HORIZON MEDICAL PRODUCTS INC - 10-K Annual Report

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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 FINANCIAL YEAR ENDED DECEMBER 31, 2001

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 001-15459

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 $4,459,279 on March 15, 2002, 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, 2002 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 2002 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

i

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 and in September 2001, the Company transitioned
the manufacturing of the Triumph-1(R) line in-house to its current manufacturing
facility. Prior to that transition, since 1996, certain models in the
Triumph-1(R) line had 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,
including the Vortex(TM), TitanPort(TM) and OmegaPort(R) lines acquired from
Norfolk Medical. In addition, the Company acquired the Columbia Vital Systems,
Inc. ("CVS") and Stepic Corporation ("Stepic") medical device distribution
businesses. See "-- Acquisitions" below. Distribution of non-Company medical
devices through Stepic during 2001 comprised approximately 57% 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

On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest Venture Partners ("ComVest"), LaSalle Business Credit,
Inc. ("LaSalle"), and Medtronic, Inc. ("Medtronic") to recapitalize the Company
(the "Recapitalization") by extinguishing all of the Company's senior debt and
warrants held by Bank of America and substantially reducing the Company's total
outstanding debt. Pursuant to the Recapitalization, the Company issued Senior
Subordinated Convertible Notes (the "Convertible Notes") in the amount of $15
million to ComVest, Medtronic and other investors, assumed a $2 million Junior
Subordinated Promissory Note payable to Bank of America (the "Junior Note"), and
entered into a new revolving and term loan facility (the "LaSalle Credit
Facility") with LaSalle for up to $22 million, of

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which approximately $8.8 million was outstanding as of March 31, 2002. The
following is a summary of key provisions of the Recapitalization:

On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
America's interest in an outstanding $50 million amended and restated senior
credit facility (the "BofA Credit Facility"). The purchase price for the
assignment was $22 million in cash, plus the $2 million Junior Note. The Company
subsequently assumed the Junior Note pursuant to the Recapitalization, and
ComVest has been released from obligations under the Junior Note. Upon the
closing of the assignment on March 15, 2002, ComVest acquired all of Bank of
America's interest in the Note under the BofA Credit Facility (the "BofA Note"),
the warrants issued to Bank of America pursuant to the BofA Credit Facility were
surrendered and cancelled, and the Forbearance Agreement between the Company and
Bank of America dated March 15, 2001 as subsequently amended (the "Forbearance
Agreement") was terminated.

On March 1, 2002, the Company entered into a Note Purchase Agreement (the
"Note Purchase Agreement") with ComVest and certain Additional Note Purchasers
(as defined in the Note Purchase Agreement). Under the Note Purchase Agreement,
the Company agreed to issue $15 million of Convertible Notes. Interest on the
Convertible Notes is payable quarterly beginning in June 2002 and accrues at a
rate of 6% per year for the first six months and 8% per year thereafter until
the notes are paid in full and mature on March 16, 2004. The Company issued the
Convertible Notes as follows: $4.4 million to ComVest, $4 million to Medtronic
and $6.6 million to the Additional Note Purchasers.

The holders of the Convertible Notes have the right to convert in the
aggregate a total of $270,000 of the Convertible Notes into shares of the
Company's common stock at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon repayment of all or a
portion of the amounts due, as described below. Under the conversion terms, if
the principal amount of the Convertible Notes, together with all interest due is
paid in full on or before 30 days following March 16, 2002 (the "Closing Date"),
then the maximum aggregate number of shares of common stock that all the
Convertible Notes may be converted into is 22,500,000. If the principal amount
of all the Convertible Notes and all interest due is paid on or before March 16,
2004, then the maximum aggregate number of shares of the Company's common stock
that the Convertible Notes can be converted into is 19,500,000. The terms of the
applicable conversion periods and conversion amounts are as follows:

- Until April 16, 2002, ComVest has the right to convert 1.25% of the
Outstanding Balance (defined as principal plus accrued and unpaid
interest under the ComVest Convertible Note) held under its $4.4 million
Convertible Note plus 0.6% of the amount of principal repaid under the
Additional Notes held by the Additional Note Purchasers (the "Additional
Notes");

- Until March 16, 2003, ComVest has the right to convert an additional
0.25% of the Outstanding Balance;

- Until March 16, 2004, Medtronic has the right to convert 1.5% of its $4
million Convertible Note;

- From March 16, 2003 through March 16, 2004, Medtronic has the right to
convert an additional 0.3% of $4 million if ComVest's Convertible Note
and the notes held by the Additional Note Purchasers have not been
repaid;

- Until April 16, 2002, the Additional Note Purchasers have the right to
convert 1.25% of the Additional Notes Outstanding Balance (defined as
principal plus accrued but unpaid interest under the Additional Notes)
held under their $6.6 million Convertible Note plus 0.6% of the amount of
principal repaid under ComVest's Convertible Note on or before April 16,
2002; and

- Until March 16, 2003, the Additional Note Purchasers have the right to
convert an additional 0.25% of the Additional Notes Outstanding Balance.

The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. The
Note Purchase Agreement also contains certain affirmative and negative
covenants, including, but not limited to, restrictions on indebtedness and
liens, business combinations, sale or
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discount of receivables, conduct of the Company's business, transactions with
affiliates, ability to enter into contracts outside the ordinary course of
business, and ability to pay dividends. The Events of Default include, but are
not limited to, failure to pay an obligation when due, breach of any covenant
that remains uncured for 15 days, bankruptcy, change of control, and failure to
obtain shareholder approval of the Recapitalization within 105 days of the
closing date of March 16, 2002. The shareholder approvals that the Company
agreed to obtain and will submit to the shareholders at the 2002 Annual Meeting
include issuances of common stock pursuant to the Recapitalization, amendments
to the Company's articles of incorporation to increase the number of authorized
shares of common stock from 50 million to 100 million and to declassify the
staggered board, amendments of the Bylaws to eliminate the fair price and
business combinations provisions, and the grant of options to Messrs. Hunt and
Peterson (as described below).

On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of the
BofA Note from $40.3 million to $22 million. As a result, the Company will
record a net extraordinary gain on the early extinguishment of debt of
approximately $11 million, net of tax of approximately $4 million during the
first quarter of 2002. In exchange for funding a portion of the $22 million cash
purchase price paid to Bank of America, ComVest assigned $4 million in principal
amount of the BofA Note to Medtronic and $6.6 million in principal amount of the
BofA Note to the Additional Note Purchasers while retaining $11.4 million in
principal amount of the BofA Note itself. After such assignments, the Company
issued the Convertible Notes under the Note Purchase Agreement in the aggregate
principal amount of $15 million in exchange for the surrender of $15 million in
principal amount of the BofA Note held by ComVest, Medtronic and the Additional
Note Purchasers. The remaining $7 million in principal amount of the BofA Note
was repaid with the proceeds of a Bridge Loan from ComVest to the Company made
on March 15, 2002 (the "Bridge Loan").

On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to a Loan and Security Agreement (the "Loan Agreement") with Standard
Federal Bank National Association ("SFB"), acting by and through LaSalle, as
SFB's agent (SFB and LaSalle, collectively, the "Lender"). Under the Loan
Agreement, the Lender has provided a $20 million senior revolving loan facility
(the "Revolving Loan") and a $2 million term loan facility (the "Term Loan").
The Company used the proceeds to repay the Bridge Loan and expenses related to
the Recapitalization and will use the remaining proceeds for working capital and
general corporate purposes. Both loan facilities will bear interest at the
LaSalle Bank Prime Rate plus 2%, subject to an additional 2% that would be added
to the interest rate upon the occurrence of an Event of Default (as discussed
below).

As collateral, the Company granted a security interest in all of the
Company's present and future assets, whether now or hereafter owned, existing,
acquired or arising and wherever now or hereafter located, including, but not
limited to: all accounts receivable; all chattel paper, instruments, documents
and general intangibles including patents, patent applications, trademarks,
trademark applications, trade secrets, trade names, goodwill, copyrights,
copyright applications, registrations, licenses, software, franchises, customer
lists, tax refund claims, claims against carriers and shippers, guaranty claims,
contract rights, payment intangibles, security interests, security deposits, and
indemnification rights; all inventory; all goods including equipment, vehicles,
and fixtures; all investment property; all deposit accounts, bank accounts,
deposits and cash; all letter-of-credit rights; certain commercial tort claims;
all property of the Company in control of the Lender or any affiliate of the
Lender; and all additions, substitutions, replacements, products, and proceeds
of the aforementioned property including proceeds from insurance policies and
all books and records relating to the Company's business.

The Loan Agreement contains affirmative and negative covenants. The
affirmative covenants require the Company to, among other things, maintain
accurate and complete records, notify the Lender of major business changes,
comply with relevant laws, maintain proper permits, conduct relevant inspections
and audits, maintain adequate insurance with the Lender named as loss payee,
keep collateral in good condition, use proceeds only for business purposes, pay
required taxes, maintain all intellectual property, maintain a checking account
with LaSalle, hire a Chief Operating Officer with experience in the medical
products industry within 90 days of the date of the Loan Agreement, grant the
Lender the right to conduct appraisals of the collateral on a bi-annual basis,
and deliver a survey of the property located at the Company's offices on
Northside Parkway in Atlanta within 60 days of the date of the Loan Agreement.
The negative covenants restrict the
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Company's ability to, among other things, make any guarantees, incur additional
indebtedness, grant liens on its assets, enter into business combinations
outside the ordinary course of business, pay dividends, make certain investments
or loans, allow its equipment to become a fixture to real estate or an accession
to personal property, alter its lines of business, settle accounts, or make
other fundamental corporate changes.

The Loan Agreement also contains financial maintenance covenants,
including, but not limited to, the following:

- maintaining Minimum Availability at all times of at least $4 million (the
"Minimum Availability Test"). "Minimum Availability" is defined as (a)
the lesser of: (i) the Revolving Loan Limit (which is up to 85% of the
face amount of the Company's eligible accounts receivable; plus the
lesser of (x) up to 55% of the lower of cost or market value of the
Company's eligible inventory or up to 85% of the net orderly liquidation
value of eligible inventory, whichever is less, or (y) $11 million; plus
such reserves as the Lender may establish) and (ii) the Maximum Revolving
Loan Limit of $20 million minus (b) the sum of (i) the amount of all then
outstanding and unpaid Liabilities (to Lender, as defined) plus (ii) the
aggregate amount of all then outstanding and unpaid trade payables and
other obligations more than 60 days past due; plus (iii) the amount of
checks issued by the Company which are more than 60 days past due but not
yet sent and the book overdraft of the Company plus (iv) $4,000,000 owed
by the Company to Arrow International;

- maintaining Tangible Net Worth of $7,698,000 for the quarter ending
December 31, 2002, $8,522,000 for the quarter ending March 31, 2003,
$9,475,000 for the quarter ending June 30, 2003, $10,544,000 for the
quarter ending September 30, 2003, $11,728,000 for the quarter ending
December 31, 2003 and each quarter thereafter (Tangible Net Worth is
defined as shareholders' equity including retained earnings less the book
value of all intangible assets, prepaid and non-cash items arising from
the transactions contemplated by the Loan Agreement and goodwill
impairment charges recorded as a result of FASB No. 142 as determined
solely by the Lender plus the amount of any LIFO reserve plus the amount
of any debt subordinated to the Lender);

- maintaining fixed charge coverage (ratio of EBITDA to fixed charges) of
1.10 to 1.0 from April 1, 2002 through December 31, 2002, 1.20 to 1.0
from April 1, 2002 through March 30, 2003, 1.40 to 1.0 for the quarter
ending June 30, 2003 and for the immediately preceding four fiscal
quarters, and 1.50 to 1.0 for the quarter ending September 30, 2003 and
for the immediately preceding four fiscal quarters and each fiscal
quarter thereafter;

- maintain EBITDA, based on the immediately preceding four fiscal quarters,
of $4,000,000 on December 31, 2002, $5,437,000 on March 31, 2003,
$6,605,000 on June 30, 2003, $7,374,000 on September 30, 2003 and
$7,482,000 on December 31, 2003 and each fiscal quarter thereafter; and

- limit capital expenditures to no more than $500,000 during any fiscal
year.

The Loan Agreement also specifies certain Events of Default, including, but
not limited to, failure to pay obligations when due, failure to direct its
account debtors to make payments to an established lockbox, failure to make
timely financial reports to the Lender, the breach by the Company or any
guarantor of any obligations with any other Person (as defined in the Loan
Agreement) if such breach might have a material adverse effect on the Company or
such guarantor, breach of representations, warranties or covenants, loss of
collateral in excess of $50,000, bankruptcy, appointment of a receiver,
judgments in excess of $25,000, any attempt to levy fees or attach the
collateral, defaults or revocations of any guarantees, institution of criminal
proceedings against the Company or any guarantor, occurrence of a change in
control, the occurrence of a Material Adverse Change or a default or an event of
default under certain subordinated debt documents. Upon the occurrence of any
Event of Default, the Lender may accelerate the Company's obligations under the
Loan Agreement.

