the last day of each
fiscal year, beginning on March 30, 2001, an amount equal to the Company's
Excess Cash Flow (as defined in the Credit Agreement) for each fiscal year. The
Company has agreed to pay any accrued and unpaid interest on the Bridge Loan on
the first day of each month, commencing on April 1, 2001, and to repay $300,000
in principal on or before each of May 31 and August 31, 2001. The unpaid balance
of the Bridge Loan will be due on November 30, 2001. Interest will continue to
accrue on the principal balances of all debt outstanding under the Credit
Facility at the Bank of America prime rate plus 2.5%. Upon expiration or early
termination of the Forbearance Agreement, interest will accrue at the rate then
in effect plus 6%.
The Forbearance Agreement expires on March 31, 2002, but generally may be
terminated earlier by Bank of America if any of the following occur: (i) the
Company files for bankruptcy or an involuntary petition for bankruptcy is filed
against the Company; (ii) the Company fails to timely make any scheduled
principal or interest payment under the Credit Facility, as modified by the
Forbearance Agreement; (iii) the Company breaches any covenant in the
Forbearance Agreement; (iv) the Company violates the modified financial
covenants set out in the Forbearance Agreement relating to minimum net worth,
capital expenditures, and minimum EBITDA, and the specific ratios for debt
service coverage, leverage, interest coverage, and debt to capitalization; (v)
the Company fails to deliver on or prior to April 29, 2001 title to certain
personal assets of Marshall B. Hunt to secure the Bridge Loan; (vi) the Company
fails to deliver on or prior to April 29, 2001 a mortgage of all real property
owned by the Company to secure the revolver loan; (vii) the Company fails to
comply with any demands by Bank of America relating to borrowing base audits;
(viii) the Company fails to hire a new Chief Operating Officer by June 30, 2001;
(ix) the Company fails to cooperate with the operational review being conducted
by the management consulting firm; or (x) the Company uses the collateral under
the Credit Facility to repay subordinated debt, except as permitted by Bank of
America.
Pursuant to the Forbearance Agreement, the Company will grant Bank of
America warrants to purchase 3% of the equity ownership of the Company. The
warrants will have a strike price of $0.05 per share and will be exercisable for
three years from the date of issuance. The warrants will contain antidilution
protection for issuance of shares at less than fair market value.
Upon the expiration or early termination of the Forbearance Agreement, if
the Company remains in default under the Credit Facility, the debt outstanding
under the Credit Facility will become due and payable. The failure by the
Company either to extend the forbearance period or refinance such debt would
have a material adverse effect on the Company's financial position, liquidity
and ability to pay its debts as they become due.
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
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
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26
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
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 substantially all of the Company's debt is
variable 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB
Statement No. 133. SFAS No. 133, as amended by SFAS No. 138, 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 -- 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 hold
derivative instruments or engage in hedging activities other than the interest
rate cap discussed in Note 6, which expired on October 2, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. This pronouncement summarizes certain of the SEC staff's views on
applying generally accepted accounting principles to revenue recognition. The
Company has reviewed the requirements of SAB 101, as amended in March 2000 and
June 2000, and believes its existing accounting policies are consistent with the
guidance provided in the SAB.
RISK FACTORS
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 Credit Facility (except for the sweep arrangement -- see discussion below),
and as of December 31, 2000 and continuing through the filing date of this Form
10-K, the Company was in default of the Credit Facility as a result of (i) the
Company's non-compliance under certain financial covenants; (ii) the Company's
failure to make its principal payments of approximately $2.5 million due October
1, 2000 and January 1, 2001; and (iii) the Company's failure to repay the Bridge
Loan and related interest which were due on August 30, 2000. See "-- Liquidity
and Capital Resources" above.
On March 30, 2001, the Company and Bank of America entered into a
Forbearance Agreement relating to the Credit Facility. Under the terms of the
Forbearance Agreement, Bank of America has agreed that it will not foreclose on,
or institute legal action to collect, the debt outstanding under the Credit
Facility, including the Bridge Loan, until March 31, 2002, or until the earlier
termination of the Forbearance Agreement. Bank of America may terminate the
Forbearance Agreement prior to March 31, 2002, upon the occurrence of certain
events as described below.
The Forbearance Agreement modifies the payment terms of the debt
outstanding under the Credit Facility. The Company has agreed to pay any accrued
and unpaid interest on the debt outstanding under the Credit Facility on the
first day of each month, commencing on April 1, 2001, and to repay $135,000 in
principal each month, beginning on May 15, 2001. The Company is required to make
an additional principal
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repayment on October 10, 2001, in an amount of the greater of $150,000 or the
gross proceeds to the Company of the second installment payment pursuant to the
sale of the IFM business. In addition, the Company is required to prepay on the
90th day following the last day of each fiscal year, beginning on March 30,
2001, an amount equal to the Company's Excess Cash Flow (as defined in the
Credit Agreement) for each fiscal year. The Company has agreed to pay any
accrued and unpaid interest on the Bridge Loan on the first day of each month,
commencing on April 1, 2001, and to repay $300,000 in principal on or before
each of May 31 and August 31, 2001. The unpaid balance of the Bridge Loan will
be due on November 30, 2001. Interest will continue to accrue on the principal
balances of all debt outstanding under the Credit Facility at the Bank of
America prime rate plus 2.5%. Upon expiration or early termination of the
Forbearance Agreement, interest will accrue at the rate then in effect plus 6%.
The Forbearance Agreement expires on March 31, 2002, but generally may be
terminated earlier by Bank of America if any of the following occur: (i) the
Company files for bankruptcy or an involuntary petition for bankruptcy is filed
against the Company; (ii) the Company fails to timely make any scheduled
principal or interest payment under the Credit Facility, as modified by the
Forbearance Agreement; (iii) the Company breaches any covenant in the
Forbearance Agreement; (iv) the Company violates the modified financial
covenants set out in the Forbearance Agreement relating to minimum net worth,
capital expenditures, and minimum EBITDA, and the specific ratios for debt
service coverage, leverage, interest coverage, and debt to capitalization; (v)
the Company fails to deliver on or prior to April 29, 2001 title to certain
personal assets of Marshall B. Hunt to secure the Bridge Loan; (vi) the Company
fails to deliver on or prior to April 29, 2001 a mortgage of all real property
owned by the Company to secure the revolver loan; (vii) the Company fails to
comply with any demands by Bank of America relating to borrowing base audits;
(viii) the Company fails to hire a new Chief Operating Officer by June 30, 2001;
(ix) the Company fails to cooperate with the operational review being conducted
by the management consulting firm; or (x) the Company uses the collateral under
the Credit Facility to repay subordinated debt, except as permitted by Bank of
America.
Pursuant to the Forbearance Agreement, the Company will grant Bank of
America warrants to purchase 3% of the equity ownership of the Company. The
warrants will have a strike price of $0.05 per share and will be exercisable for
three years from the date of issuance. The warrants will contain antidilution
protections for issuance of shares at less than fair market value.
Upon the expiration or early termination of the Forbearance Agreement, if
the Company remains in default under the Credit Facility the debt outstanding
under the Credit Facility will become due and payable and Bank of America will
have the right to exercise all of its remedies under the Credit Facility. The
Company is required to make an additional principal repayment on October 10,
2001, in an amount of the greater of $150,000 or the gross proceeds to the
Company of the second installment payment pursuant to the sale of the IFM
business. The remedies available to Bank of America include, without limitation,
the right to foreclose upon the collateral securing the Credit Facility, the
Bridge Loan or the Shareholder Bridge Loan, the right to declare immediately due
and payable all amounts due under the Credit Facility, the right to collect
attorneys' fees under the Credit Facility and the Bridge Loan, and the right to
file suit against any and all parties liable on the Credit Facility, the Bridge
Loan or the Shareholder Bridge Loan. The exercise of these remedies upon the
failure by the Company either to extend the forbearance period or refinance such
debt would have a material adverse effect on the Company's financial position,
liquidity and ability to pay its debts as they become due.
As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Company's depository accounts are swept periodically into the Company's lockbox
account with Bank of America and applied against the outstanding loan balance
under the Credit Facility. The financial institutions which hold such accounts
have been notified by Bank of America that such lockbox arrangements have been
instituted, and the Company's as well as its subsidiaries' right to withdraw,
transfer or pay funds from the accounts has been terminated. The Company
periodically will apply to receive additional loans under the Working Capital
Loan in the Credit Facility to the extent such loan has been paid down under the
lockbox arrangement. There can be no assurance that Bank of America will
continue to loan the Company additional funds under the Credit Facility as the
outstanding loan is paid down periodically under the sweep arrangement and the
Company applies for additional loans. The failure of the
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Company to obtain additional loans from Bank of America as the Company applies
for such loans will have a material adverse effect on the Company's business,
results of operations, consolidated financial condition, liquidity and ability
to pay its debts as they become due.