The Company must repay the Revolving Loan on or before March 17, 2005,
("the Termination Date"), unless the Loan Agreement is renewed and the repayment
period is extended through a new Termination Date. The Company must repay the
Term Loan in 36 equal monthly installments of $55,556. The Loan Agreement will
automatically renew for one-year terms unless the Lender demands repayment prior
to the
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Termination Date as a result of an Event of Default, the Company gives 90-days
notice of its intent to terminate and pays all amounts due in full, or the
Lender elects to terminate on or after February 1, 2004 as a result of a
Termination Event. A Termination Event is defined as the failure of Medtronic,
ComVest or any Additional Note Purchaser to extend the maturity date of the
Convertible Notes at least thirty days past the date of the original term or any
applicable renewal term.

Pursuant to the LaSalle Credit Facility, the Company also issued to LaSalle
and SFB warrants to purchase up to an aggregate of 748,619 shares of common
stock at an exercise price of $.01 per share.

The Junior Note in the amount of $2 million bears interest at a rate of 6%
per annum, payable monthly beginning April 2002, and matures on March 15, 2007.
Beginning on May 1, 2003, a principal payment on the Junior Note of $22,500 is
payable on the first day of each month until maturity of the Junior Note.

As a condition to closing, the Company also agreed to enter into a
Securityholders Agreement dated March 16, 2002 with ComVest, Medtronic, LaSalle,
Marshall B. Hunt ("Hunt") and William E. Peterson, Jr. ("Peterson") (together
ComVest, Medtronic, LaSalle, Hunt and Peterson are the "Investors") under which
the Company granted certain registration rights, rights of first refusal and
corporate governance rights to the Investors. The registration rights require
the Company to file a shelf registration statement covering the resale of
certain shares of common stock issuable pursuant to the Recapitalization and to
include, at the Investors' option, certain of the Investors' shares of common
stock in any registration statement undertaken by the Company, at the Company's
expense. Pursuant to the Securityholders Agreement, ComVest and Medtronic have
been granted (i) a right of first refusal to purchase all or part of their pro
rata share of new securities which the Company may propose to sell or issue,
(ii) the right of first refusal to participate in any sale of Hunt's and/or
Peterson's shares of common stock to third parties upon the same terms and
conditions, (iii) the co-sale right of first refusal to participate in sales of
shares of common stock by Hunt and/or Peterson, and (iv) the "bring-along right"
to require Hunt and Peterson to sell the same percentage of shares of common
stock as the holders of the rights propose to sell in the event that the rights
holders propose to sell 51% or more of their common stock. The corporate
governance rights include, but are not limited to, the following: (i) granting
ComVest the right to designate one ComVest director and two additional
independent directors, (ii) requiring that certain actions of the Board of
Directors include the affirmative vote of the ComVest director, (iii) requiring
the Company to establish and maintain an Executive Committee consisting of the
ComVest director as Chairman, one of the independent directors designated by
ComVest, and Hunt, and (iv) requiring that the Executive Committee approve
certain actions. Failure to comply with the Securityholders Agreement is
considered an Event of Default under the Note Purchase Agreement.

On March 15, 2002, the Company entered into a Co-Promotion Agreement with
Medtronic under which the Company will promote and provide technical advice for
Medtronic's implantable drug delivery systems which are used for the treatment
of hepatic arterial infusion and malignant pain. After basic sales training,
sales representatives of the Company and of its distributors will promote the
sale of such systems, identify appropriate patients for such systems, and after
additional training provide assistance in the implantation and refill procedure
for such systems, for which identification and assistance the Company will be
compensated by Medtronic. If the Company breaches or fails to comply with its
obligations under the Co-Promotion Agreement (after giving effect to any
applicable cure periods), then Medtronic or 51% of the holders of the aggregate
principal amount of the Convertible Notes may accelerate the due date for
payment of the Convertible Notes.

To effect the Recapitalization, the Company also entered into certain
ancillary agreements including the following: (i) a voting agreement under which
Hunt and Peterson have agreed to vote their shares in favor of all proposals
relating to the Recapitalization; (ii) a new employment agreement and option
agreements with Hunt that grants him options to purchase an aggregate of
3,500,000 shares of common stock (The new employment agreement replaced Hunt's
previous employment agreement and reduced the previous term of employment and
the previous severance compensation and benefits from approximately four years
to twelve months.); (iii) a new employment agreement and an option agreement
with Peterson that grants him options to purchase 1,000,000 shares of common
stock (The new employment agreement replaced Peterson's previous employment
agreement and reduced the previous term of employment from approximately four
years to six

5

months and reduced the previous severance compensation and benefits from
approximately four years to twelve months.); (iv) an advisory agreement with an
affiliate of ComVest under which the affiliate received 2,645,398 shares of
common stock and a cash fee of $750,000; (v) a note with ComVest under which
ComVest received 75,000 shares in exchange for advancing certain transaction
expenses associated with the Recapitalization; (vi) an expense guaranty with Mr.
Hunt under which he received 150,000 shares of common stock in exchange for
agreeing to reimburse ComVest for certain of its transaction expenses in the
event that the Recapitalization were not consummated; and (vii) an advance note
with Mr. Hunt under which he received 75,000 shares of common stock in exchange
for advancing to the Company certain transaction expenses associated with the
Recapitalization.

The auditor's opinion related to the consolidated financial statements
included in this report, dated April 15, 2002, states that there is substantial
doubt as to the Company's ability to continue as a going concern. Delivery of
this opinion would have triggered an Event of Default under the Loan Agreement
and the Note Purchase Agreement as originally executed because both agreements
require audited financial statements to be delivered within 90 days of December
31, 2001 with an auditor's opinion that does not contain such going concern
language. However, the default provisions relating to the audit opinion in the
Loan Agreement and the Note Purchase Agreement have been waived.

As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments were
terminated. However, because those agreements were significant to the
capitalization of the Company in 2001, the terms of those agreements are briefly
summarized as follows:

On March 30, 2001, the Company entered into a Forbearance Agreement and a
First Amendment to Forbearance Agreement wherein Bank of America agreed to
forbear from exercising its rights and remedies under the BofA Credit Facility
due to certain defaults. The Company was in default at that time for violating
certain restrictive covenants and for failing to make principal payments when
due. All of the defaults were foreborne as provided for in the Forbearance
Agreement, and revised restrictive covenants were set. By September 30, 2001,
the Company was in default under the Forbearance Agreement for failing to comply
with some of the revised covenants, including minimum net worth, debt service
coverage, leverage and minimum EBITDA.

On October 15, 2001, the Company entered into a Second Amendment to the
Forbearance Agreement (the "Second Amendment"). The Second Amendment amended the
Forbearance Agreement as follows: (i) changed the termination date of the
Forbearance Agreement from March 31, 2002 to January 15, 2002 (the period from
March 30, 2001 through January 15, 2002 being defined as the "Forbearance
Period"); (ii) required the Company to maintain a general operating account with
Bank of America and restricted the use of funds in an calendar month to payments
equal to or less than a monthly budget submitted to Bank of America; (iii)
required the Company to pay any accrued or unpaid interest (but not principal)
on the B of A Note on the first day of each month and allow interest to continue
to accrue at the Bank of America Prime Rate plus two and one-half percent (2.5%)
per annum; and (iv) required the Company to furnish Bank of America with certain
financial reports.

The Second Amendment also amended the "Termination Events" as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Company's CEO, Marshall B. Hunt and Hunt
Family Investments, LLLP ("Hunt LLLP") to execute and deliver within 10 days
from the effective date of the Second Amendment a pledge to Bank of America of
all the stock owned by Hunt and documentation to amend the current Pledge
Agreement between Hunt, Hunt LLLP and the Company. The pledge documents will be
held in escrow and will be released only in the event that Hunt interferes with
the daily operations of the Company determinable at the Bank of America's
discretion at any point prior to January 1, 2005; (ii) the Company fails to
engage and hire within five days from the effective date of the Second Amendment
competent crisis and turn around management and a new Chief Executive Officer
who shall report directly to the independent members of the Company's Board of
Directors; (iii) the Company fails to provide Bank of America within five days
from the effective date of the Second Amendment a copy of resolutions confirming
Hunt's resignation as an officer and director of the Company and that no

6

further salary or bonuses shall be paid to Hunt; (iv) the Company fails to make
efforts to refinance the amounts outstanding under the BofA Credit Facility and
fails to provide weekly status reports; (v) on or before December 15, 2001, the
Company fails to provide Bank of America evidence that the Company has engaged
an investment banking firm to begin marketing the sale of the assets of the
Company if the amounts outstanding under the BofA Credit Facility are not paid
off by the Termination Date; or (vi) the Company fails to execute and deliver to
Bank of America within 24 hours of Bank of America's request a consent order
consenting to the appointment of a receiver in the event of a Termination Event.

In addition, the Second Amendment reduced the Working Capital Sublimit to
$5,000,000 and limited the Working Capital Loan to the smaller of the Working
Capital Sublimit or an amount equal to the Borrowing Base, as defined in the
BofA Credit Facility. The Second Amendment also amended several of the financial
covenants previously contained in the Forbearance Agreement.

The Forbearance Agreement provided for the payment of Excess Cash Flow, as
defined in the BofA Credit Facility, on the ninetieth day following the last day
of each fiscal year. There was no Excess Cash Flow payment required for fiscal
year 2001. In addition, the Forbearance Agreement required 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 the IFM business
(see Note 14 to the Company's consolidated financial statements contained
elsewhere in this Form 10-K).

The Forbearance Agreement further required payments of $300,000 each on a
short-term bridge loan (the "BofA Bridge Loan") on May 31, 2001, August 31,
2001, and November 30, 2001. All of the installments under the BofA Bridge Loan
were paid. The Forbearance Agreement also provided 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 435,157 shares of the Company's common stock for
$.05 per share. The warrant was exercisable by Bank of America during a
three-year period without regard to the status of the BofA Credit Facility or
the BofA Bridge Loan. The Company recorded the estimated fair value of the
warrant as of December 31, 2001 of $260,000, determined using the Black-Scholes
Model (using weighted average assumptions as 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 amortized the deferred cost over
the Forbearance Period. As with the BofA Credit Facility and other related
agreements, the warrant was cancelled pursuant to the Recapitalization.

The Forbearance Agreement also required the Company to hire on or before
June 30, 2001 a new chief operating officer, restricted the repayment of
principal debt to junior lien holders, and to either i) sell the assets of IFM
or ii) obtain an agreement from the seller of the IFM business to defer all
payments under the related promissory note (see below) through the Termination
Date (see Note 14 to the Company's consolidated financial statements contained
elsewhere in this Form 10-K regarding the sale of the IFM business). The Company
hired a Chief Operating Officer in April 2001 who was terminated in June 2001,
and the Company did not hire a replacement. The Company sold the assets of the
IFM business as of March 30, 2001 (see Note 14 to the Company's consolidated
financial statements contained elsewhere in this Form 10-K).

On December 15, 2001, the Company entered into a Third Amendment to the
Forbearance Agreement under which Bank of America consented to the increase in
payments of $8,000 per month to certain former shareholders of Stepic.

In January 2002, the Company entered into a Fourth Amendment to Forbearance
Agreement with Bank of America, pursuant to which Bank of America agreed to
extend the Forbearance Period until March 15, 2002 (the "Expiration Date") in
order for the Company to consider its strategic alternatives. On March 15, 2002,
the BofA Credit Facility was assigned from BofA to ComVest. On March 16, 2002,
the Company issued the Convertible Notes in an aggregate amount of $15 million
to ComVest, Medtronic and the Additional Note Purchasers. On March 18, 2002, the
Company entered into the LaSalle Credit Facility.

7

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 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 $220,367,
payable six months from the closing date. The second installment payment has not
been made, and the Company has initiated legal action against the purchaser. See
"Item 3. Legal Proceedings".

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, paid $2.4 million between December
2000 and January 2001 and paid

8

$2.4 million between December 2001 and January 2002, all previously supported by
standby letters 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 and in 2001, an additional $667,000 was
earned. The balance owed under the stock purchase agreement was approximately
$1,665,000 as of March 15, 2002. On March 14, 2002, the Company entered an
agreement with two of the former Stepic shareholders, which replaces an earlier
settlement agreement, pursuant to which the Company paid $100,000 on March 15,
2002 and will make monthly payments of approximately $36,000 through March 15,
2006.

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, needle
infusion sets and other 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, $17.6 million and $18.5 million for 1999, 2000 and 2001
respectively.

The Company's lines of vascular access ports consist of the following
families of products: (i) the Vortex(TM) family of ports including VortexVTX(R),
LifePortVTX(R), TriumphVTX(R) and GenesisVTX(R); (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
totaled $4.7 million, $3.8 million and $2.9 million for the years ended December
31, 1999, 2000 and 2001, respectively.

The Company's catheters include the following families of products: (i)
Circle C(R) chronic and acute hemodialysis catheters, including the new
LifeJet(TM) chronic hemodialysis catheter; 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 CTX(TM) and
Pheres-Flow(R) designs, allowing some of the highest flow rates available in the
market.

The Company maintains a sales and marketing organization for its vascular
access products of approximately 55 full-time employees and five independent
specialty distributors employing over 40 sales

9

representatives. The Company's direct sales force focuses primarily on vascular
and general surgeons and interventional radiologists 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 approximately 20 active distributors in Europe
and approximately 40 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. The Company's direct sales force calls on physicians associated
with these buying groups in order to improve compliance with these GPO's and
improve market share. Although GPO's will continue to be a vital part of the GPO
sales process, the Company has seen great success in selling its new and
differentiated technologies to the end users regardless of GPO affiliation.