The Company has retained a management consulting firm to assist the Company
in restructuring its current senior indebtedness and to seek alternative sources
of either senior and/or subordinated debt or an equity investment.
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.
Possis Litigation
In January 2001, Possis filed suit against the Company for alleged breach
of the Perma-Seal dialysis access graft distribution agreement. See Item 3.
"Legal Proceedings." Although the Company believes the suit is without merit,
the outcome cannot be predicted at this time. If the ultimate disposition of
this matter is determined adversely to the Company, it could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company believes that it has defenses to the claims of
liability and for damages in the action 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 lawsuit will not have
a disruptive effect upon the operations of the business, that the defense of the
lawsuit will not consume the time and attention of the senior management of the
Company and its subsidiaries, or that the resolution of the lawsuit will not
have a material adverse effect on the operating results and financial condition
of the Company.
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.
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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 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.
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
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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.
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
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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, 2000 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.
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 7%, 7%
and 6% of total sales during 1998, 1999 and 2000, 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
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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.
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, most medical devices must receive FDA clearance
through the Section 510(k) notification process ("510(k)") or the more lengthy
premarket approval (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" in terms of safety and effectiveness to a product
already legally marketed and which does not require a PMA. Therefore, it is not
always necessary to prove the actual 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. 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
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not involve delays adversely affecting the marketing and sale of the Company's
products. FDA's quality system regulations also require companies to adhere to
certain good manufacturing practices requirements, which include testing,
quality control, storage, and documentation procedures. Compliance with
applicable regulatory requirements is monitored through periodic site
inspections by the FDA. 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.
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, possible withdrawal of
product clearances, 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 requirements. 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.
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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 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 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 used this Cap Agreement to
reduce risk by essentially creating offsetting market exposures. The Cap
Agreement was not held for trading purposes.
At December 31, 2000, the Company had approximately $42.9 million
outstanding under its Credit Facility, which expires in July 2004. Certain
amounts outstanding under the Credit Facility were subject to the Cap Agreement,
which expired in October 2000.
For more information on the Cap Agreement, see Note 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.
32
35
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
2001 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 2001
Annual Meeting of Stockholders.
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 2000" and "Option Exercises and Values for Fiscal 2000" in the
Company's Proxy Statement for the 2001 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 2001 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 2001 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
Consolidated Financial Statements
Report of Independent Accountants......................... F-1
Consolidated Balance Sheets as of December 31, 1999 and
2000................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000....................... F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000........... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000....................... F-5
Notes to Consolidated Financial Statements................ F-6
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement
Schedule.................................................. F-30
Schedule II -- Valuation and Qualifying Accounts............ F-31
33
36
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.
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.
34
37
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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, filed as Exhibit 10.10 to the Registrant's Form
10-K dated March 29, 2000 (SEC File No. 000-24025) and
incorporated herein by reference.
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.
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.
35
38
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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.
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.
36
39
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
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, filed as
Exhibit 10.34 to the Registrant's Form 10-K dated March 29,
2000 (SEC File No. 000-24025) and incorporated herein by
reference.
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.
10.37 -- Standard Form of Resolution and Agreement Engaging the
Services of Osnos Associates, Inc. as Consultant, dated
October 8, 2001, between the Company and Osnos Associates,
Inc.
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, filed as Exhibit 10.42 to
the Registrant's Form 10-K dated March 29, 2000 (SEC File
No. 000-24025) and incorporated herein by reference.
10.43 -- Lease Agreement dated August 17, 1998 between HP Aviation,
Inc. and the Company, filed as Exhibit 10.43 to the
Registrant's Form 10-K dated March 29, 2000 (SEC File No.
000-24025) and incorporated herein by reference.
10.44 -- Agreement dated December 22, 1998 between Marshall B. Hunt
and William E. Peterson, Jr. and the Company, filed as
Exhibit 10.44 to the Registrant's Form 10-K dated March 29,
2000 (SEC File No. 000-24025) and incorporated herein by
reference.
10.45 -- Third Amendment to Amended and Restated Credit Agreement and
Waiver, dated as of March 29, 2000, by and among the
Company, the Lenders referred to therein and Banc of America
Commercial Finance Corporation, as Agent, filed as Exhibit
10.1 to the Registrant's Form 10-Q dated May 15, 2000 (SEC
File No. 000-24025) and incorporated herein by reference.
10.46 -- Loan Agreement, dated as of June 6, 2000, by and among the
Company, Marshall B. Hunt and Hunt Family Investments,
L.L.L.P., filed as Exhibit 10.1 to the Registrant's Form
10-Q dated August 14, 2000 (SEC File No. 000-24025) and
incorporated herein by reference.
10.47 -- Revolving Credit Note, dated as of July 1, 2000, by the
Company in favor of Bank of America, N.A., filed as Exhibit
10.2 to the Registrant's Form 10-Q dated August 14, 2000
(SEC File No. 000-24025) and incorporated herein by
reference.
10.48 -- Bridge Loan Note, dated as of July 1, 2000, by the Company
in favor of Bank of America, N.A., filed as Exhibit 10.3 to
the Registrant's Form 10-Q dated August 14, 2000 (SEC File
No. 000-24025) and incorporated herein by reference.
37
40
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
10.49 -- Pledge and Assignment of Note and Collateral, dated as of
June 6, 2000, by and between the Company and Banc of America
Commercial Finance Corporation, as Agent for the Lenders
referred to therein, filed as Exhibit 10.4 to the
Registrant's Form 10-Q dated August 14, 2000 (SEC File No.
000-24025) and incorporated herein by reference.
10.50 -- Promissory Note, dated as of June 6, 2000, by Marshall B.
Hunt and Hunt Family Investments, L.L.L.P. in favor of the
Company, filed as Exhibit 10.5 to the Registrant's Form 10-Q
dated August 14, 2000 (SEC File No. 000-24025) and
incorporated herein by reference.
10.51 -- Pledge Agreement, dated as of June 6, 2000, between Marshall
B. Hunt and the Company, filed as Exhibit 10.6 to the
Registrant's Form 10-Q dated August 14, 2000 (SEC File No.
000-24025) and incorporated herein by reference.
10.52 -- Pledge Agreement, dated as of June 6, 2000, between Hunt
Family Investments, L.L.L.P. and the Company, filed as
Exhibit 10.7 to the Registrant's Form 10-Q dated August 14,
2000 (SEC File No. 000-24025) and incorporated herein by
reference.
10.53 -- Fourth Amendment to Amended and Restated Credit Agreement,
dated as of June 6, 2000, by and among the Company, the
Lenders referred to therein and Banc of America Commercial
Finance Corporation, as Agent, filed as Exhibit 10.2 to the
Registrant's Form 8-K dated August 18, 2000 (SEC File Number
000-24025) and incorporated herein by reference.
10.54 -- Letter Agreement, dated as of June 6, 2000, between the
Company and Banc of America Commercial Finance Corporation,
filed as Exhibit 10.3 to the Registrant's Form 8-K dated
August 18, 2000 (SEC File Number 000-24025) and incorporated
herein by reference.
10.55 -- Fifth Amendment to Amended and Restated Credit Agreement and
Waiver, dated as of August 14, 2000, by and among the
Company, Horizon Acquisition Corp., Strato/Infusaid, Inc.,
Stepic Corporation the Lenders referred to therein and Bank
of America, as Agent, filed as Exhibit 10.1 to the
Registrant's Form 8-K dated August 18, 2000 (SEC File Number
000-24025) and incorporated herein by reference.
10.56 -- Asset Purchase Agreement by and between the Company and
Ideas for Medicine, Inc., dated October 9, 2000, filed as
Exhibit 2.1 to the Registrant's Form 8-K, dated October 24,
2000 (SEC File Number 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.
10.57 -- Settlement Agreement dated March 29, 2001 between the
Company, Steven Picheny and Howard Fuchs.
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.
(b) Reports on Form 8-K
On October 24, 2000 the Company filed a Current Report on Form 8-K relating
to the consummation of the acquisition of certain assets used in the
manufacture and sale of medical devices by Ideas for Medicine, Inc., a
wholly-owned subsidiary of CryoLife, Inc.
On December 13, 2000 the Company filed an amendment to its Current Report on
Form 8-K filed October 24, 2000 to discuss the omission of financial
statements.
38
41
SIGNATURES
Pursuant to 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 the 2nd day of
April, 2001.
HORIZON MEDICAL PRODUCTS, INC.
(Registrant)
By: /s/ MARSHALL B. HUNT
------------------------------------
Marshall B. Hunt
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of March, 2001.