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. 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. Pursuant to the agreement, the Company was an
approved vendor for the hospitals participating in Premier's purchasing program.
Premier was 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 were met. The right to
purchase shares of common stock under the warrant vested 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 three years under the warrant term
(ending June 30, 2001), there was no vesting under the warrant. In September
2001, Premier terminated its agreement with the Company. As a result, the
warrant was terminated effective with the termination date of the agreement.

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 provided 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 vested and became
exercisable by Healthcare Alliance only if it procured group purchasing
agreements with certain GPOs, and the Company achieved 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 granted an option to Healthcare Alliance for the purchase of 45,000
shares of common stock of the Company. Such options vested and became
exercisable by Healthcare Alliance only if the Company achieved certain amounts
of incremental sales revenue under the Company's group purchasing agreement with
Premier. The exercise price for these options was the closing stock price of the
Company's common stock on the day that the options vested. The options were
exercisable for a period of five years upon vesting. The Alliance Agreement
expired on December 31, 2001, and none of the options has vested.

The Company is also currently a party to group purchasing agreements with
AmeriNet Inc. and MedAssets HSCA (formerly Health Services Corporation of
America (HSCA)), as well as a number of regional and/or local Integrated
Delivery Networks (IDN's) that serve small groups of hospitals. The
10

AmeriNet purchasing agreement, which serves approximately 2,000 hospitals, runs
through 2004 and covers substantially all of the Company's products. The
MedAssets HSCA agreement serves approximately 1,000 hospitals, runs through
April 30, 2002 and covers Company products in its 2000 product catalog. The
Company has submitted a proposal to MedAssets HSCA to extend the agreement for
three years and to add the Company's newly released products. The Company pays
administrative fees on all sales through these GPO groups.

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, comprising 57% of total
revenues in 2001. 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.

In 2001, Stepic generated approximately 68% of its sales through
distribution of products of three major manufacturers: Arrow International,
Ballard Medical, and Pall Biomedical. Arrow sales totaled $13.9 million, $13.0
million and $13.5 million for 1999, 2000, and 2001, respectively; Ballard sales
totaled $7.7 million, $6.6 million and $6.1 million in 1999, 2000, and 2001,
respectively; Pall sales totaled $8.4 million, $6.6 million and $5.3 million in
1999, 2000, and 2001, respectively. 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. In November 2001, Pall Biomedical
terminated its agreement with Stepic as a result of its decision to sell direct
rather than through distributors. 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 distributed Arrow
and Ballard products for 23 and 15 years, respectively, and by the fact that
Stepic has lost only one other major product line in its 25-year history, in
addition to the loss of Pall. However, the deterioration or termination of other
relationships with manufacturers could have a material adverse impact on the
Company's business, financial condition, and operating results. 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 2001 is presented in Note 15 of notes to consolidated financial
statements included herein.

MANUFACTURING

At its Manchester, Georgia facility, the Company manufactures its complete
line of ports; infusion sets; and Circle(C) hemodialysis catheters,
Pheres-Flow(R), Infuse-a-Cath(R), and other miscellaneous catheters, and
dialysis accessories, except for a peripherally inserted central venous catheter
("PICC") line and certain product accessories produced for the Company by other
manufacturers.

The Company has received certification as an ISO 9001 medical device
manufacturer for its Manchester facility. The Company also has obtained the
right to affix CE (Conformite Europeenne) marking to its product lines
manufactured at the facility. CE marking is a European symbol of conformance to
strict product manufacturing and quality system standards.

11

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 relationships will not deteriorate in the future or be terminated.
Deterioration in or termination of 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 operating results. 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.

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 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 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)

12

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
generally 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.

Pursuant to the FDA's Good Manufacturing Practices under the Quality System
Regulations ("GMP/QSR"), the Company must manufacture its products and maintain
its records in a prescribed manner with respect to manufacturing, testing and
control activities. Further, the Company is required to comply with FDA
requirements for labeling and promotion of its products. For example, the FDA
prohibits cleared or approved devices from being marketed or promoted for
uncleared or unapproved uses. The medical device reporting regulation requires
that the Company provide information to the FDA whenever there is evidence to
reasonably suggest that one of its devices may have caused or contributed to a
death or serious injury, or that there has occurred a malfunction that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur.

Medical device manufacturers and distributors are generally subject to
periodic inspections by the FDA. If the FDA determines that a company is not in
compliance with applicable laws and regulations, it can, among other things,
issue a warning letter apprising the company of violative conduct, detain or
seize products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the company, its officers or its employees. In
addition, 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.

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
13

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 operating results.

ANTI-KICKBACK STATUTE

Pursuant to 42 U.S.C. Section 1320a-7b(b) (the "Anti-Kickback Statute"),
the knowing and willful offer or receipt of any remuneration, directly or
indirectly, in cash or in kind, in exchange for or which is intended to induce
the purchase, lease or order of any good, facility, item or service for which
payment may be made in whole or in part under a federal healthcare program,
including Medicare and Medicaid, is prohibited. A violation of the Anti-Kickback
Statute is a felony, punishable by fine, imprisonment or exclusion from the
Medicare and Medicaid or other applicable federal healthcare programs. The
Anti-Kickback Statute has been interpreted broadly by courts and administrative
bodies. Certain regulations promulgated under the Anti-Kickback Statute (i.e.,
42 C.F.R. Section 1001.952(j)) provide that prohibited remuneration under the
Anti-Kickback Statute does not include any payment by a vendor of goods to a
group purchasing organization, as defined in the regulations, if certain
standards are met. The Company believes that the group purchasing organizations
with which it has purchasing agreements comply in all material respects with
such standards.

HEALTHCARE REFORM

In recent years, several comprehensive healthcare reform proposals were
introduced in the United States Congress. The intent of the proposals was,
generally, to expand healthcare coverage for the uninsured and reduce the growth
of total healthcare expenditures. While none of the proposals were adopted,
healthcare reform may again be addressed by the current United States Congress.
Certain states have made significant changes to their Medicaid programs and have
adopted various measures to expand coverage and limit costs.

Implementation of government healthcare reform and other efforts to control
costs may limit the price of, or the level at which reimbursement is provided
for, the Company's products. In addition, healthcare reform may accelerate the
growing trend toward involvement by hospital administrators, purchasing managers
and buying groups in purchasing decisions. This trend would likely include
increased emphasis on the cost-effectiveness of any treatment regimen. These
changes also may 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

14

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 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. The Company's products subject to such
license agreements include the Circle C(R) acute and chronic catheters, which
includes the LifeJet(TM) chronic catheters, and certain products in the
development stage. There can be no assurance that the Company or its licensors
have or will develop or obtain additional rights to products or processes that
are patentable, that patents will issue from any of the pending patent
applications filed by the Company or that claims allowed will be sufficient to
protect any technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued or licensed to the Company or
other licensing arrangements will not be challenged, invalidated, infringed or
circumvented or that the rights granted thereunder will provide competitive
advantages for the Company's business or products. In such event the business,
results of financial condition and operating results 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),

15

LifePort(R), Pheres-Flow(R), Vortex(TM), VTX(R) and LifeJet(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 operating results.

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 operating results.

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 $125,200 in 2001 (less than
1% of net sales). The Company did not incur material research and development
expenses during 1999 and 2000. The 2001 amount was used primarily to incorporate
the VTX(TM) technology into its other line of ports, including LifePort(R)VTX
and Triumph(TM)VTX and to develop its LifeJet(TM) chronic dialysis catheter.

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)
innovative product design, development and
16

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. ("Bard"), and Sims, a division of
Smiths Group plc. The Company's competitors in its catheter products business
include Medical Components, Inc., Bard, and Quinton, a division of Tyco
International. 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

As of December 31, 2001, the Company had approximately 160 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.

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 $9,150. 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. The Company also uses a bonded warehouse facility for
storage of a portion of its inventory.

ITEM 3. LEGAL PROCEEDINGS

On March 30, 2001, the Company and Vascutech Acquisition, LLC ("Vascutech")
entered into an asset purchase agreement (the "IFM Agreement") whereby the
Company sold to Vascutech the IFM product line and related assets. Pursuant to
the IFM Agreement, the second installment of the purchase price in the amount of
$220,366.80 (the "Second Installment") was due from Vascutech to the Company on
September 30, 2001. On September 7, 2001, LeMaitre Vascular, Inc. (formerly
known as Vascutech, Inc.) ("LeMaitre") sent a letter to the Company seeking
indemnification under the IFM Agreement in an amount equal to $800,000 for the
Company's alleged breach of its representations and warranties set forth in the
IFM Agreement. The Company responded to LeMaitre by letter on September 19,
2001, notifying LeMaitre of the Company's position that it had not breached the
IFM Agreement and indicating that the Company expected receipt of the Second
Installment on September 30, 2001. On September 24, 2001, the Company filed a
complaint for Declaratory Judgment and Breach of Contract against LeMaitre and
Vascutech in the Superior Court of Fulton County in the State of Georgia. The
Company has requested (i) judgment in the amount of $220,366.80, the amount owed
to the Company under the IFM Agreement; and (ii) that the Court declare that the
Company has not breached the representations and warranties in the IFM Agreement
and that its obligations under the IFM Agreement have been fully satisfied. On
November 8, 2001, LeMaitre filed its Answer to the Complaint, denying both the
breach of contract claim and the grounds for the Company's request for a
declaratory judgment. LeMaitre also filed a counterclaim against the Company for
breach of contract, fraud and deceit, and punitive damages. LeMaitre seeks in
excess of $800,000 in actual damages.

17

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.

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 2001.

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." The following table sets forth the high and low sales price of the
common stock as reported on The American Stock Exchange for the periods
indicated.

As of March 15, 2002, there were 68 record holders of the Company's common
stock. On March 26, 2002, the last reported sales price of the common stock on
The American Stock Exchange was $0.89 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 LaSalle Credit Facility currently prohibits the
payment of dividends on the Company's capital stock.

18

SALES OF UNREGISTERED SECURITIES DURING 2001

In connection with the Forbearance Agreement, the Company issued a warrant
to Bank of America to acquire 435,157 shares of common stock at an exercise
price of $.05 per share. The warrant was cancelled pursuant to the
Recapitalization.

The foregoing issuance was conducted without an underwriter or placement
agent.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company as of and for each of
the five years ended December 31, 2001 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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the consolidated 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."

20

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 and in 2001, the Company transitioned the
manufacturing of the port line in-house to its current manufacturing facility.
Prior to that transition, since 1996, certain models in the Triumph-1(R) line
had 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,
including the VortexPort(TM), TitanPort(TM) and OmegaPort(R) lines acquired from
Norfolk Medical. In addition, the Company acquired the CVS and Stepic medical
device distribution businesses. Distribution of non-Company medical devices
through Stepic and CVS during 2001 comprised approximately 57% 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 business was sold to Vascutech, Inc.
on March 30, 2001, and Vascutech assumed control of such facility. The
consideration for the sale of the IFM business consisted of cash in the amount
of $2,250,500 at closing, the 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 $220,367, payable six months from the closing date. The second
installment payment has not been made, and the Company has initiated legal
action against the purchaser. See "Item 1. Description of
Business -- Acquisitions and "Item 3. Legal Proceedings."

On March 19, 2002, the Company announced a recapitalization transaction
that extinguished all of the Company's senior debt and warrants held by Bank of
America and substantially reduced the Company's total outstanding debt. See
"Item 1. Description of Business -- Recent Developments."

21

CRITICAL ACCOUNTING POLICIES

Management believes the following critical accounting policies, among
others, affect the more significant judgments and estimates used in the
preparation of its consolidated financial statements:

- We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

- We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the estimated market value based upon assumptions
about future demand and market conditions. If actual future demand or
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

- We review customer contracts to determine if all of the requirements for
revenue recognition have been met prior to recording revenues from sales
transactions.

- We estimate allowances for sales returns and rebates based on our
experiences from historical customer returns and rebates. If actual
future customer returns and rebates are less favorable than those
projected by management, additional sales allowances may be required.

- We review intangible assets and long-lived assets for impairment under
the guidance prescribed by SFAS No. 121 if indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying values of the assets. Effective
January 1, 2002, we will adopt SFAS No. 142. Upon the adoption of SFAS
No. 142, the Company will recognize an impairment loss of approximately
$6.3 million related to its manufacturing reporting unit. If economic
conditions deteriorate and indicators of impairment become present,
another adjustment to the carrying value of goodwill may be required.

RELATED PARTY TRANSACTIONS

Recent significant related party transactions of the Company are summarized
below. For a more detailed discussion of the Company's related party
transactions, see Note 11 to the Company's consolidated financial statements
contained elsewhere in this Form 10-K.

During 2001, Mr. Hunt, the Company's Chief Executive Officer, repaid the
outstanding balance of $900,000 under the Loan Agreement, dated June 6, 2000,
among the Company, Marshall B. Hunt and Hunt Family Investments L.L.L.P. (the
"Shareholder Bridge Loan"). Accrued interest of approximately $109,000 related
to the Shareholder Bridge Loan remained outstanding as of December 31, 2001 and
was recorded as contra-equity.

In connection with the Recapitalization, Mr. Hunt and Mr. Peterson, the
Company's two majority shareholders, paid their outstanding shareholder notes
and accrued interest of approximately $342,000, representing the balance as of
March 15, 2002. In addition, the Company incurred fees of approximately $484,000
and $320,000 during 2001 and the first quarter of 2002, respectively, related to
consulting services provided by a Director of the Company in connection with the
Recapitalization.

22

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:

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

Net Sales. Net sales decreased 6.7% to $59.1 million in 2001 from $63.3
million in 2000. The decrease in manufacturing sales resulted from the sale of
the IFM product line as well as the discontinuance of the Possis Perma-Seal
graft product line early in the first quarter of 2001. The decrease was
partially offset by an increase in port sales and lower distributor rebates in
2001 compared to 2000. The decrease in distribution sales resulted from
continuous 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 2001 net sales on a segment basis resulted in net sales of
$24.7 million from the manufacturing segment and $36.4 million from the
distribution segment before intersegment eliminations. 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.

Gross Profit. Gross profit increased 22.3% to $20.3 million in 2001, from
$16.6 million in 2000. Gross margin increased to 34.4% in 2001, from 26.2% in
2000. The increase was primarily attributable to the 2000 year-end inventory and
other adjustments of approximately $5.2 million that were made in connection
with management's decisions in the fourth quarter of 2000 to deal with changing
business conditions. In addition, the manufacturing segment experienced improved
gross margins due to higher average selling prices in 2001 and lower distributor
rebates and also, distribution sales comprised a lower percentage of total sales
in 2001 compared to 2000, thereby increasing overall gross margins. The 2001
gross profit on a segment basis resulted in gross profit of $13.6 million or
55.1% from the manufacturing segment and $7.0 million or 19.2% from the
distribution segment before intersegment eliminations. The 2000 gross profit on
a segment basis resulted in 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.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased approximately $820,000 or 4.1% in
2001 as compared to 2000. The increase in SG&A was primarily the result of the
restructuring charges in 2001 which consisted of new product launch costs,
turnaround and other consulting fees, severances, PR campaign fees and bad debt
expense recorded on the amounts outstanding from Vascutech. The increase in SG&A
was partially offset by reduced expenses, including salaries, travel, legal and
amortization expense. SG&A expenses increased as a percentage of net sales to
35.4% in 2001 from 31.7% in 2000 due to increased expenses and decreased sales.

23

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, decreased
approximately $700,000 or 13.2% from $5.3 million in 2000 to $4.6 million in
2001. The decrease is due to a decrease in interest rates as well as lower debt
outstanding during 2001 of approximately $41.9 million at the end of 2001 versus
approximately $52 million outstanding at the end of 2000. The reduction in debt
was the result of proceeds generated from the sale of the IFM business, payments
under the Forbearance Agreement with the Company's BofA Credit Facility as well
as payments under the Working Capital Loan pursuant to the sweep arrangement
with its BofA Credit Facility.

Income Taxes. During the year ended December 31, 2001, the Company
generated an income tax benefit of approximately $2 million which was reduced
fully by a valuation allowance established on the Company's deferred tax assets
generated by the income tax benefit. During the year ended December 31, 2000,
the Company recorded an income tax benefit of approximately $1.1 million. The
income tax benefit for both years consists of the federal and state benefits,
adjusted for certain nondeductible items, reduced by a valuation allowance on
the Company's deferred tax assets. The valuation allowance is deemed necessary
due to uncertainties indicated by the Company's taxable loss in both 2001 and
2000 and forecasted taxable loss for 2002. The resulting $1.1 million benefit in
2000 represents the refunds available from net operating loss carrybacks offset
by the valuation allowance on deferred items arising in previous years.

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; lower
sales 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 product 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.

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.

24

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.

QUARTERLY RESULTS

The following tables set forth quarterly statement of operations data for
2000 and 2001. 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.

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 $6.4 million in 2001, as
compared with ($2.4 million) and $4.9 million in 1999 and 2000, respectively.
The increase in cash from operations during 2001 over 2000 was substantially due
to income tax refunds received in 2001 due to net operating loss carrybacks as
well as lower income taxes paid during 2001 compared to 2000. The increase in
cash from operations during 2001 over 1999 was primarily the result of decreases
in accounts receivable and inventory levels. In addition, there were lower
income taxes paid as well as lower reductions in accounts payable and accrued
expenses in 2001 as compared to 1999.

Net cash provided by (used in) investing activities was $2.4 million during
2001, as compared with ($1.9 million) and ($1.3 million) in 1999 and 2000,
respectively. The investing activities in 2001 consisted primarily of proceeds
from the sale of the IFM business and principal payments made to the Company on
a loan to the Company's CEO. The investing activities for 2000 consist of
capital expenditures and a loan to the Company's CEO (See Notes 6 and 11 to the
Company's consolidated financial statements included elsewhere in this Form
10-K). Substantially all of the investing activities in 1999 were for cash paid
for acquisitions of $1.4 million and capital expenditures.

The Company has established a capital expenditure budget in 2002 of
$400,000, primarily for manufacturing and office equipment.

Net cash provided by (used in) financing activities was ($6.6 million) in
2001, as compared with $26,779 and ($5 million) in 1999 and 2000, respectively.
Financing activities for both 2001 and 2000 primarily included principal
payments on outstanding debt attributable to depository funds applied against
the working capital loan under the Company's BofA Credit Facility pursuant to
the Company's sweep arrangement with Bank of America (as discussed in Note 6 to
the Company's consolidated financial statements included elsewhere in this Form
10-K). These payments were partially offset by cash proceeds issued to the
Company from Bank of America under the same sweep arrangement and $900,000 in
2000 to fund a loan to the Company's CEO (See Notes 6 and 11 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

26

the Company's BofA Credit Facility to fund operations and $2.9 million used for
principal payments on long-term debt.

The Company's approximate total scheduled future payments under contractual
obligations and debt outstanding as of March 31, 2002 are as follows:

(1) The above table reflects debt payments as provided for under terms of the
applicable debt agreements. Because of certain covenants included in the
Loan Agreement, the satisfaction of which is not objectively determinable,
certain amounts outstanding under the Loan Agreement and the Note Purchase
Agreement may be classified as current liabilities in the Company's
consolidated financial statements as of March 31, 2002, even though such
amounts by their terms are not payable until 2004.

The Company incurred a loss of approximately $5 million in 2001, and as
discussed in Note 6 to the Company's consolidated financial statements included
elsewhere in this Form 10-K, the Company was in violation of the Forbearance
Agreement with Bank of America as of December 31, 2001 and continuing into 2002.
As more fully described below, the Company has completed a recapitalization
transaction that extinguished all of the Company's outstanding debt and warrants
held by Bank of America, entered into new financing facilities with new lenders
and substantially reduced the Company's total outstanding debt. The Company's
senior loan agreement contains certain requirements which are either determined
at the discretion of the lender or involve meeting financial covenants. The
Company is unable to objectively determine or measure whether it can comply with
those requirements. While there can be no assurance, it is the Company's
expectation to comply with these requirements and to have the financing
facilities available for its working capital needs throughout 2002. If the
Company is unable to comply with the requirements of the new financing
facilities during 2002, the Company may not be able to borrow under the senior
loan agreement, and all amounts may become immediately due.

The details of the Recapitalization follow:

On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest, LaSalle, and Medtronic to recapitalize the Company by
extinguishing all of the Company's senior debt and warrants held by Bank of
America and substantially reducing the Company's total outstanding debt.
Pursuant to the Recapitalization, the Company issued Convertible Notes in the
amount of $15 million to ComVest, Medtronic and other investors, assumed a $2
million Junior Note payable to Bank of America, and entered into the LaSalle
Credit Facility for up to $22 million, of which approximately $8.8 million was
outstanding as of March 31, 2002. The following is a summary of key provisions
of the Recapitalization:

On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
America's interest in an outstanding $50 million amended the BofA Credit
Facility. The purchase price for the assignment was $22 million in cash, plus
the $2 million Junior Note. The Company subsequently assumed the Junior Note
pursuant to the Recapitalization, and ComVest has been released from obligations
under the Junior Note. Upon the closing of the assignment on March 15, 2002,
ComVest acquired all of Bank of America's interest in the BofA Note, the
warrants issued to Bank of America pursuant to the BofA Credit Facility were
surrendered and cancelled, and the Forbearance Agreement was terminated. The
estimated fair value of the warrants on March 15, 2002 of approximately $345,000
will be recorded in additional paid-in-capital, and the existing value of the
warrant of $260,000 will be extinguished.

On March 1, 2002, the Company entered into the Note Purchase Agreement with
ComVest and certain Additional Note Purchasers. Under the Note Purchase
Agreement, the Company agreed to issue $15 million of Convertible Notes.
Interest on the Convertible Notes is payable quarterly beginning in June 2002
and accrues at a rate of 6% per year for the first six months and 8% per year
thereafter until the notes are paid in

27

full and mature on March 16, 2004. The Company issued the Convertible Notes as
follows: $4.4 million to ComVest, $4 million to Medtronic and $6.6 million to
the Additional Note Purchasers.

The holders of the Convertible Notes have the right to convert in the
aggregate a total of $270,000 of the Convertible Notes into shares of the
Company's common stock at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon repayment of all or a
portion of the amounts due, as described below. Under the conversion terms, if
the principal amount of the Convertible Notes, together with all interest due is
paid in full on or before 30 days following March 16, 2002 (the "Closing Date"),
then the maximum aggregate number of shares of common stock that all the
Convertible Notes may be converted into is 22,500,000. If the principal amount
of all the Convertible Notes and all interest due is paid on or before March 16,
2004, then the maximum aggregate number of shares of the Company's common stock
that the Convertible Notes can be converted into is 19,500,000. The terms of the
applicable conversion periods and conversion amounts are as follows:

- Until April 16, 2002, ComVest has the right to convert 1.25% of the
Outstanding Balance (defined as principal plus accrued and unpaid
interest under the ComVest Convertible Note) held under its $4.4 million
Convertible Note plus 0.6% of the amount of principal repaid under the
Additional Notes;

- Until March 16, 2003, ComVest has the right to convert an additional
0.25% of the Outstanding Balance;

- Until March 16, 2004, Medtronic has the right to convert 1.5% of its $4
million Convertible Note;

- From March 16, 2003 through March 16, 2004, Medtronic has the right to
convert an additional 0.3% of $4 million if ComVest's Convertible Note
and the notes held by the Additional Note Purchasers have not been
repaid;

- Until April 16, 2002, the Additional Note Purchasers have the right to
convert 1.25% of the Additional Notes Outstanding Balance (defined as
principal plus accrued but unpaid interest under the Additional Notes)
held under their $6.6 million Convertible Note plus 0.6% of the amount of
principal repaid under ComVest's Convertible Note on or before April 16,
2002; and

- Until March 16, 2003, the Additional Note Purchasers have the right to
convert an additional 0.25% of the Additional Notes Outstanding Balance.

The Company will record the value of the beneficial conversion feature at
the amount of proceeds allocated to the convertible instrument of $270,000 as a
credit to equity and as a debt discount and will amortize the debt discount over
the period to the Convertible Notes' earliest conversion date using the
effective interest method.

The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. The
Note Purchase Agreement also contains certain affirmative and negative
covenants, including, but not limited to, restrictions on indebtedness and
liens, business combinations, sale or discount of receivables, conduct of the
Company's business, transactions with affiliates, ability to enter into
contracts outside the ordinary course of business, and ability to pay dividends.
The Events of Default include, but are not limited to, failure to pay an
obligation when due, breach of any covenant that remains uncured for 15 days,
bankruptcy, change of control, and failure to obtain shareholder approval of the
Recapitalization within 105 days of the closing date of March 16, 2002. The
shareholder approvals that the Company agreed to obtain and will submit to the
shareholders at the 2002 Annual Meeting include issuances of common stock
pursuant to the Recapitalization, amendments to the Company's articles of
incorporation to increase the number of authorized shares of common stock from
50 million to 100 million and to declassify the staggered board, amendments of
the Bylaws to eliminate the fair price and business combinations provisions, and
the grant of options to Messrs. Hunt and Peterson (as described below).

On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of the
BofA Note from $40.3 million to $22 million. As a result, the Company will
record a net extraordinary gain on the early extinguishment of debt of
approximately
28

$11 million, net of tax of approximately $4 million during the first quarter of
2002. In exchange for funding a portion of the $22 million cash purchase price
paid to BofA, ComVest assigned $4 million in principal amount of the BofA Note
to Medtronic and $6.6 million in principal amount of the BofA Note to the
Additional Note Purchasers while retaining $11.4 million in principal amount of
the BofA Note itself. After such assignments, the Company issued the Convertible
Notes under the Note Purchase Agreement in the aggregate principal amount of $15
million in exchange for the surrender of $15 million in principal amount of the
BofA Note held by ComVest, Medtronic and the Additional Note Purchasers. The
remaining $7 million in principal amount of the BofA Note was repaid with the
proceeds of the Bridge Loan.

On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to the Loan Agreement. Under the Loan Agreement, the Lender has
provided a $20 million Revolving Loan and a $2 million Term Loan. The Company
used the proceeds to repay the Bridge Loan and expenses related to the
Recapitalization and will use the remaining proceeds for working capital and
general corporate purposes. Both loan facilities will bear interest at the
LaSalle Bank Prime Rate plus 2%, subject to an additional 2% that would be added
to the interest rate upon the occurrence of an Event of Default (as discussed
below).