SIGNATURE TITLE
--------- -----
/s/ MARSHALL B. HUNT Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer
Marshall B. Hunt (Principal Executive Officer)
/s/ WILLIAM E. PETERSON, JR. President and Director
- ----------------------------------------------------- (Principal Financial Officer)
William E. Peterson, Jr.
/s/ JULIE F. LANCASTER Vice President -- Finance
- ----------------------------------------------------- (Principal Accounting Officer)
Julie F. Lancaster
/s/ ROBERT COHEN Director
- -----------------------------------------------------
Robert Cohen
/s/ LYNN R. DETLOR Director
- -----------------------------------------------------
Lynn R. Detlor
/s/ ROBERT J. SIMMONS Director
- -----------------------------------------------------
Robert J. Simmons
/s/ A. GORDON TUNSTALL Director
- -----------------------------------------------------
A. Gordon Tunstall
39
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and 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,
1999 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
The Company has established a plan to achieve sufficient liquidity during
2001. The plan is described in Notes 6 and 20 to the consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
February 16, 2001, except for Notes 6, 15, 16 and 20, as
to which the date is April 2, 2001.
F-1
43
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,991,427 $ 537,954
Accounts receivable -- trade (net of allowance for
doubtful accounts of $1,031,751 and $2,224,822 as of
December 31, 1999 and 2000, respectively).............. 18,091,455 13,763,837
Inventories............................................... 19,647,250 20,721,483
Prepaid expenses and other current assets................. 1,262,611 1,306,043
Income tax receivable..................................... 953,055 1,903,802
Deferred taxes............................................ 1,246,439
------------ ------------
Total current assets.............................. 43,192,237 38,233,119
Property and equipment, net................................. 3,683,446 5,680,473
Intangible assets, net...................................... 55,259,193 41,902,486
Other assets................................................ 262,596 222,408
------------ ------------
Total assets...................................... $102,397,472 $ 86,038,486
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 609,176
Accounts payable -- trade................................. $ 5,861,935 8,897,350
Accrued salaries and commissions.......................... 203,415 178,408
Accrued royalties......................................... 172,073 89,577
Accrued interest.......................................... 450,560 814,150
Other accrued expenses.................................... 820,227 955,229
Current portion of long-term debt......................... 5,757,196 11,430,228
------------ ------------
Total current liabilities......................... 13,265,406 22,974,118
Long-term debt, net of current portion...................... 44,998,709 40,597,750
Other liabilities........................................... 157,282 134,558
Deferred taxes.............................................. 907,079
------------ ------------
Total liabilities................................. 59,328,476 63,706,426
------------ ------------
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 as of December 31, 1999 and
2000
Common stock, $.001 par value per share; 50,000,000 shares
authorized, 13,366,278 shares issued and outstanding as of
December 31, 1999 and 2000................................ 13,366 13,366
Additional paid-in capital.................................. 51,826,125 51,826,125
Shareholders' notes receivable.............................. (452,581) (1,428,939)
Accumulated deficit......................................... (8,317,914) (28,078,492)
------------ ------------
Total shareholders' equity........................ 43,068,996 22,332,060
------------ ------------
Total liabilities and shareholders' equity........ $102,397,472 $ 86,038,486
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
44
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000
----------- ----------- ------------
Net sales.............................................. $39,399,361 $75,370,657 $ 63,335,239
Cost of goods sold..................................... 19,932,953 48,010,817 46,722,112
----------- ----------- ------------
Gross profit................................. 19,466,408 27,359,840 16,613,127
Selling, general and administrative expenses........... 13,597,097 20,146,901 20,093,406
Impairment charge (Note 16)............................ 12,086,334
----------- ----------- ------------
Income (loss) from operations................ 5,869,311 7,212,939 (15,566,613)
----------- ----------- ------------
Other income (expense):
Interest expense, net................................ (3,103,222) (4,140,134) (5,296,852)
Other income......................................... 46,262 99,038 31,703
----------- ----------- ------------
(3,056,960) (4,041,096) (5,265,149)
----------- ----------- ------------
Income (loss) before income taxes and
extraordinary items........................ 2,812,351 3,171,843 (20,831,762)
Income tax provision (benefit)......................... 1,780,649 1,506,625 (1,071,184)
----------- ----------- ------------
Income (loss) before extraordinary items..... 1,031,702 1,665,218 (19,760,578)
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)............................ $ 2,048,288 $ 1,665,218 $(19,760,578)
=========== =========== ============
Net income (loss) per share before extraordinary
items -- basic and diluted........................... $ .08 $ .12 $ (1.48)
=========== =========== ============
Net income (loss) per share -- basic and diluted....... $ .17 $ .12 $ (1.48)
=========== =========== ============
Weighted average common shares outstanding -- basic.... 12,187,070 13,366,278 13,366,278
=========== =========== ============
Weighted average common shares outstanding --diluted... 12,412,394 13,372,571 13,366,278
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
45
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
NUMBER ADDITIONAL SHAREHOLDERS'
OF COMMON PAID-IN NOTES ACCUMULATED
SHARES STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
---------- ------- ----------- -------------- ------------ ------------
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....... 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
Net increase in
shareholders' notes
receivable............... (976,358) (976,358)
Net loss................... (19,760,578) (19,760,578)
---------- ------- ----------- ----------- ------------ ------------
Balance, December 31,
2000..................... 13,366,278 $13,366 $51,826,125 $(1,428,939) $(28,078,492) $ 22,332,060
========== ======= =========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
46
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1998 1999 2000
------------ ----------- ------------
Cash flows from operating activities:
Net income (loss)................................... $ 2,048,288 $ 1,665,218 $(19,760,578)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of fixed assets................. 4,750 83,850
Extraordinary losses on early extinguishments of
debt........................................... 136,744
Extraordinary gain on early extinguishment of put
feature........................................ (1,100,000)
Depreciation expense............................. 487,674 766,063 902,086
Amortization expense............................. 1,787,964 2,907,011 2,870,373
Amortization of discount......................... 1,266,319 40,460
Impairment charge................................ 12,086,334
Deferred income taxes, net change................ 200,330 359,956 339,360
Non-cash officer compensation.................... 91,250
Non-cash consulting expense...................... 657,256
Non-cash increase in notes
receivable -- shareholders..................... (27,028) (27,028) (76,358)
Changes in operating assets and liabilities, net:
Accounts receivable -- trade................... (4,436,228) (1,165,968) 4,327,618
Inventories.................................... (4,718,470) (440,172) 1,956,662
Prepaid expenses and other assets.............. 1,221,005 474,344 71,587
Income tax receivable/payable.................. 933,747 (2,296,528) (950,747)
Accounts payable -- trade...................... 5,201,530 (3,913,485) 3,035,415
Accrued expenses and other liabilities......... (4,483,751) (748,230) (68,898)
------------ ----------- ------------
Net cash provided by (used in) operating
activities................................ (733,370) (2,414,069) 4,857,164
------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures................................ (1,845,561) (369,339) (385,297)
Short-term bridge loan to shareholder............... (900,000)
Change in other nonoperating assets, net............ (120,666) (84,159)
Payment for acquisitions, net of cash acquired...... (36,120,798) (1,400,000)
------------ ----------- ------------
Net cash used in investing activities....... (38,087,025) (1,853,498) (1,285,297)
------------ ----------- ------------
Cash flows from financing activities:
Debt issue costs.................................... (293,916)
Cash overdraft...................................... 609,176
Proceeds from issuance of long-term debt............ 41,812,039 2,906,000 20,745,642
Principal payments on long-term debt................ (27,305,465) (2,879,221) (26,380,158)
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
------------ ----------- ------------
Net cash provided by (used in) financing
activities................................ 42,158,686 26,779 (5,025,340)
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents............................... 3,338,291 (4,240,788) (1,453,473)
Cash and cash equivalents, beginning of year.......... 2,893,924 6,232,215 1,991,427
------------ ----------- ------------
Cash and cash equivalents, end of year................ $ 6,232,215 $ 1,991,427 $ 537,954
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 1,335,405 $ 4,001,207 $ 4,357,778
============ =========== ============
Cash paid for taxes, net of cash refunds received... $ 587,019 $ 3,536,799 $ (241,593)
============ =========== ============
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
47
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
1. DESCRIPTION OF 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 manufactures, markets and distributes three 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; and (iii) embolectomy catheters and carotid
shunts, utilizing the Company's balloon technology for endarectomy procedures.
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
accounting principles generally accepted in the United States of America.
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, as the Company generally has no significant post delivery
obligations, the product price is fixed and determinable, collection of the
resulting receivable is probable, and product returns are reasonably estimable.
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.
Cash Overdraft. As further discussed in Note 6, the Company's lender has
instituted a sweep arrangement related the Company's lockbox. As a result of
maintaining the sweep arrangement with its lender, the Company maintains a zero
cash balance, resulting in book cash overdrafts. Such overdrafts are included in
current liabilities.
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 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.
F-6
48
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. During the year ended December 31, 2000, the Company recognized such a
loss related to the write down of certain assets (see Note 16). There were no
such losses recognized during the years ended December 31, 1998 and 1999.
Research and Development. Research and development costs are charged to
expense as incurred and were approximately $412,000 during the year ended
December 31, 1998. The Company did not incur research and development costs
during the years ended December 31, 1999 or 2000.
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.
The amounts recognized are based on enacted tax rates in effect in the
years in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
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.
F-7
49
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133. SFAS No. 133, as amended
by SFAS No. 138, 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 -- 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 hold derivative instruments or engage
in hedging activities other than the interest rate cap discussed in Note 6,
which expired on October 2, 2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
This pronouncement summarizes certain of the SEC staff's views on applying
generally accepted accounting principles to revenue recognition. The Company has
reviewed the requirements of SAB 101, as amended in March 2000 and June 2000,
and believes its existing accounting policies are consistent with the guidance
provided in the SAB.
3. INVENTORIES
A summary of inventories as of December 31 is as follows:
1999 2000
----------- -----------
Raw materials............................................. $ 5,551,390 $ 4,013,959
Work in process........................................... 3,943,563 3,706,925
Finished goods............................................ 11,260,057 17,805,996
----------- -----------
20,755,010 25,526,880
Less inventory reserves................................. (1,107,760) (4,805,397)
----------- -----------
$19,647,250 $20,721,483
=========== ===========
F-8
50
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31 is as follows:
1999 2000
----------- -----------
Building and improvements................................. $ 2,088,198 $ 4,266,555
Office equipment.......................................... 1,661,225 1,891,362
Plant equipment........................................... 1,433,536 1,895,275
Transportation equipment.................................. 145,287 131,560
----------- -----------
5,328,246 8,184,752
Less accumulated depreciation........................... (1,644,800) (2,504,279)
----------- -----------
$ 3,683,446 $ 5,680,473
=========== ===========
As of December 31, 1999 and 2000, the Company had capitalized computer
software costs of approximately $149,000 and $117,000, respectively.
Depreciation expense associated with capitalized computer software costs was
approximately $26,700, $55,000, and $6,600 during each of the three years in the
period ended December 31, 2000, respectively.
5. INTANGIBLE ASSETS
A summary of intangible assets as of December 31 is as follows:
1999 2000
----------- -----------
Goodwill.................................................. $49,590,643 $37,924,276
Patents................................................... 8,284,656 8,218,000
Non-compete and consulting agreements..................... 2,100,592 2,100,592
Debt issuance costs....................................... 297,917 297,917
Other..................................................... 449,286 368,253
----------- -----------
60,723,094 48,909,038
Less accumulated amortization........................... (5,463,901) (7,006,552)
----------- -----------
$55,259,193 $41,902,486
=========== ===========
The expected amortization charges related to these intangible assets are as
follows for the years ended December 31:
2001........................................................ $ 2,299,552
2002........................................................ 2,218,227
2003........................................................ 1,958,228
2004........................................................ 1,929,459
2005........................................................ 1,876,374
Thereafter.................................................. 31,620,646
-----------
$41,902,486
===========
6. LONG-TERM DEBT
The Company maintains a $50 million amended and restated credit facility
(the "Credit Facility") with Bank of America, N.A. (Bank of America), successor
to Banc of America Commercial Finance Corporation, formerly known as
NationsCredit which is used for working capital purposes (the "Working Capital
Loans") and to fund acquisitions (the "Acquisition Loans"). The Credit Facility
provides for a sublimit, as of December 31, 2000, of $10 million as it relates
to the Working Capital Loans. The Working Capital Loans
F-9
51
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the Acquisition Loans are collectively referred to herein as the Revolving
Credit Loans. The availability of funds under the Acquisition Loans terminated
on May 26, 2000, and the Credit Facility expires on July 1, 2004. In addition,
the Company had outstanding standby letters of credit of $4,800,000 and
$2,544,000 as of December 31, 1999 and 2000, respectively. These letters of
credit, which have terms through January 2002, collateralize the Company's
obligations to third parties in connection with an acquisition (See Note 15).
Effective June 6, 2000, the Credit Facility was amended to provide for a
short-term bridge loan (the "Bridge Loan") to the Company in the principal
amount of $900,000. The proceeds of the Bridge Loan were used to fund a
short-term bridge loan to the Company's Chairman of the Board, Chief Executive
Officer, and largest shareholder (the "CEO") (the "Shareholder Bridge Loan")
(see Note 12).
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. The Bridge Loan,
including accrued interest, was due on August 30, 2000. As of December 31, 1999
and 2000, $5,500,000 and $2,561,661, respectively, was outstanding under the
Working Capital Loans and $39,476,264 and $39,443,039, respectively, was
outstanding under the Acquisition Loans. No funds were available for borrowing
under the Credit Facility as of December 31, 2000, except as may be available
under the sweep arrangement (see below).
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.
As of December 31, 2000, the Company is in default under its Credit
Facility. The defaults result from the Company's failure to make the first
principal payment due under the Credit Facility in October 2000, the failure to
repay the Bridge Loan in August 2000, and violations of certain of the Company's
financial covenants.
Effective March 30, 2001, the Company entered into a Forbearance Agreement,
as amended, with Bank of America wherein Bank of America will forbear from
exercising its rights and remedies allowed under the Credit Facility due to the
defaults until March 31, 2002 or upon earlier termination as defined in the
Forbearance Agreement (the Termination Date). The period from March 30, 2001
through the Termination Date is defined as the Forbearance Period. The
Forbearance Agreement provides for the monthly payment, during the Forbearance
Period, of interest based on the Bank of America prime rate plus 2.5% per annum
and principal payments of $135,000 beginning on May 15, 2001 and a payment of
Excess Cash Flow, as defined, on the ninetieth day following the last day of
each fiscal year. In addition, the Forbearance Agreement requires an additional
principal payment in the amount of the greater of $150,000 or the gross proceeds
payable to the Company in connection with the Company's sale of IFM (see Note
16). The Forbearance Agreement further requires payments of $300,000 each on the
Bridge Loan on May 31, 2001, August 31, 2001, and November 30, 2001 and adjusts
certain of the financial ratio covenants. The Forbearance Agreement also
provides for a forbearance and restructuring fee of $10,000 plus related
expenses and interest at the rate then in effect plus 6% upon a Termination
Event, as defined in the Forbearance Agreement.
In connection with the Forbearance Agreement, the Company issued a warrant
to Bank of America to acquire common shares equal to 3% of the Company's total
shares for $.05 per share. The warrant is exercisable by Bank of America during
a three year period without regard to the status of the Credit Facility or the
Bridge Loan. The Company will record the estimated fair value of the warrant as
of March 30, 2001 of approximately $260,000, determined using the Black-Scholes
Model (using weighted average assumptions as
F-10
52
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
follows: dividend yield of 0%, expected life of five years, expected volatility
of 107.6% and a risk free interest rate of 4.44%) as a deferred cost and will
amortize the deferred cost over the Forbearance Period.
The Forbearance Agreement also requires the Company to hire on or before
June 30, 2001 a new chief operating officer, restricts the repayment of
principal debt to junior lien holders, as defined, and either i) sell the assets
of the Ideas for Medicine product line (IFM) or ii) obtain an agreement from the
seller of the IFM product line to defer all payments under the related
promissory note (see below) through the Termination Date. (See Notes 15 and 16)
The Forbearance Agreement amends the Credit Facility such that the Working
Capital Loans shall not exceed the least of i) the Working Capital Sublimit of
$10 million, as reduced due to the sale of IFM (see Note 16) as defined; ii) an
amount equal to the Borrowing Base, as defined; and iii) the Revolving Credit
Commitment, as defined, then in effect.
As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Company's lockbox accounts are swept periodically into a Bank of America account
and applied against the outstanding loan under the Credit Facility. The
financial institutions which hold such accounts have been notified by Bank of
America that such lockbox arrangements have been instituted, and the Company's
as well as its subsidiaries' right to withdraw, transfer or pay funds from the
accounts has been terminated. The Company periodically will apply to receive
additional loans under the Working Capital Loans under the Credit Facility to
the extent such loan has been paid down under the lockbox arrangement.
Effective March 29, 2000, the Credit Facility, bears interest, at the
option of the Company, at the Index Rate or adjusted LIBOR, as defined in the
agreement, plus an applicable margin ranging from 3.50% to 4.50%. Through June
30, 1999, the 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's prime rate plus .5%.