As collateral, the Company granted a security interest in all of the
Company's present and future assets, whether now or hereafter owned, existing,
acquired or arising and wherever now or hereafter located, including, but not
limited to: all accounts receivable; all chattel paper, instruments, documents
and general intangibles including patents, patent applications, trademarks,
trademark applications, trade secrets, trade names, goodwill, copyrights,
copyright applications, registrations, licenses, software, franchises, customer
lists, tax refund claims, claims against carriers and shippers, guaranty claims,
contract rights, payment intangibles, security interests, security deposits, and
indemnification rights; all inventory; all goods including equipment, vehicles,
and fixtures; all investment property; all deposit accounts, bank accounts,
deposits and cash; all letter-of-credit rights; certain commercial tort claims;
all property of the Company in control of the Lender or any affiliate of the
Lender; and all additions, substitutions, replacements, products, and proceeds
of the aforementioned property including proceeds from insurance policies and
all books and records relating to the Company's business.

The Loan Agreement contains affirmative and negative covenants. The
affirmative covenants require the Company to, among other things, maintain
accurate and complete records, notify the Lender of major business changes,
comply with relevant laws, maintain proper permits, conduct relevant inspections
and audits, maintain adequate insurance with the Lender named as loss payee,
keep collateral in good condition, use proceeds only for business purposes, pay
required taxes, maintain all intellectual property, maintain a checking account
with LaSalle, hire a Chief Operating Officer with experience in the medical
products industry within 90 days of the date of the Loan Agreement, grant the
Lender the right to conduct appraisals of the collateral on a bi-annual basis,
and deliver a survey of the property located at the Company's offices on
Northside Parkway in Atlanta within 60 days of the date of the Loan Agreement.
The negative covenants restrict the Company's ability to, among other things,
make any guarantees, incur additional indebtedness, grant liens on its assets,
enter into business combinations outside the ordinary course of business, pay
dividends, make certain investments or loans, allow its equipment to become a
fixture to real estate or an accession to personal property, alter its lines of
business, settle accounts, or make other fundamental corporate changes.

The Loan Agreement also contains financial maintenance covenants,
including, but not limited to, the following:

- maintaining Minimum Availability at all times of at least $4 million
under the Minimum Availability Test. "Minimum Availability" is defined as
(a) the lesser of: (i) the Revolving Loan Limit (which is up to 85% of
the face amount of the Company's eligible accounts receivable; plus the
lesser of (x) up to 55% of the lower of cost or market value of the
Company's eligible inventory or up to 85% of the net orderly liquidation
value of eligible inventory, whichever is less, or (y) $11 million; plus
such reserves as the Lender may establish) and (ii) the Maximum Revolving
Loan Limit of $20 million minus (b) the sum of (i) the amount of all then
outstanding and unpaid Liabilities (to Lenders, as defined) plus (ii) the
aggregate amount of all then outstanding and unpaid trade payables and
other obligations more than 60 days past due; plus (iii) the amount of
checks issued by the Company which are more

29

than 60 days past due but not yet sent and the book overdraft of the
Company plus (iv) $4,000,000 owed by the Company to Arrow International;

- maintaining Tangible Net Worth of $7,698,000 for the quarter ending
December 31, 2002, $8,522,000 for the quarter ending March 31, 2003,
$9,475,000 for the quarter ending June 30, 2003, $10,544,000 for the
quarter ending September 30, 2003, $11,728,000 for the quarter ending
December 31, 2003 and each quarter thereafter (Tangible Net Worth is
defined as shareholders' equity including retained earnings less the book
value of all intangible assets, prepaid and non-cash items arising from
the transactions contemplated by the Loan Agreement and goodwill
impairment charges recorded as a result of FASB No. 142 as determined
solely by the Lender plus the amount of any LIFO reserve plus the amount
of any debt subordinated to the Lender);

- maintaining fixed charge coverage (ratio of EBITDA to fixed charges) of
1.10 to 1.0 from April 1, 2002 through December 31, 2002, 1.20 to 1.0
from April 1, 2002 through March 30, 2003, 1.40 to 1.0 for the quarter
ending June 30, 2003 and for the immediately preceding four fiscal
quarters, and 1.50 to 1.0 for the quarter ending September 30, 2003 and
for the immediately preceding four fiscal quarters and each fiscal
quarter thereafter;

- maintain EBITDA, based on the immediately preceding four fiscal quarters,
of $4,000,000 on December 31, 2002, $5,437,000 on March 31, 2003,
$6,605,000 on June 30, 2003, $7,374,000 on September 30, 2003 and
$7,482,000 on December 31, 2003 and each fiscal quarter thereafter; and

- limit capital expenditures to no more than $500,000 during any fiscal
year.

The Loan Agreement also specifies certain Events of Default, including, but
not limited to, failure to pay obligations when due, failure to direct its
account debtors to make payments to an established lockbox, failure to make
timely financial reports to the Lender, the breach by the Company or any
guarantor of any obligations with any other Person (as defined in the Loan
Agreement) if such breach might have a material adverse effect on the Company or
such guarantor, breach of representations, warranties or covenants, loss of
collateral in excess of $50,000, bankruptcy, appointment of a receiver,
judgments in excess of $25,000, any attempt to levy fees or attach the
collateral, defaults or revocations of any guarantees, institution of criminal
proceedings against the Company or any guarantor, occurrence of a change in
control, the occurrence of a Material Adverse Change or a default or an event of
default under certain subordinated debt documents. Upon the occurrence of any
Event of Default, the Lender may accelerate the Company's obligations under the
Loan Agreement.

The Company must repay the Revolving Loan on or before March 17, 2005, the
Termination Date, unless the Loan Agreement is renewed and the repayment period
is extended through a new Termination Date. The Company must repay the Term Loan
in 36 equal monthly installments of $55,556. The Loan Agreement will
automatically renew for one-year terms unless the Lender demands repayment prior
to the Termination Date as a result of an Event of Default, the Company gives
90-days notice of its intent to terminate and pays all amounts due in full, or
the Lender elects to terminate on or after February 1, 2004 as a result of a
Termination Event. A Termination Event is defined as the failure of Medtronic,
ComVest or any Additional Note Purchaser to extend the maturity date of the
Convertible Notes at least thirty days past the date of the original term or any
applicable renewal term.

Pursuant to the LaSalle Credit Facility, the Company also issued to LaSalle
and SFB warrants to purchase up to an aggregate of 748,619 shares of common
stock at an exercise price of $.01 per share. The Company will record the
estimated fair value of the warrant as of March 18, 2002 of approximately
$695,000, determined using the Black-Scholes model (using weighted average
assumptions as follows: dividend yield of 0%, expected life of 3 years, expected
volatility of 112.2% and a risk free interest rate of 2.43%) as a reduction of
the gain on early extinguishment of debt.

The Junior Note in the amount of $2 million bears interest at a rate of 6%
per annum, payable monthly beginning April 2002, and matures on March 15, 2007.
Beginning on May 1, 2003, a principal payment on the Junior Note of $22,500 is
payable on the first day of each month until maturity of the Junior Note.

30

As a condition to closing, the Company also agreed to enter into a
Securityholders Agreement dated March 16, 2002 with ComVest, Medtronic, LaSalle,
Hunt and Peterson under which the Company granted certain registration rights,
rights of first refusal and corporate governance rights to the Investors. The
registration rights require the Company to file a shelf registration statement
covering the resale of certain shares of common stock issuable pursuant to the
Recapitalization and to include, at the Investors' option, certain of the
Investors' shares of common stock in any registration statement undertaken by
the Company, at the Company's expense. Pursuant to the Securityholders
Agreement, ComVest and Medtronic have been granted (i) a right of first refusal
to purchase all or part of their pro rata share of new securities which the
Company may propose to sell or issue, (ii) the right of first refusal to
participate in any sale of Hunt's and/or Peterson's shares of common stock to
third parties upon the same terms and conditions, (iii) the co-sale right of
first refusal to participate in sales of shares of common stock by Hunt and/or
Peterson, and (iv) the "bring-along right" to require Hunt and Peterson to sell
the same percentage of shares of common stock as the holders of the rights
propose to sell in the event that the rights holders propose to sell 51% or more
of their common stock. The corporate governance rights include, but are not
limited to, the following: (i) granting ComVest the right to designate one
ComVest director and two additional independent directors, (ii) requiring that
certain actions of the Board of Directors include the affirmative vote of the
ComVest director, (iii) requiring the Company to establish and maintain an
Executive Committee consisting of the ComVest director as Chairman, one of the
independent directors designated by ComVest, and Hunt, and (iv) requiring that
the Executive Committee approve certain actions. Failure to comply with the
Securityholders Agreement is considered an Event of Default under the Note
Purchase Agreement.

On March 15, 2002, the Company entered into a Co-Promotion Agreement with
Medtronic under which the Company will promote and provide technical advice for
Medtronic's implantable drug delivery systems which are used for the treatment
of hepatic arterial infusion and malignant pain. After basic sales training,
sales representatives of the Company and of its distributors will promote the
sale of such systems, identify appropriate patients for such systems, and after
additional training provide assistance in the implantation and refill procedure
for such systems, for which identification and assistance the Company will be
compensated by Medtronic. If the Company breaches or fails to comply with its
obligations under the Co-Promotion Agreement (after giving effect to any
applicable cure periods), then Medtronic or 51% of the holders of the aggregate
principal amount of the Convertible Notes may accelerate the due date for
payment of the Convertible Notes.

To effect the Recapitalization, the Company also entered into certain
ancillary agreements including the following: (i) a voting agreement under which
Hunt and Peterson have agreed to vote their shares in favor of all proposals
relating to the Recapitalization; (ii) a new employment agreement and option
agreements with Hunt that grants him options to purchase an aggregate of
3,500,000 shares of common stock (The new employment agreement replaced Hunt's
previous employment agreement and reduced the previous term of employment and
the previous severance compensation and benefits from approximately four years
to twelve months.); (iii) a new employment agreement and an option agreement
with Peterson that grants him options to purchase 1,000,000 shares of common
stock (The new employment agreement replaced Peterson's previous employment
agreement and reduced the previous term of employment from approximately four
years to six months and reduced the previous severance compensation and benefits
from approximately four years to twelve months.); (iv) an advisory agreement
with an affiliate of ComVest under which the affiliate received 2,645,398 shares
of common stock and a cash fee of $750,000; (v) a note with ComVest under which
ComVest received 75,000 shares in exchange for advancing certain transaction
expenses associated with the Recapitalization; (vi) an expense guaranty with Mr.
Hunt under which he received 150,000 shares of common stock in exchange for
agreeing to reimburse ComVest for certain of its transaction expenses in the
event that the Recapitalization were not consummated; and (vii) an advance note
with Mr. Hunt under which he received 75,000 shares of common stock in exchange
for advancing to the Company certain transaction expenses associated with the
Recapitalization. The Company will recognize compensation expense of
approximately $1,400,000 during the first quarter of 2002 related to 2,500,000
of the options granted to the CEO and all of the options granted to the
Company's President. The remaining 1,000,000 options that were granted to the
CEO are performance-based, and the Company will measure and recognize
compensation as the options are earned. The Company will record the estimated
fair value of the share of the common stock
31

issued to ComVest of approximately $2,500,000, as well as the cash fee of
$750,000, as a reduction of its extraordinary gain on early extinguishment of
debt. The Company will record the value of the shares of the common stock issued
to the CEO of approximately $152,000 as debt cost and amortize over the terms of
the related agreements.

The auditor's opinion related to the consolidated financial statements
included in this report states that there is substantial doubt as to the
Company's ability to continue as a going concern. Delivery of this opinion would
have triggered an Event of Default under the Loan Agreement and the Note
Purchase Agreement as originally executed because both agreements require
audited financial statements to be delivered within 90 days of December 31, 2001
with an auditor's opinion that does not contain such going concern language.
However, the default provisions relating to the audit opinion in the Loan
Agreement and the Note Purchase Agreement have been waived.

As of April 15, 2002, the Company has complied with all of the requirements
of the Loan Agreement and believes that it has the financial resources available
to meet its working capital needs through fiscal year 2002.

As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments were
terminated. However, because those agreements were significant to the
capitalization of the Company in 2001, the terms of those agreements are briefly
summarized as follows:

On March 30, 2001, the Company entered into a Forbearance Agreement and a
First Amendment to Forbearance Agreement wherein Bank of America agreed to
forbear from exercising its rights and remedies under the BofA Credit Facility
due to certain defaults. The Company was in default at that time for violating
certain restrictive covenants and for failing to make principal payments when
due. All of the defaults were foreborne as provided for in the Forbearance
Agreement, and revised restrictive covenants were set. By September 30, 2001,
the Company was in default under the Forbearance Agreement for failing to comply
with some of the revised covenants, including minimum net worth, debt service
coverage, leverage and minimum EBITDA.

On October 15, 2001, the Company entered into the Second Amendment to the
Forbearance Agreement. The Second Amendment amended the Forbearance Agreement as
follows: (i) changed the termination date of the Forbearance Agreement from
March 31, 2002 to January 15, 2002 (the period from March 30, 2001 through
January 15, 2002 being defined as the "Forbearance Period"); (ii) required the
Company to maintain a general operating account with Bank of America and
restricted the use of funds in an calendar month to payments equal to or less
than a monthly budget submitted to Bank of America; (iii) required the Company
to pay any accrued or unpaid interest (but not principal) on the B of A Note on
the first day of each month and allow interest to continue to accrue at the Bank
of America Prime Rate plus two and one-half percent (2.5%) per annum; and (iv)
required the Company to furnish Bank of America with certain financial reports.