Effective July 1, 1999, the Credit Facility bore 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's 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. As of December 31, 1999 and 2000, the Company's
interest rate on the Credit Facility is based on the Index Rate with a resulting
rate of approximately 9.5% and 11%, respectively. The Bridge Loan bears
interest, at the option of the Company, at the Index Rate or Adjusted LIBOR, as
defined in the Bridge Loan documents, plus 4.5%. As of December 31, 2000, the
Company's interest rate on the Bridge Loan is based on the Index Rate with a
resulting rate of approximately 11.32%. The default interest rate under the
Credit Facility and the Bridge Loan is equal to the otherwise applicable
interest rate plus 2%. No default interest rates have been charged relating to
the defaults discussed above.
The Company's interest rate cap agreement with Bank of America expired in
October 2000. The Company utilized the interest rate cap agreement to limit the
impact of increases in interest rates on its floating rate debt. The interest
rate cap agreement entitled the Company to receive from Bank of America the
amounts, if any, by which the floating rate, as defined in the agreement,
exceeded the strike rates (or cap rates) stated in the agreement. As of December
31, 1999, the Company had an interest rate cap with a notional amount of
$11,062,500. Under this agreement, the interest rate on the notional amount was
capped at 8.8%. The Company has received no payments from Bank of America under
the interest rate cap agreement during the three years in the period ended
December 31, 2000.
The Credit Facility calls for an unused commitment fee payable quarterly,
in arrears, at a rate of .375% per annum, as well as a letter of credit fee
payable quarterly, in arrears, at a rate of 2% per annum. Both fees are based on
a defined calculation in the agreement. In addition, the Credit Facility
requires an administrative fee in the amount of $30,000 to be paid annually.
F-11
53
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's obligations under the 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 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. The Company's
obligation under the Bridge Loan is collateralized by the pledge of 2,813,943
shares of the Company's common stock beneficially owned by the Company's CEO,
and by the collateral previously pledged by the Company to Bank of America under
the Credit Facility.
The Company's 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. As
of December 31, 2000, the Company has violated certain of these financial
covenants and, as a result, is in default under its Credit Facility. In
addition, the Company is also in default under its Credit Facility as a result
of not making its principal payment of approximately $2.5 million due October 1,
2000, as well as non-payment of the Bridge Loan that was due on August 30, 2000.
Revised restrictive covenants for the Forbearance Period have been set in the
Forbearance Agreement.
As of December 31, long-term debt consists of the following:
1999 2000
----------- -----------
Credit Facility, including acquisition obligations supported
by letters of credit...................................... $49,776,264 $45,448,700
Note payable for the purchase of IFM, less unamortized
discount of $411,380 as of December 31, 2000 (see
below).................................................... 5,286,045
Obligation for the purchase of CVS, due in September 2000... 225,000
Notes payable for the first additional Stepic purchase
payment, bearing interest at a fixed rate of 11%, interest
and principal payable through April 2000.................. 633,464
Notes payable for the second additional Stepic purchase
payment, bearing interest at a fixed rate of 11%, interest
and principal payable through February 2002 (see Note
15)....................................................... 1,161,042
Miscellaneous notes payable, bearing interest at fixed rates
ranging from .90% to 8.25%, requiring monthly payments of
principal and interest, and maturing at various dates
through January 2004...................................... 48,844 49,891
Miscellaneous capital lease obligations for office
equipment, requiring monthly payments ranging from $133 to
$2,729, bearing interest at rates ranging 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 $110,000 and $102,600 as of
December 31, 1999 and 2000, respectively.................. 72,333 82,300
----------- -----------
50,755,905 52,027,978
Less current portion........................................ 5,757,196 11,430,228
----------- -----------
$44,998,709 $40,597,750
=========== ===========
F-12
54
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt are as follow for the years ended
December 31:
2001........................................................ $11,430,228
2002........................................................ 40,956,891
2003........................................................ 29,248
2004........................................................ 22,991
-----------
52,439,358
Less unamortized discount................................. (411,380)
-----------
$52,027,978
===========
The table above gives consideration to the terms of the Forbearance
Agreement.
As discussed in Note 13, the Company entered into a promissory note (the
"Note") on October 9, 2000 in connection with the purchase of certain assets
from IFM. The Note is payable in 22 equal monthly installments of principal and
interest of $140,000 and a $1 million payment upon the earlier of April 3, 2001
or the closing of an equity financing, as described in the related asset
purchase agreement. The Note consists of a portion, equal to approximately $3.9
million, which bears interest at 9% per year, and a non-interest bearing portion
of approximately $2.1 million. If the $1 million payment under the Note is made
when due, and no other defaults exist under the Note, then $1 million of the
non-interest bearing portion of the Note will be forgiven. In addition, at such
time as the principal balance has been paid down to $1.145 million and assuming
that there have been no defaults under the Note, the remainder of the Note will
be forgiven, and the Note will be canceled. Subsequent to December 31, 2000, the
Company sold the assets of IFM (see Note 16). In connection with the sale, the
Buyer assumed the Note. Accordingly, the Note as been classified in 2001 in the
above debt payout schedule.
During the year ended December 31, 1997, the Company issued a warrant to
Bank of America in connection with its 1997 Credit Facility 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 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 1997 Credit
Facility and certain other long term debt 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. Bank of
America exercised its warrants immediately prior to the IPO and sold the related
shares in the offering as well.
F-13
55
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the income tax provision (benefit) consist of the
following for the years ended December 31:
1998 1999 2000
---------- ---------- -----------
Current:
Federal......................................... $1,301,484 $ 732,556 $(1,410,544)
State........................................... 278,835 251,427
---------- ---------- -----------
1,580,319 983,983 (1,410,544)
Deferred tax provision (benefit).................. 200,330 522,642 (7,255,717)
---------- ---------- -----------
1,780,649 1,506,625 (8,666,261)
Change in valuation allowance..................... 7,595,077
---------- ---------- -----------
Income tax provision (benefit) before
extraordinary items............................. 1,780,649 1,506,625 (1,071,184)
Income tax benefit of extraordinary items......... (53,330)
---------- ---------- -----------
$1,727,319 $1,506,625 $(1,071,184)
========== ========== ===========
Deferred tax assets and liabilities as of December 31, 1999 and 2000 are
comprised of the following:
1999 2000
---------- -----------
Gross deferred tax assets:
Allowance for doubtful accounts and returns............... $ 433,748 $ 935,315
Inventory and inventory reserve........................... 812,691 2,249,736
Basis differences of intangible assets.................... 5,730,083
Basis differences of property and equipment............... 62,525
State net operating losses................................ 433,497
---------- -----------
Gross deferred tax assets......................... 1,246,439 9,411,156
---------- -----------
Gross deferred tax liabilities:
Basis differences of intangible assets.................... (798,008) (1,779,591)
Basis differences of property and equipment............... (109,071) (36,488)
---------- -----------
Gross deferred tax liabilities.................... (907,079) (1,816,079)
---------- -----------
Valuation allowance for net deferred tax assets........... (7,595,077)
---------- -----------
Net deferred tax assets........................... $ 339,360 $
========== ===========
The Company has net operating losses (NOL) for state income tax reporting
purposes of approximately $4,148,000. These NOLs have expiration dates through
fiscal year 2020.
A valuation allowance has been recorded against all deferred tax assets as
of December 31, 2000 as the Company believes that it is more likely than not
that the net deferred tax assets will not be realized through carrybacks to
years in which it paid tax or through future taxable income.
F-14
56
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) 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:
1998 1999 2000
---------- ---------- -----------
Income tax provision (benefit) at statutory
federal income tax rate......................... $ 956,199 $1,078,426 $(7,082,799)
Increase (decrease) resulting from:
Non-deductible meals and entertainment
expense...................................... 39,282 38,110 42,635
State income taxes.............................. 208,052 253,952 (1,762,147)
Non-deductible interest and accretion of put
warrant repurchase obligation................ 396,667
Non-deductible amortization of goodwill......... 136,309 136,137 136,050
Non-deductible officer compensation............. 31,025
Change in valuation allowance................... 7,595,077
Other, net...................................... 13,115
---------- ---------- -----------
Income tax provision (benefit) before
extraordinary items................... $1,780,649 $1,506,625 $(1,071,184)
========== ========== ===========
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.
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 1997 Credit Facility, the
Company issued a warrant to Bank of America to acquire shares of non-voting
Class B common stock, representing 15% of outstanding shares. 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. Effective January 29, 1998,
Bank of America and the Company amended the warrant agreement such that Bank 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. Bank 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 Bank of
America.
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
F-15
57
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 have been earned under the Warrant Agreement, and none of these
warrants is vested or exercisable as of December 31, 2000. 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.
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:
Outstanding, January 1, 1998 (at $1.00 per unit)............ $ 99,600
Canceled.................................................. (99,600)
--------
December 31, 1998........................................... $
========
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.