The Second Amendment also amended the "Termination Events" as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Company's CEO, Marshall B. Hunt and Hunt
LLLP to execute and deliver within 10 days from the effective date of the Second
Amendment a pledge to Bank of America of all the stock owned by Hunt and
documentation to amend the current Pledge Agreement between Hunt, Hunt LLLP and
the Company. The pledge documents will be held in escrow and will be released
only in the event that Hunt interferes with the daily operations of the Company
determinable at the Bank of America's discretion at any point prior to January
1, 2005; (ii) the Company fails to engage and hire within five days from the
effective date of the Second Amendment competent crisis and turn around
management and a new Chief Executive Officer who shall report directly to the
independent members of the Company's Board of Directors; (iii) the Company fails
to provide Bank of America within five days from the effective date of the
Second Amendment a copy of resolutions confirming Hunt's resignation as an
officer and director of the Company and that no further salary or bonuses shall
be paid to Hunt; (iv) the Company fails to make efforts to refinance the amounts
outstanding under the BofA Credit Facility and fails to provide weekly status
reports; (v) on or before December 15, 2001, the Company fails to provide Bank
of America evidence that the Company has engaged an investment banking firm to
begin marketing the sale of the assets of the Company if the amounts outstanding
under the BofA Credit Facility are
32

not paid off by the Termination Date; or (vi) the Company fails to execute and
deliver to Bank of America within 24 hours of Bank of America's request a
consent order consenting to the appointment of a receiver in the event of a
Termination Event.

In addition, the Second Amendment reduced the Working Capital Sublimit to
$5,000,000 and limited the Working Capital Loan to the smaller of the Working
Capital Sublimit or an amount equal to the Borrowing Base, as defined in the
BofA Credit Facility. The Second Amendment also amended several of the financial
covenants previously contained in the Forbearance Agreement.

The Forbearance Agreement provided for the payment of Excess Cash Flow, as
defined in the BofA Credit Facility, on the ninetieth day following the last day
of each fiscal year. There was no Excess Cash Flow payment required for fiscal
year 2001. In addition, the Forbearance Agreement required 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 the IFM product
line (see Note 14 to the Company's consolidated financial statements contained
elsewhere in this Form 10-K).

The Forbearance Agreement further required payments of $300,000 each on the
BofA Bridge Loan on May 31, 2001, August 31, 2001, and November 30, 2001. All of
the installments under the BofA Bridge Loan were paid. The Forbearance Agreement
also provided 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 435,157 shares of the Company's common stock for
$.05 per share. The warrant was exercisable by Bank of America during a
three-year period without regard to the status of the BofA Credit Facility or
the BofA Bridge Loan. The Company recorded the estimated fair value of the
warrant as of December 31, 2001 of $260,000, determined using the Black-Scholes
Model (using weighted average assumptions as 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 amortized the deferred cost over
the Forbearance Period. As with the BofA Credit Facility and other related
agreements, the warrant was cancelled pursuant to the Recapitalization.

The Forbearance Agreement also required the Company to hire on or before
June 30, 2001 a new chief operating officer, restricted the repayment of
principal debt to junior lien holders, and to either i) sell the assets of 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 Note 14 to the Company's consolidated financial statements contained
elsewhere in this Form 10-K regarding the sale of the IFM product line). The
Company hired a Chief Operating Officer in April 2001 who was terminated in June
2001, and the Company did not hire a replacement. The Company sold the assets of
the IFM product line as of March 30, 2001 (see Note 14 to the Company's
consolidated financial statements contained elsewhere in this Form 10-K).

On December 15, 2001, the Company entered into a Third Amendment to the
Forbearance Agreement under which Bank of America consented to the increase in
payments of $8,000 per month to certain former shareholders of Stepic.

In January 2002, the Company entered into a Fourth Amendment to Forbearance
Agreement with Bank of America, pursuant to which Bank of America agreed to
extend the Forbearance Period until March 15, 2002 (the "Expiration Date") in
order for the Company to consider its strategic alternatives. On March 15, 2002,
the BofA Credit Facility was assigned from BofA to ComVest. On March 16, 2002,
the Company issued the Convertible Notes in an aggregate amount of $15 million
to ComVest, Medtronic and the Additional Note Purchasers. On March 18, 2002, the
Company entered into the LaSalle Credit Facility.

33

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. While
the Company has not historically been adversely affected by increases in the
cost of raw materials and components, several GPO agreements to which the
Company is a party limit the Company's ability to raise prices. Thus, future
increases in the cost of raw materials and components could adversely affect the
Company's business, financial condition and operating results. 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 to 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

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS No. 141 supercedes Accounting Principles Board Opinion
("APB") No. 16, Business Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001,
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain (instead of being deferred and
amortized). The Company does not expect the adoption of SFAS No. 141 to have a
material impact on the consolidated financial statements.

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 supersedes APB No. 17, and requires that:
1) goodwill and indefinite lived intangible assets will no longer be amortized;
2) goodwill will be tested for impairment at least annually at the reporting
unit level; 3) intangible assets deemed to have an indefinite life will be
tested for impairment at least annually; and 4) the amortization period of
intangible assets with finite lives will no longer be limited to forty years. As
of December 31, 2001, the Company has goodwill and other intangible assets of
$38.2 million and has recognized amortization expense of approximately $2.7
million during the year ended December 31, 2001. Upon the adoption of SFAS No.
142, the Company recognized an impairment loss of approximately $6.3 million
related to its manufacturing reporting unit. In addition, the Company ceased
amortization of its goodwill (See Note 5 to the Company's Consolidated Financial
Statements included elsewhere in this Form 10-K for the Company's expected
future amortization charges after adoption of SFAS No. 142).

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("ARO"), which has an effective date for financial
statements for fiscal years beginning after June 15, 2002. This statement
addresses the diversity in practice for recognizing asset retirement obligations
and requires that obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those obligations are incurred,
with the amount of the liability initially measured at fair value. Upon
initially recognizing a liability for an ARO, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The impact of
SFAS No. 143 is not expected to be material to the Company's consolidated
financial statements.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which has an effective date for
financial statements for fiscal years beginning after December 15, 2001. This
statement, which supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, as well as
certain other accounting standards, establishes a single accounting model, based
on framework established in SFAS No. 121 for long-lived assets to be disposed of
by

34

sale, including segments of a business accounted for as discontinued operations.
The impact of adopting SFAS No. 144 is not expected to be material to the
Company's financial statements.

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. As of March 31, 2002, The Company had $8.8 million of
borrowing capacity under the LaSalle Credit Facility. There are certain
covenants in the Loan Agreement, the compliance with which is not objectively
determinable and, as a result, the auditor's opinion accompanying the
consolidated financial statements included in this report states that there is
substantial doubt as to the Company's ability to continue as a going concern.
See "Item 1. Description of Business -- Recent Developments" for a description
of the Recapitalization.

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, financial condition and operating
results.

The Company is required to make periodic interest and principal payments on
its outstanding indebtedness, including the Convertible Notes, the LaSalle
Credit Facility and the Junior Note. Failure to make any such required payments
may result in an event of default and the acceleration of all outstanding
indebtedness. For a description of the Company's scheduled payments on its
obligations, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

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(R) 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. In 2001, the Company transitioned the manufacturing of the
Triumph-1(R) port line to the Manufacturing facility from Act Medical as well as
its infusion sets which had previously been manufactured by a third party. 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 developed
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, financial condition and operating results.

35

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 also may 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 operating results 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, financial condition, and operating results. 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 operating results.
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 operating
results.

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 agreements in
consideration for royalty payments. Many of the Company's catheter 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

36

business or products. In such event the business, financial condition, and
operating results 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

37

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, 2001 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. In 2001, the recall was
terminated by the FDA.

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%, 6%
and 8% of total sales during 1999, 2000 and 2001, 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 68% 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, and financial
condition and operating results. See discussion of distribution relationship
with Pall Biomedical in "Item 1. Description of Business by Industry
Segment -- Product Distribution."

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
38

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. Mr. Hunt's employment agreement expires March 16, 2003, and Mr.
Peterson's employment agreement expires September 16, 2002. 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, financial condition and operating results.

Control by Certain Shareholders

As of the date of this report, Hunt, Peterson, and Roy C. Mallady, Jr.
collectively own more than 50% of the Company's outstanding common stock. In
addition, ComVest, Medtronic and the Additional Note Purchasers have the right
to convert a portion of their Convertible Notes into up to 27 million shares of
common stock. ComVest and its affiliates also received 2,720,398 shares of
common stock in connection with the Recapitalization. See discussion in "Item 1.
Description of Business -- Recent Developments." 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 Restated and Amended 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. See description
of Securityholders Agreement in "Item 1. Description of Business -- Recent
Developments" for information on these corporate governance restrictions.

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

39

("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 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 Centers for
Medicare and Medicaid Services ("CMS"). 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

40

procedures employing the Company's products, would have a material adverse
effect on the Company's business, results of operations and financial condition.

Competition

The medical devices industry is highly competitive and fragmented. The
Company currently competes with many companies in the development, manufacturing
and marketing of vascular access ports, dialysis and apheresis catheters and
related ancillary products and in the distribution of medical devices. Some of
these competitors have substantially greater capital resources, management
resources, research and development staffs, sales and marketing organizations
and experience in the medical devices industry than the Company.

These competitors may succeed in marketing their products more effectively,
pricing their products more competitively, or developing technologies and
products that are more effective than those sold or produced by the Company or
that would render some products offered by the Company noncompetitive.

Factors Inhibiting Takeover

Certain provisions of the Articles and Bylaws may delay or prevent a
takeover attempt that a shareholder might consider in its best interest. Among
other things, these provisions establish certain advance notice procedures for
shareholder proposals to be considered at shareholders' meetings, provide for
the classification of the Board of Directors, provide that only the Board of
Directors or shareholders owning 70% or more of the outstanding Common Stock may
call special meetings of the shareholders and establish supermajority voting
requirements with 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. Pursuant to the
Recapitalization, the Company is seeking shareholder approval to eliminate the
classified board and to opt out of the Georgia Business Combination statute and
Fair Price statute.

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. Borrowings under the LaSalle Credit Facility
accrue interest at an annual rate of prime plus 2%, plus an additional 2% upon
the occurrence of an event of default. As of March 31, 2002, the Company had
$8.8 million outstanding under the LaSalle Credit Facility. If market rates were
to increase immediately and uniformly by 10% from levels as of March 31, 2002,
the additional interest expense of $42,000 would be immaterial to the Company's
consolidated financial position, cash flows, and operating results.

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.

41

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the captions
"Directors Standing for Election," "Directors Continuing in Office," and
"Executive Officers and Key Employees" in the Company's Proxy Statement for the
2002 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 2002
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 2002" and "Option Exercises and Values for Fiscal 2002" in the
Company's Proxy Statement for the 2002 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 2002 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 2002 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, 2000 and
2001................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001....................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 2000 and 2001... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001....................... F-5
Notes to Consolidated Financial Statements................ F-6

42

2. Financial Statement Schedules

Report of Independent Accountants on Financial Statement
Schedule.................................................. F-33
Schedule II -- Valuation and Qualifying Accounts............ F-34

3. Exhibits

Included as exhibits are the items listed on the Exhibit Index below.

(b) Reports on Form 8-K

No Reports on Form 8-K were filed during the last quarter of the period
covered by this report.

48

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 15th day of
April, 2002.

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 15th day of April, 2002.

49

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, changes in shareholders' equity, and cash
flows present fairly, in all material respects, the consolidated financial
position of Horizon Medical Products, Inc. and subsidiaries (the "Company") as
of December 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, 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 accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
17 to the consolidated financial statements, the Company's senior loan agreement
requires compliance with certain financial covenants the compliance with which
cannot be objectively determined. This matter raises substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 26, 2002, except for Notes 6, 9, 12 and 17,
as to which the date is April 15, 2002

F-1

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

F-2

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

See Notes 13 and 14 for additional supplemental disclosures of cash flow
information.

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

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.

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.

The Company has reviewed the requirements of Staff Accounting Bulletin
("SAB") 101, Revenue Recognition in Financial Statements, as amended, and
believes its existing accounting policies are consistent with the guidance
provided in the SAB.

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 to the Company's lockbox. As a result of
maintaining the sweep arrangement with its lender and the timing of the
Company's request for funds, the Company periodically incurs book cash
overdrafts. Such overdrafts are included in current liabilities.

Inventories. Raw materials, work in process, purchased finished goods, and
manufactured finished goods are stated at the lower of cost or market using the
first-in, first-out method for determining costs. Standard cost, which
approximates actual cost, is used to value work in process and manufactured
finished goods. Standard cost includes direct labor, raw materials, and
manufacturing overhead.

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

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.

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 14). There were no
such losses recognized during the years ended December 31, 1999 or 2001.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 supercedes APB No. 17 and requires that: 1) goodwill and indefinite
lived intangible assets will no longer be amortized; 2) goodwill will be tested
for impairment at least annually at the reporting unit level; 3) intangible
assets deemed to have an indefinite life will be tested for impairment at least
annually; and 4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. As of December 31, 2001, the Company
has goodwill and other intangible assets of $38.2 million and has recognized
amortization expense of approximately $2.7 million during the year ended
December 31, 2001. Upon the adoption of SFAS No. 142 on January 1, 2002, the
Company recognized an estimated impairment loss of approximately $6.3 million
related to its manufacturing reporting unit. In addition, the Company ceased
amortization of its goodwill. The Company's goodwill amortization was
approximately $1.3 million during the year ended December 31, 2001. See Note 5
for the Company's expected future amortization charges after adoption of SFAS
No. 142.

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 October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which has an effective date for financial statements for fiscal years beginning
after December 15, 2001. This statement, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, as well as certain other accounting standards, establishes a
single accounting model based on framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, including segments of a business
accounted for as discontinued operations. The impact of adopting SFAS No. 144 is
not expected to be material to the Company's financial statements.

Research and Development. Research and development costs are charged to
expense as incurred and were approximately $125,200 during the year ended
December 31, 2001. 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 SFAS No. 109,
Accounting for Income Taxes, which requires recognition of deferred tax assets
and liabilities for the expected future tax conse-

F-7

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

quences 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.

Derivative Financial Instruments. Effective January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended, 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. The Company
does not hold derivative instruments or engage in hedging activities.

Financial Instruments. 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 amounts 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 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.

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.

Reclassifications. Certain reclassifications have been made to the
previous years' consolidated financial statements in order to make them
comparable to the current year's presentation. These reclassifications had no
impact on previously reported shareholders' equity, net income (loss) or cash
flows (used in) provided by operating activities.

F-8

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Recently Issued Accounting Standards. In June 2001, the FASB issued
SFAS No. 141, Business Combinations. SFAS No. 141 supercedes APB No. 16,
Business Combinations, and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and for all business combinations accounted for by the purchase method
for which the date of acquisition is after June 30, 2001, establishes specific
criteria for the recognition of intangible assets separately from goodwill, and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). The Company does
not expect the adoption of SFAS No. 141 to have a material impact on the
consolidated financial statements.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("ARO"), which has an effective date for financial
statements for fiscal years beginning after June 15, 2002. This statement
addresses the diversity in practice for recognizing asset retirement obligations
and requires that obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those obligations are incurred,
with the amount of the liability initially measured at fair value. Upon
initially recognizing a liability for an ARO, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The impact of
SFAS No. 143 is not expected to be material to the Company's consolidated
financial statements.

3. INVENTORIES

A summary of inventories as of December 31 is as follows:

4. PROPERTY AND EQUIPMENT

A summary of property and equipment as of December 31 is as follows:

As of December 31, 2000 and 2001, the Company had capitalized computer
software costs of approximately $117,000 and $34,000, respectively. Depreciation
expense associated with capitalized computer software costs was approximately
$55,000, $6,600, and $39,300 during each of the three years in the period ended
December 31, 2001, respectively.

F-9

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INTANGIBLE ASSETS

A summary of intangible assets as of December 31 is as follows:

As discussed in Note 2, the Company adopted SFAS No. 142 on January 1,
2002. The expected amortization charges related to the amortizable intangible
assets are as follows for the years ended December 31:

2002........................................................ $ 938,905
2003........................................................ 684,008
2004........................................................ 656,180
2005........................................................ 635,022
2006........................................................ 622,061
Thereafter.................................................. 2,948,107
----------
$6,484,283
==========

F-10

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT

As of December 31, long-term debt consists of the following:

As a result of the Recapitalization discussed in Note 17, the BofA Credit
Facility and the Forbearance Agreement (each as defined below) and all
subsequent amendments were terminated. Because those agreements were significant
to the capitalization of the Company in 2001, the terms of those agreements are
summarized below:

Effective March 30, 2001, the Company entered into a Forbearance Agreement
(as amended, the "Forbearance Agreement") and a First Amendment to Forbearance
Agreement with Bank of America, N.A. ("Bank of America") wherein Bank of America
agreed to forbear from exercising its rights and remedies allowed under a $50
million amended and restated credit facility (the "BofA Credit Facility") due to
certain defaults. The Company was in default at that time for violating certain
restrictive covenants and for failing to make principal payments when due. All
of the defaults were foreborne as provided for in the Forbearance Agreement, and
revised restrictive covenants were set. By September 30, 2001, the Company was
in default under the Forbearance Agreement for failing to comply with several of
the revised covenants, including minimum net worth, debt service coverage,
leverage and minimum EBITDA.

Effective October 15, 2001, the Company entered into a Second Amendment to
the Forbearance Agreement (the "Second Amendment"). The Second Amendment amended
the terms of the Forbearance Agreement as follows: (i) changed the termination
date of the Forbearance Agreement (the "Termination Date") from March 31, 2002
to January 15, 2002 (the period from March 30, 2001 through January 15, 2002
being defined as the "Forbearance Period"); (ii) required the Company to
maintain a general operating account with Bank of America and restricted the use
of funds in a calendar month to payments equal to or less than the monthly
budget submitted to Bank of America; (iii) required the Company to pay accrued
or unpaid interest on the BofA Note on the first day of each month beginning
November 1, 2001 and each month thereafter during the Forbearance Period at the
Bank of America Prime Rate plus 2.5% per annum; and (iv) added additional
reporting requirements.

F-11

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Second Amendment also amended the "Termination Events" as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Company's Chief Executive Officer (the
"CEO") and related entity to execute and deliver within ten days from the
effective date of the Second Amendment a pledge to Bank of America of all the
stock owned by the CEO and documentation to amend the current pledge agreement
between the CEO, an affiliate and the Company; (ii) the Company fails to engage
and hire within five days from the effective date of the Second Amendment
competent crisis and turn around management and a new Chief Executive Officer to
report directly to the independent members of the Company's Board of Directors;
(iii) the Company fails to provide Bank of America within five days from the
effective date of the Second Amendment a copy of resolutions confirming the
resignation of the CEO as an officer and director of the Company and that no
further salary or bonuses shall be paid to the CEO; (iv) the Company fails to
make efforts to refinance the amounts outstanding under the BofA Credit Facility
and fails to provide weekly status reports; (v) on or before December 15, 2001,
the Company fails to provide Bank of America evidence that the Company has
engaged an investment banking firm to begin marketing the sale of the assets of
the Company if the amounts outstanding under the BofA Credit Facility are not
paid off by the Termination Date; or (vi) the Company fails to execute and
deliver to Bank of America within 24 hours of Bank of America's request a
consent order consenting to the appointment of a Receiver in the event of a
Termination Event, as defined.

In addition, the Second Amendment reduced the Working Capital Sublimit
under the BofA Credit Facility to $5,000,000 and limited the Working Capital
Loan to the smaller of the Working Capital Sublimit or an amount equal to the
Borrowing Base, as defined in the BofA Credit Facility. The Second Amendment
also amended several of the financial covenants previously contained in the
Forbearance Agreement.

The Forbearance Agreement provided for the payment of Excess Cash Flow, as
defined in the BofA Credit Facility, on the ninetieth day following the last day
of each fiscal year. There was no Excess Cash Flow payment required for fiscal
year 2001. In addition, the Forbearance Agreement required 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 the Ideas for
Medicine business ("IFM") (see Note 14).

The Forbearance Agreement further required payments of $300,000 each on a
short-term bridge loan (the "BofA Bridge Loan") on May 31, 2001, August 31,
2001, and November 30, 2001. The proceeds of the BofA Bridge Loan were used to
fund a short-term bridge loan to the Company's Chairman of the Board, CEO, and
largest shareholder (the "Shareholder Bridge Loan") (see Note 11). The Company
received approximately $474,000 from the CEO as payment on the Shareholder
Bridge Loan and paid that amount to reduce the amount outstanding under the BofA
Bridge Loan. In addition, the CEO paid approximately $426,000 directly to Bank
of America, which was applied against the BofA Bridge Loan (and which the
Company applied to the Shareholder Bridge Loan).

The Forbearance Agreement also provided 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.

As permitted under the BofA Credit Facility and BofA Bridge Loan documents,
Bank of America instituted a sweep arrangement whereby funds collected in the
Company's lockbox accounts were swept periodically into a Bank of America
account and applied against the outstanding loan under the BofA Credit Facility.
The financial institutions which held such accounts were notified by Bank of
America that such lockbox arrangements had been instituted, and the Company's
right to withdraw, transfer or pay funds from the accounts had been terminated.
The Company periodically applied to receive additional loans under the Working
Capital Loans under the BofA Credit Facility to the extent such loan had been
paid down under the lockbox arrangement.

F-12

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the Forbearance Agreement, the Company issued a warrant
to Bank of America to acquire 435,157 shares of the Company's common stock for
$.05 per share. The warrant was exercisable by Bank of America during a
three-year period without regard to the status of the BofA Credit Facility or
the BofA Bridge Loan. The Company recorded the estimated fair value of the
warrant as of April 2001 of $260,000, determined using the Black-Scholes Model
(using weighted average assumptions as 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 which was being amortized over the Forbearance
Period. As discussed in Note 17, the warrant was terminated in connection with
the Recapitalization.

The Forbearance Agreement also required the Company to hire on or before
June 30, 2001 a new chief operating officer, restricted the repayment of
principal debt to junior lien holders, and to either (i) sell the assets of IFM
or (ii) obtain an agreement from the seller of the IFM business to defer all
payments under the related promissory note through the Termination Date (see
Note 14 regarding the sale of the IFM business.) The Company hired a Chief
Operating Officer in April 2001 who was terminated in June 2001, and the Company
has not hired a replacement as of December 31, 2001.

On December 15, 2001, the Company entered into a third amendment to the
Forbearance Agreement under which Bank of America consented to the increase in
payments of $8,000 per month to certain former shareholders of Stepic
Corporation ("Stepic") (see Note 12).

In January 2002, the Company entered into a fourth amendment to Forbearance
Agreement with Bank of America, pursuant to which Bank of America agreed to
extend the Forbearance Period until March 15, 2002 (the "Expiration Date") in
order for the Company to consider its strategic alternatives. The Company
subsequently effected the Recapitalization as discussed in Note 17.

As of December 31, 2000 and 2001, $2,561,661 and $3,465,874, respectively,
was outstanding under the Working Capital Loans, and $39,443,039 and
$36,518,039, respectively, was outstanding under the Acquisition Loans, each as
defined in the BofA Credit Facility. No funds were available for borrowing under
the BofA Credit Facility as of December 31, 2001, except as may be available
under the sweep arrangement described below. Also, $900,000 was outstanding
under the BofA Bridge Loan as of December 31, 2000. In addition, the Company had
outstanding standby letters of credit of $2,544,000 and $144,000 as of December
31, 2000 and 2001, 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 12).

Effective March 30, 2001, through the Termination Date of the Forbearance
Agreement, the BofA Credit Facility bore interest at the Bank of America prime
rate plus 2.5% per annum. As of December 31, 2001, the Company's interest rate
on the BofA Credit Facility was approximately 7.25%. As of December 31, 2000,
the BofA Credit Facility bore interest, at the option of the Company, at the
Index Rate or Adjusted LIBOR, as defined in the BofA Credit Facility, plus an
applicable margin ranging from 3.5% to 4.5%. The applicable margin applied was
based on the Company's leverage ratio, as defined in the BofA Credit Facility.
As of December 31, 2000, the Company's interest rate on the BofA Credit Facility
was based on the Index Rate with a resulting rate of approximately 11%. The BofA
Bridge Loan bore interest, at the option of the Company, at the Index Rate or
Adjusted LIBOR, as defined in the BofA Bridge Loan documents, plus 4.5%. As of
December 31, 2000, the Company's interest rate on the BofA Bridge Loan was based
on the Index Rate with a resulting rate of approximately 11.32%.

The BofA Credit Facility called 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
were based on a defined calculation in the agreement. In addition, the BofA
Credit Facility required an administrative fee in the amount of $30,000 to be
paid annually.

The Company's obligations under the BofA Credit Facility were
collateralized by liens on substantially all of the Company's assets, including
inventory, accounts receivable and general intangibles as well as a pledge of
F-13

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the stock of the Company's subsidiaries. The Company's obligations under the
BofA Credit Facility were also guaranteed individually by each of the Company's
subsidiaries (the "Guarantees"). The obligations of such subsidiaries under the
Guarantees were 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 was collateralized by the pledge of
2,813,943 shares of the Company's common stock beneficially owned by the CEO and
an affiliate, and by the collateral previously pledged by the Company to Bank of
America under the BofA Credit Facility.

As of December 31, 2000, the Company had a promissory note (the "Note")
outstanding in the approximate amount of $5.3 million in connection with the
October 9, 2000 purchase of IFM. On March 30, 2001, the Company sold the assets
of IFM (see Note 14). In connection with the sale, the Buyer assumed the Note,
and the Company has no further obligations under this Note.

Future maturities of long-term debt outstanding as of December 31, 2001 are
as follows:

2002........................................................ $40,585,159
2003........................................................ 395,735
2004........................................................ 413,314
2005........................................................ 432,961
2006........................................................ 112,693
-----------
$41,939,862
===========

The Company's long term debt was refinanced in a recapitalization
transaction in March 2002. See Note 17.

7. INCOME TAXES

The components of the income tax provision (benefit) consist of the
following for the years ended December 31:

F-14

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets and liabilities as of December 31, 2000 and 2001 are
comprised of the following:

The Company has net operating losses ("NOL") for federal and state income
tax reporting purposes of approximately $18,651,000. These NOLs have expiration
dates through fiscal year 2021.