During 2000, the Company amended the Incentive Plan to increase the number of
shares authorized and reserved for issuance under the Incentive Plan to 800,000.
In addition in February 2001, the Board of Directors of the Company approved an
increase in the number of shares authorized and reserved for issuance under the
Incentive Plan to 1,400,000, subject to shareholder approval. 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.
Transactions under the Incentive Plan are summarized as follows:
F-16
58
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Cancelled............................................... (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
Cancelled............................................... (92,850) $1.875 - $14.625 $ 6.33
--------
Options outstanding, December 31, 1999.................... 361,275 $1.875 - $15.50 $ 9.14
Granted................................................. 456,000 $0.440 - $ 2.125 $ 0.637
Cancelled............................................... (115,950) $1.875 - $14.625 $ 9.473
--------
Options outstanding, December 31, 2000.................... 701,325 $0.440 - $15.50 $ 3.557
========
The weighted average fair value of options granted during the three years
in the period ended December 31, 2000 was $12.38, $3.63 and $0.54, respectively.
The following table summarizes information about options outstanding as of
December 31, 2000.
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
EXERCISE PRICE OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISABLE
- -------------- ----------- -------------------------- -----------
$14.500................................... 94,250 7.67 52,125
$15.500................................... 10,000 7.67 6,667
$14.625................................... 3,200 7.67 1,600
$13.750................................... 6,300 7.58 3,150
$ 9.250................................... 5,000 7.33 2,500
$ 1.875................................... 2,000 7.17 1,000
$ 7.000................................... 18,000 8.04 4,560
$ 7.375................................... 2,000 8.07 500
$ 6.250................................... 8,575 8.14 2,149
$ 4.063................................... 22,000 8.07 5,500
$ 3.375................................... 24,000 8.92 8,000
$ 2.688................................... 50,000 8.97 12,500
$ 1.738................................... 25,000 9.30
$ 2.125................................... 30,000 9.33
$ 1.625................................... 1,000 9.54
$ 0.500................................... 10,000 9.91
$ 0.440................................... 390,000 9.95
------- -------
701,325 100,251
======= =======
The Company applies APB No. 25 and related interpretations in accounting
for the Incentive Plan. Accordingly, no compensation expense has been recognized
by the Company for fixed stock option awards under the 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
F-17
59
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 123, the Company's net income (loss) and net income (loss) per share
would have been reduced (increased) to the pro forma amounts indicated below:
1998 1999 2000
---------- ---------- ------------
Net income (loss):
As reported................................ $2,048,288 $1,665,218 $(19,760,578)
Pro forma.................................. $1,798,423 $1,235,470 $(20,148,569)
Net income (loss) per share -- basic and
diluted:
As reported................................ $ 0.17 $ 0.12 $ (1.48)
Pro forma.................................. $ 0.15 $ 0.09 $ (1.51)
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 2000
------ ----- ------
Dividend yield............................................ 0% 0% 0%
Expected life (years)..................................... 7 7 7
Expected volatility....................................... 114.00% 97.10% 107.60%
Risk free interest rate................................... 5.54% 5.15% 5.40%
11. EARNINGS (LOSS) PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the years ended December 31, 1998, 1999, and 2000 is as follows:
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
========== ========== =====
F-18
60
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------
NET LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
EPS -- basic............................................. $(19,760,578) 13,366,278 $(1.48)
------------ ---------- ------
EPS diluted.................................... $(19,760,578) 13,366,278 $(1.48)
============ ========== ======
The EPS impact of the extraordinary items for the year ended December 31,
1998 is 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.
Options to purchase 180,350 shares of common stock and warrants to purchase
500,000 shares of common stock were outstanding as of December 31, 1998 but are
not included in the computation of the 1998 diluted EPS because the exercise
price of the options and warrants was greater than the average market value of
the common shares. The options have exercise prices ranging from $9.25 to $15.50
and expire in 2008. The warrants have an exercise price of $14.50 and expire as
discussed in Note 9.
Options to purchase 228,275 shares of common stock and warrants to purchase
500,000 shares of common stock were outstanding as of December 31, 1999 but are
not included in the computation of the 1999 diluted EPS because the exercise
price of the options and warrants was greater than the average market value of
the common shares. The options have exercise prices ranging from $5.75 to $15.50
and expire in 2008 and 2009. The warrants have an exercise price of $14.50 and
expire as discussed in Note 9.
Options to purchase 701,325 shares of common stock and warrants to purchase
500,000 shares of common stock were outstanding as of December 31, 2000 but are
not included in the computation of the 2000 diluted EPS because the effect would
be anti-dilutive. The options have exercise prices ranging from $.44 to $15.50
and expire in 2010. The warrants have an exercise price of $14.50 and expire as
discussed in Note 9.
12. RELATED-PARTY TRANSACTIONS
As discussed in Note 6 on June 6, 2000, the Company obtained the Bridge
Loan from Bank of America in the amount of $900,000, which was used to fund the
Shareholder Bridge Loan to the Company's CEO. The Shareholder Bridge Loan
requires interest at either the Index Rate or adjusted LIBOR, as defined in the
Shareholder Bridge Loan, plus 4.5%, as elected by the CEO. As of December 31,
2000, the interest rate is based on the Index Rate with a resulting rate of
approximately 11.32%. The Shareholder Bridge Loan and related interest were due
on August 30, 2000 but not paid. As a result, the Company was unable to pay the
amount due to Bank of America under the Bridge Loan, thereby causing the Company
to default under the Bridge Loan and its Credit Facility (see Note 6). The
Shareholder Bridge Loan and related accrued interest of $49,330 are recorded as
contra-equity in the consolidated balance sheet as of December 31, 2000.
The Company has unsecured loans to the CEO, the President of the Company,
and a former Vice Chairman of the Board of the Company in the form of notes
receivable in the amount of $337,837, plus accrued interest receivable of
$114,744 and $141,772 as of December 31, 1999 and 2000, respectively. The notes
require annual payments of interest at 8% beginning on September 28, 1997. Three
of the notes were due September 20, 2000, and the remaining three notes were due
October 12, 2000. All of these notes are in default as a result of non-payment.
The Company recognized interest income of $27,028 during each of the three years
in the period ending December 31, 2000 related to the notes. The notes and
related accrued interest are recorded as contra-equity in the consolidated
balance sheets.
F-19
61
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the period January 1998 through March 1998 of $91,250 has been
recorded in the consolidated financial statements of the Company with a
corresponding credit to additional paid-in capital.
The CEO and the 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 each of the three years in the period ended
December 31, 2000, the Company paid HP Aviation, Inc. approximately $38,900,
$104,100 and $104,350, 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
each of the three years in the period ended December 31, 2000, the Company paid
these officers approximately $17,300, $18,850 and $12,200, respectively, for use
of the real estate property.
The Company has an arrangement with the CEO regarding the Company's use of
a boat owned by the CEO (the "Marine Reimbursement Arrangement"). Under the
Marine Reimbursement Arrangement, the Company and its employees, agents and
guests may use the boat for purposes of management meetings, sales meetings, and
entertainment of guests. During the year ended 2000, the Company reimbursed the
CEO approximately $13,800, for the use of the boat. There were no amounts
reimbursed during the years ended December 31, 1998 and 1999.
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. 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.
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.
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, 2000. The Company also
reimbursed Healthcare Alliances for expenses incurred of approximately $3,200
and $9,900 during the years ended December 31, 1999 and 2000, respectively. 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 earned during
the years ended December 31, 1998 and 2000. In addition, there were no grants of
Company stock options during each of the three years in the period ended
December 31, 2000 related to provision (iii) of the Alliance Agreement.
F-20
62
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, (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 has vested as of December 31, 2000. The Alliance Agreement
terminates on December 31, 2001. During the year ended December 31, 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 $657,266 related to this transaction based on
the fair value of the Company's stock of $14.50 per share at the time of
issuance.
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. During the
years ended December 31, 1999 and 2000, the Company paid administrative fees to
Premier of approximately $75,000 and $89,000, respectively. The Premier
Agreement expires in February 2004. One of the Company's board members served as
president of Premier until December 1999.
On May 8, 1997, the Company entered into a letter agreement with a director
of the Company (the "Director"), pursuant to which the Director has agreed to
provide acquisition consulting and related services to the Company. In the event
such services result in an acquisition or merger of the Company, the Director
will be entitled to receive a fee (a "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 or any of the Company's assets are
acquired. Such General Consulting Fee is payable, at the Director's option, (i)
in shares of the Company's common stock, (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 $14.50 per share) which equals the
General Consulting Fee, (iii) in shares of the company which acquires the
Company, in the event the Company is acquired or (iv) in cash. The letter
agreement also provides for payments to the Director for his consulting services
in connection with the acquisition of Strato/Infusaid and a second strategic
venture of $375,000 and $250,000, respectively (the "Specific Consulting Fees").
The Specific Consulting Fee relating to the Strato/Infusaid acquisition was paid
to the Director in cash upon consummation of the Company's IPO in April 1998.
The Specific Consulting Fee for the second strategic venture is payable only if
such venture is completed and is payable in warrants or options to purchase, at
a nominal exercise price, that number of shares of the Company's common stock
(valued at $14.50 per share) which equals $250,000. Such Specific Consulting
Fees are to be paid in lieu of and not in addition to the General Consulting
Fees described above with respect to the strategic ventures. The letter
agreement was terminated by the Company on February 24, 2000.
An affiliate of one of the Directors of the Company provided consulting
services to the Company during each of the three years during the period ended
December 31, 2000, which were expensed in the amounts of approximately $40,600,
$77,300, and $92,000, respectively.
F-21
63
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES
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 $180,000, $217,000, and $219,000 during each
of the three years in the period ended December 31, 2000, respectively.
Approximate minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year are as follows:
2001........................................................ $ 254,000
2002........................................................ 252,000
2003........................................................ 196,000
2004........................................................ 116,000
2005........................................................ 114,000
Thereafter.................................................. 406,000
----------
$1,338,000
==========
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 connection with the 1998 acquisition of IFM (discussed in Note 15), the
Company entered into a long-term 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
specified minimum amount of products from the medical device product lines
acquired by the Company. The Manufacturing Agreement provided that annual sales
of the products from IFM to the Company would be equal to at least $6 million
during each twelve-month period under the Manufacturing Agreement.
On June 22, 1999, IFM notified the Company that it was in breach of the
Manufacturing Agreement in several respects, including non-payment of invoices
from IFM to the Company within 45 days after invoice date, the Company's failure
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, the Company's
failure to provide packaging and labeling, and non-payment of interest related
to past due invoices.
On October 9, 2000, the Company acquired certain additional assets from
IFM, including inventory of approximately $3 million, and leasehold improvements
and other fixed assets of approximately $3 million. The Company also assumed
IFM's lease for its manufacturing facility located in St. Petersburg, Florida.
In connection with the acquisition, the Manufacturing Agreement was terminated,
and the Company has no further obligation after October 9, 2000 to purchase
products from IFM. With such termination, the above-described defaults were
resolved. In consideration for the October 2000 acquisition, the Company agreed
to pay IFM approximately $6 million (See Note 6). Subsequent to December 31,
2000, the Company sold the business of IFM (see Note 16).
Also in connection with the 1998 acquisition of IFM, 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
F-22
64
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or the expiration date of each corresponding licensed patent covering each
product under the agreements. Payments under the license agreements totaled
approximately $106,000 and $91,000 during the years ended December 31, 1999 and
December 31, 2000. The Company made no payments under these license agreements
during 1998.
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 agreement. Payments under these license agreements totaled
approximately $439,000, $448,000, and $382,000 during each of the three years in
the period ended December 31, 2000, 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 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, 2000, 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, 2000, 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 will be paid
quarterly and calculated as 40% 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 June 2000. The term of the agreement has been renewed through June
2002, and there are minimum commitments for each year during the renewal term.
As of December 31, 2000, 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.
On December 11, 1998, the Company entered into a long-term distribution
agreement (the "Distribution Agreement") with a medical devices manufacturer
("Possis"). The Distribution Agreement provides for Possis 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 Distributor
Agreement is cancelable at the option of the distributor if the Company fails to
meet the quotas required under the Distribution Agreement. As of December 31,
2000, the Company was not in compliance with the minimum commitments under the
Distribution Agreement and on January 23, 2001, was sued by Possis in connection
with the breach of
these minimum commitments. As of December 31, 2000, the Company has accrued for
expected product returns related to Possis and has written-off all related
inventory in the consolidated balance sheet.
F-23
65
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the year ended December 31, 1999. The Company incurred no
expenses during the year ended December 31, 2000 related to this matter.
The Company has entered into various distribution agreements under which
the Company has guaranteed certain gross margin percentages to its distributors.
As a result of these guarantees, the Company has accrued approximately $287,000
and $471,000 as of December 31, 1999 and 2000 related to amounts to be rebated
to the various distributors.
The Company is party to numerous agreements which contain certain
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.
Non-compete and consulting agreements related to the 1995 acquisition of
Neostar Medical Technologies, Inc. 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.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following represent noncash activities for the years ended December 31:
1998 1999 2000
----------- -------- ----------
Short-term debt issued for certain prepaid
insurance coverage............................... $115,493 $ 135,086
Increase to goodwill related to purchase price
allocation....................................... $ 351,104 286,797 438,958
Notes issued for purchase of equipment............. 122,720 30,347
Issuance of non-compete agreement.................. 250,000
Notes issued for additional Stepic purchase
payment.......................................... 650,834 1,162,042
Reduction of long-term debt to settle other
receivable....................................... 60,255
Note issued for IFM purchase (see Notes 6 and
13).............................................. 6,050,054
Discount recorded on IFM Note...................... 451,840
Increase in notes receivable -- shareholders....... 27,028 27,028 76,358
Increase to additional paid-in capital for:
Contributed services............................. 91,250
Consulting services.............................. 657,256
Extinguishment of put feature of warrant......... 9,900,000
Change in value of put warrant..................... (1,100,000)
15. ACQUISITIONS
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
F-24
66
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (see below and Notes 13 and 16).
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, 2000, 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.
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 made will be accounted for as additional costs of acquired assets and
amortized over the remaining life of the assets.
During 1999 and 2000, the Company recorded additional purchase price
payable to the previous Stepic shareholders of approximately $2.1 million and
$1.2 million, respectively, representing the Company's additional earned
contingent payments for fiscal years 1999 and 2000 as required by the purchase
agreement (the "Purchase Agreement"). In addition, the Company recorded
approximately $437,000 related to the 2001 contingent payment during the year
ended December 31, 2000. This amount was included in accrued expenses as of
December 31, 2000. The 1999 contingent payment was due December 15, 1999 and
approximately $1.4 million was paid on that date by the Company with general
company funds and $2.4 million, which was previously accrued, was paid from
proceeds from the Credit Facility. On December 14, 1999, the Company amended the
Purchase Agreement so that the remaining balance of approximately $651,000 could
be paid, together with the interest at 11%, through April 2000. The 2000
contingent payment was due December 15, 2000 and $2.3 million, which was
previously accrued, was paid from proceeds from the Credit Facility. On December
15, 2000, the Company amended the Purchase Agreement so that the 2000 contingent
payment of approximately $1.2 million could be paid, together with interest at
11%, through April 2001. The Company has not made any payments to the Stepic
shareholders under the December 15, 2000 amendment since January 2001, and two
of the three previous Stepic shareholders (the "Plaintiffs") have filed suit
against the Company for non-payment. On March 30, 2001, the Company entered into
a Settlement Agreement with the Plaintiffs wherein the Plaintiffs have agreed to
voluntarily dismiss their pending lawsuit against the Company, and the Company
has agreed to pay the 2000 contingent payment at a rate of $9,400 per month
beginning on
F-25
67
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 15, 2001, until final payment of the remaining outstanding balance on
February 10, 2002. In addition, the Company will pay interest to the Plaintiffs
on the unpaid balance of the 2000 contingent payment at the rate of 11% per
annum, including a lump sum interest payment of approximately $27,000 that has
accrued since the Company's last payment to the Plaintiffs.
As of December 31, 1999 and 2000, $4.8 million and $2.544 million,
respectively, of the contingent payments recorded at the acquisition date were
supported by standby letters of credit (see Note 6). The schedule below has been
adjusted to include the additional contingent payments 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.
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 and other
assets.................. 703,478 8,872,112 2,659,349 14,234,320 17,458,905
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 $ 18,413,571
========= ========== ========== =========== ============
16. IMPAIRMENT CHARGE AND SALE OF IFM
During the year ended December 31, 2000, the Company recognized an
impairment loss, in accordance with APB No. 17, on the long-lived assets of IFM.
The trends for IFM indicated that the future discounted cash flows from this
division would be substantially less than its carrying value for long-lived
assets, specifically intangibles comprised of goodwill and patents. Accordingly,
the Company recognized a non-cash pre-tax charge of $12.1 million during the
year ended December 31, 2000 to write the assets down to their estimated fair
value based on management's estimate of the expected proceeds to be received
upon a sale of IFM.
Effective March 30, 2001 (the "Closing Date"), the Company completed the
sale of certain IFM assets for the assumption of the Note related to IFM (see
Note 6), cash of $2,250,500 upon closing, and cash of $150,000 due six months
from the Closing Date (the "Second Installment"). The asset purchase agreement
provides for a purchase price adjustment equal to a) $1 for every dollar that
the value, within five business days after the Closing Date, of the Fresh
Inventory, as defined, is more or less than $738,000 and b) twenty cents for
every dollar that the value, within five business days after the Closing Date,
of the Dated Inventory, as defined, is more or less than $393,000, provided that
no adjustment to the purchase price will be made if the adjustment is less than
$50,000. Any decrease in the purchase price shall be paid promptly by the
Company as defined in the purchase agreement. Any increase in the purchase price
shall be paid to the Company six months from the Closing Date and deemed part of
the Second Installment, however, if the increase exceeds $100,000, the excess
shall be paid promptly to the Company .In addition to the purchase of certain
assets, the buyer assumed the Company's sublease of the IFM facility and the
related employees.
F-26
68
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SEGMENT INFORMATION AND MAJOR CUSTOMERS
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.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" (see Note 2) 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 sales), gross profit (which include intersegment gross
profit) and identifiable assets of the Company's segments as of December 31,
1999 and 2000 and for each of the three years in the period ended December 31,
2000.
1998 1999
------------------------- ----------------------------------------
GROSS GROSS IDENTIFIABLE
SALES PROFIT SALES PROFIT ASSETS
----------- ----------- ----------- ----------- ------------
Manufacturing.................. $27,584,756 $16,359,469 $32,660,880 $17,568,526 $ 63,964,482
Distribution................... 12,020,468 3,156,939 45,883,836 9,888,249 37,922,265
----------- ----------- ----------- ----------- ------------
$39,605,224 $19,516,408 $78,544,716 $27,456,775 $101,886,747
=========== =========== =========== =========== ============
2000
----------------------------------------
GROSS IDENTIFIABLE
SALES PROFIT ASSETS
----------- ----------- ------------
Manufacturing........................................... $25,717,073 $ 8,250,015 $46,196,933
Distribution............................................ 41,522,035 8,561,642 39,879,507
----------- ----------- -----------
$67,239,108 $16,811,657 $86,076,440
=========== =========== ===========
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
each of the three years in the period ended December 31, 2000 is as follows:
1998 1999 2000
----------- ----------- -----------
Total segment sales............................. $39,605,224 $78,544,716 $67,239,108
Elimination of intersegment sales............... (205,863) (3,174,059) (3,903,869)
----------- ----------- -----------
Consolidated sales.................... $39,399,361 $75,370,657 $63,335,239
=========== =========== ===========
Total segment gross profit...................... $19,516,408 $27,456,775 $16,811,657
Elimination of intersegment gross profit........ (50,000) (96,935) (198,530)
----------- ----------- -----------
Consolidated gross profit............. $19,466,408 $27,359,840 $16,613,127
=========== =========== ===========
A reconciliation of total segment assets to total consolidated assets of
the Company as of December 31, 1999 and 2000 is as follows:
1999 2000
------------ -----------
Total segment assets....................................... $101,886,747 $86,076,440
Elimination of intersegment receivables.................... (735,714) (37,954)
Assets not allocated to segments........................... 1,246,439
------------ -----------
Consolidated assets.............................. $102,397,472 $86,038,486
============ ===========
F-27
69
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 each of the three years in the period ended December 31, 2000 is as follows:
1998 1999 2000
----------- ----------- -----------
United States................................... $35,665,412 $71,103,033 $60,109,243
Foreign......................................... 3,733,949 4,267,624 3,225,996
----------- ----------- -----------
Consolidated net sales................ $39,399,361 $75,370,657 $63,335,239
=========== =========== ===========
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 7%, 7%, and 6% of total sales during each of the three
years in the period ended December 31, 2000, respectively. As of December 31,
1999 and 2000, 16%, and 10%, respectively, of the accounts receivable balance
consisted of amounts due from the Company's three largest customers.
18. FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
DECEMBER 31, 1999 DECEMBER 31, 2000
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Accounts receivable -- trade, net... $18,091,455 $18,091,455 $13,763,837 $13,763,837
Accounts payable -- trade........... $ 5,861,935 $ 5,861,935 $ 8,897,350 $ 8,897,350
Interest rate cap agreement......... $ 23
Long-term debt...................... $50,755,905 $50,755,905 $52,027,978 $52,027,978
Off-balance sheet financial
instruments:
Letters of credit................. $ 4,800,000 $ 4,800,000 $ 2,544,000 $ 2,544,000
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.
19. 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 each of the three years in the
period ended December 31, 2000.
20. LIQUIDITY
The Company incurred a loss of $19.8 million in 2000. The net loss included
a pre-tax impairment charge of $12.1 million related to IFM and a $7.6 million
charge to establish a valuation allowance against its
F-28
70
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred income tax assets as more fully described in Notes 16 and 7,
respectively. As discussed in Note 6, the Company was in violation of payment
and financial covenants under the terms of the Credit Facility as of December
31, 2000 and continuing into 2001.
During the third quarter of 2000, the Company retained a management
consulting firm (the "Consulting Firm") to assist the Company in improving cash
flow and financial controls, increasing operating efficiencies, reducing costs
and expenses, and restructuring its current senior indebtedness (the "Plan").
The Plan is designed to maintain liquidity throughout 2001.
The Company began implementation of the Plan during the fourth quarter of
2000. As of December 31, 2000, the Company had reduced the executive management
group, reduced certain of its product offerings, discontinued plans to rework
defective product, recognized the devaluation of its Possis product line (see
Note 13), and modified its inventory purchasing procedures to provide better
controls and to match purchases to forecasted and actual demand. During the
first quarter of 2001, the Company has continued to implement components of the
Plan by reducing costs, improving production planning, by launching a new
version of an existing product (the "Titanium Vortex Port") at the end of March
2001, and by planning further new product introductions (the Plastic Vortex Port
and the Super Circle Catheter -- both pending final FDA approval) later during
2001. Management expects these new products to gain market share due to their
technological advantages and to command higher selling prices than the Company's
existing ports and catheter products.
In order to maintain adequate liquidity throughout 2001, the Company has
completed the following as of April 2, 2001:
1. Established a financial forecast for 2001 taking into consideration
the elements of the Plan.
2. Entered into a Forbearance Agreement with Bank of America wherein
Bank of America will forebear until March 31, 2002 from exercising its
rights and remedies allowed under the Credit Facility. Compliance with the
financial covenants in the Forbearance Agreement is designed around the
achievement of the Company's financial forecast.
3. Sold the assets of IFM effective March 30, 2001 for cash of
$2,400,500 (to be adjusted as described in Note 16) and the assumption of
approximately $5.6 million (as of December 31, 2000) of the Company's
long-term debt related to IFM.
4. Entered into a Settlement Agreement with two of the former Stepic
shareholders calling for revised payment terms of $9,400 per month through
February 10, 2002, thus eliminating the default conditions that existed at
December 31, 2000 and settling the outstanding legal action commenced
subsequent to December 31, 2000.
5. Reached agreement with the Company's CEO to collect $900,000 in
2001 in connection with the Shareholder Bridge Loan. The proceeds from
these collections will be used to reduce the Company's indebtedness with
Bank of America. In March 2001, the CEO also agreed to provide additional
liens on certain of the CEO's assets to further collateralize the
indebtedness.
Management believes that the Plan, if successfully implemented, will enable
the Company to comply with the financial covenants contained in the Forbearance
Agreement and maintain adequate liquidity throughout 2001. Management also
believes that the long-term benefits of the Plan will stabilize the Company and
improve its position with lenders and customers. Management believes that the
Plan is sound and attainable. Although there can be no assurance that the
Company will successfully implement the Plan or that the Plan is adequate,
management believes that should the Company fall short of its targets, certain
additional costs and expenditures will be reduced to comply with the Forbearance
Agreement and maintain adequate liquidity.
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71
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Horizon Medical Products, Inc. and Subsidiaries
Our audits of the consolidated financial statements referred to in our
report dated February 16, 2001, except for Notes 6, 15, 16, and 20, as to which
the date is April 2, 2001, 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
April 2, 2001
F-30
72
SCHEDULE II
HORIZON MEDICAL PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
ADDITIONS
----------------------
BEGINNING CHARGED TO COSTS AND ENDING
BALANCE EXPENSE OTHER(1) DEDUCTIONS BALANCE
---------- ---------- --------- ---------- ----------
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
Year ended December 31, 2000:
Allowance for returns and doubtful
accounts............................ $1,031,751 1,341,951 148,880 $2,224,822
Inventory reserve...................... $1,107,760 4,036,592 338,955 $4,805,397
Valuation allowance for deferred tax
assets.............................. 7,595,077 $7,595,077
- ---------------
(1) Other consists of allowances and reserves acquired through acquisitions.
F-31