A valuation allowance has been recorded against all deferred tax assets as
of December 31, 2000 and 2001 as the Company believes that it is more likely
than not that the net deferred tax assets will not be realized.

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 as indicated below:

8. PREFERRED 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.

F-15

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCK-BASED COMPENSATION

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,
as amended, 1,400,000 shares of the Company's common stock have been reserved
for issuance. In March 2002, 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 6,000,000, 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:

The weighted average fair value of options granted during the three years
in the period ended December 31, 2001 was $12.38, $3.63 and $0.54, respectively.

F-16

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about options outstanding as of
December 31, 2001.

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 options granted under the Company's Incentive Plan been
determined based on the fair value at the grant dates for awards under the
Incentive Plan consistent with the method of SFAS No. 123, the Company's net
income (loss) and net income (loss) per share would have been reduced
(increased) to the pro forma amounts indicated below:

The pro forma amounts reflected above are not representative of the effects
on reported net income (loss) in future years because, in general, the options
granted have different vesting periods and additional awards may be made each
year.

F-17

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

Subsequent to December 31, 2001, all of the Company's outstanding options
became immediately vested under the terms of the Incentive Plan as a result of
the Recapitalization discussed in Note 17. In addition, the Company granted
additional options in connection with the Recapitalization.

10. EARNINGS (LOSS) PER SHARE

A summary of the calculation of basic and diluted earnings per share
("EPS") for the years ended December 31, 1999, 2000, and 2001 is as follows:

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 $5.09 for
the year ended December 31, 1999.

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 were
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 11.

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 were
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 2011. The warrants have an exercise price of $14.50 and expire as
discussed in Note 11.

F-18

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options to purchase 774,270 shares of common stock and warrants to purchase
435,157 shares of common stock were outstanding as of December 31, 2001 but were
not included in the computation of the 2001 diluted EPS because the effect would
be anti-dilutive. The options have exercise prices ranging from $.44 to $15.50
and expire in 2011. The warrants had an exercise price of $.05 per share and
expiration date of June 19, 2004 (see Notes 6 and 17).

11. RELATED-PARTY TRANSACTIONS

As discussed in Note 6, on June 6, 2000, the Company obtained the BofA
Bridge Loan in the amount of $900,000, which was used to fund the Shareholder
Bridge Loan to the Company's CEO. The Shareholder Bridge Loan required 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 was based on the Index Rate with a resulting rate of approximately 11.32%.
The Shareholder Bridge Loan and related accrued interest were recorded as
contra-equity in the consolidated balance sheets and were due on August 30, 2000
but not paid. As a result, the Company was unable to pay the amount due under
the BofA Bridge Loan, thereby causing the Company to default under the BofA
Bridge Loan and the BofA Credit Facility (see Note 6). During 2001, the CEO paid
the Shareholder Bridge Loan obligation of $900,000 as described in Note 6.
Accrued interest of $49,330 and $109,303 related to the Shareholder Bridge Loan
was outstanding as of December 31, 2000 and 2001, respectively and recorded as
contra-equity.

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
$141,772 and $168,800 as of December 31, 2000 and 2001, respectively. The notes
require annual payments of interest at 8% beginning on September 28, 1997 and
were amended in September 2001 to extend the maturity date from 2000 to December
31, 2002. The Company recognized interest income of $27,028 during each of the
three years in the period ending December 31, 2001 related to the notes. The
notes and related accrued interest are recorded as contra-equity in the
consolidated balance sheets. Subsequent to December 31, 2001, approximately
$342,000 was paid to the Company by the CEO and the President in full settlement
of their outstanding balances, which included accrued interest.

The CEO and the President of the Company each owned a 50% interest in the
capital stock of HP Aviation, Inc., an entity that provided the use of an
airplane to the Company. During each of the three years in the period ended
December 31, 2001, the Company paid HP Aviation, Inc. approximately $104,100,
$104,350, and $58,500 respectively, for use of the airplane. The agreement was
terminated in 2001. In addition, the CEO and the President of the Company each
own a 50% interest in real estate property that is used by the Company for
various management and sales related functions. During each of the three years
in the period ended December 31, 2001, the Company paid these officers
approximately $18,850, $12,200, and $6,900 respectively, for use of the real
estate property.

The Company had an arrangement with the CEO regarding the Company's use of
a boat that was previously owned by the CEO (the "Marine Reimbursement
Arrangement"). Under the Marine Reimbursement Arrangement, the Company and its
employees, agents and guests used the boat for purposes of management meetings,
sales meetings, and entertainment of guests. During the years ended 2000 and
2001, the Company reimbursed the CEO approximately $13,800 and $8,600,
respectively, for the use of the boat. There were no amounts reimbursed during
the year ended December 31, 1999. The Marine Reimbursement Arrangement was
terminated in 2001.

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 the former majority shareholders
F-19

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Company and Cardiac Medical, Inc., an entity related due to common
ownership by certain officers and shareholders.

The Company has entered into a Consulting and Services Agreement with
Healthcare Alliance (the "Alliance Agreement"), an affiliate of one of the
Company's directors. The Alliance Agreement provided 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 resulting 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 vested and became exercisable by
Healthcare Alliance only if it procured group purchasing agreements with certain
Group Purchasing Organizations ("GPOs"), and the Company achieved certain levels
of incremental sales revenue under its agreement with the particular GPO (at 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, 2001. The Company also
reimbursed Healthcare Alliance for expenses incurred of approximately $9,900 and
$1,100 during the years ended December 31, 2000 and 2001, 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, 2000 and 2001. In addition, there were no grants of
Company stock options during each of the three years in the period ended
December 31, 2001 related to provision (iii) of the Alliance Agreement.

In addition, the Company granted an option to Healthcare Alliance for the
purchase of 45,000 shares of common stock of the Company. Such options vested
and became exercisable by Healthcare Alliance only if the Company achieved
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 was the closing stock price of the Company's
common stock on the day that the options vest. The options were exercisable for
a period of five years upon vesting. None of the 45,000 options had vested as of
December 31, 2001 and the Alliance Agreement expired on December 31, 2001.

In connection with the Premier Purchasing Partners, L.P. ("Premier")
Agreement, the Company entered into a related warrant agreement with Premier
(the "Warrant Agreement") pursuant to which the Company granted Premier a
warrant to acquire up to 500,000 shares of the Company's common stock for $14.50
per share. The Warrant Agreement provided for vesting 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
with automatic acceleration in any given year in the event that both the Minimum
Annual Sales Targets and Cumulative Sales Targets with respect to such year were
achieved. During the life of the Warrant Agreement, there was no vesting under
the warrant. In September 2001, Premier terminated its agreement with the
Company. As a result, the Warrant Agreement was terminated effective with the
termination of the Premier Agreement. During each of the years in the period
ended December 31, 2001, the Company paid administrative fees to Premier of
approximately $75,000, $89,000 and $98,000, respectively. One of the Company's
board members served as president of Premier until December 1999.

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, 2001, which were expensed in the amounts of approximately $77,300,
$92,000, and $484,000, respectively. As of December 31, 2001, amounts payable to
this affiliate totaled approximately $272,000 related to these consulting
services.

F-20

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. 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 $217,000, $219,000, and $399,000 during each
of the three years in the period ended December 31, 2001, respectively.
Approximate minimum future rental payments under noncancelable operating leases
having remaining terms in excess of one year are as follows:

2002........................................................ $ 323,000
2003........................................................ 279,000
2004........................................................ 191,000
2005........................................................ 190,000
2006........................................................ 190,000
Thereafter.................................................. 622,000
----------
$1,795,000
==========

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, 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. In 1999, the Company breached the
Manufacturing Agreement.

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's breaches were resolved. In consideration for the October 2000
acquisition, the Company agreed to pay IFM approximately $6 million (see Note
6).

On March 30, 2001, the Company and Vascutech Acquisition, LLC ("Vascutech")
entered into an asset purchase agreement (the "IFM Agreement") whereby the
Company sold to Vascutech the IFM business and related assets. Pursuant to the
IFM Agreement, the second installment of the purchase price in the amount of
approximately $220,000 (the "Second Installment") was due from Vascutech to the
Company on September 30, 2001. On September 7, 2001, LeMaitre Vascular, Inc.
(formerly known as Vascutech, Inc.) ("LeMaitre") sent a letter to the Company
seeking indemnification under the IFM Agreement in an amount equal to $800,000
for the Company's alleged breach of its representations and warranties set forth
in the IFM Agreement. The Company responded to LeMaitre by letter on September
19, 2001, notifying LeMaitre of the Company's position that it had not breached
the IFM Agreement and indicating that the Company expected receipt of the Second
Installment on September 30, 2001. On September 24, 2001, the Company filed a
complaint for Declaratory Judgment and Breach of Contract against LeMaitre and
Vascutech in the Superior Court of Fulton County in the State of Georgia. The
Company has requested (i) judgment in the amount of approximately $220,000, the
amount owed to the Company under the IFM Agreement; and (ii) that the

F-21

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Court declare that the Company has not breached the representations and
warranties in the IFM Agreement and that its obligations under the IFM Agreement
have been fully satisfied. On November 8, 2001, LeMaitre filed its Answer to the
Complaint, denying both the breach of contract claim and the grounds for the
Company's request for a declaratory judgment. LeMaitre also filed a counterclaim
against the Company for breach of contract, fraud and deceit, and punitive
damages. LeMaitre seeks in excess of $800,000 in actual damages.

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 the
license agreements totaled approximately $106,000, $91,000, and $48,000 during
the years ended December 31, 1999, 2000, and 2001, respectively. These license
agreements were transferred to Vascutech pursuant to the IFM Agreement.

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 $448,000, $382,000, and $234,000 during each of the three years in
the period ended December 31, 2001, 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 plastic 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
through December 2002. During 2001, the Company took over the manufacturing
process for both the titanium port models and the plastic port models. Sales of
the plastic port models manufactured by the Company will commence in 2002. In
2001, under the terms of the agreement, the Company purchased the Manufacturer's
inventory of related parts and finished ports at the Manufacturer's cost. The
Company made no royalty payments to the Manufacturer during 2001.

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 provided for Possis to supply, and the
Company to purchase, certain minimum levels of vascular grafts for an initial
term of three years. In January 2001, the Company was sued by Possis in
connection with non-payment of invoices and breach of the minimum commitments
under the Distribution Agreement. In June 2001, the distribution agreement with
Possis was terminated by agreement of the parties in connection with settling
the litigation with Possis. The consolidated balance sheet as of December 31,
2000 included accruals for expected product returns related to Possis and all
related inventory.

Effective November 15, 2001, the exclusive distributor agreement between
Stepic and Pall Medical Companies ("Pall") was terminated. As part of the
termination, Stepic was permitted to sell the Pall critical care products
through November 14, 2001 and the Pall blood products through January 31, 2002.
In addition,
F-22

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stepic has the right to return for credit all remaining Pall inventory within 30
days of the last permitted sale date.

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 $471,000
and $649,000 as of December 31, 2000 and 2001, respectively, 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, as
defined, occur.

Effective October 15, 1998, the Company completed the purchase of the
outstanding stock of 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. All additional payments made have been
accounted for as additional costs of acquired assets and amortized over the
remaining life of the assets.

During 1999, 2000, and 2001, the Company recorded additional purchase price
payable to the previous Stepic shareholders of approximately $2.1 million, $1.2
million, and $667,000, respectively, representing the Company's additional
earned contingent payments for the anniversary years ending October 31, 1999,
2000 and 2001, respectively, as required by the purchase agreement (the
"Purchase Agreement"). The Company recorded approximately $439,000 related to
the 2001 contingent payment during the year ended December 31, 2000, which was
included in accrued expenses as of December 31, 2000.

The 2000 contingent payment was due December 15, 2000 and $2.4 million,
which was previously accrued, was paid from proceeds from the BofA Credit
Facility. On December 15, 2000, the Company amended the Purchase Agreement so
that the remaining portion of the 2000 contingent payment of approximately $1.2
million could be paid, together with interest at 11%, through April 2001. The
Company failed to make all required payments to the Stepic shareholders under
the December 15, 2000 amendment and on February 14, 2001, two of the three
previous Stepic shareholders (the "Plaintiffs") 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 agreed to voluntarily
dismiss their pending lawsuit against the Company, and the Company agreed to pay
the 2000 contingent payment at a rate of $9,400 per month beginning on April 15,
2001, until final payment of the remaining outstanding balance on February 10,
2002. In addition, under the terms of the Settlement Agreement, the Company
agreed to 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.

The 2001 contingent payment was due December 15, 2001, and $2.4 million,
which was previously accrued, was paid from proceeds from the BofA Credit
Facility. On March 14, 2002, the Company entered into an agreement with the
Plaintiffs, which replaces the Settlement Agreement, pursuant to which the
Company paid $100,000 to the Plaintiffs on March 15, 2002 and agreed to pay
monthly payments of principal and interest of approximately $36,000 through
March 2006.

F-23

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following represent noncash activities for the years ended December 31:

14. 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 "IFM 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 IFM Closing Date (the "Second Installment"). Assets sold
included inventory of $3.3 million, property and equipment of $2.4 million, and
intangible assets of $1.6 million. The asset purchase agreement provided for a
purchase price adjustment related to certain inventory values within five
business days after the IFM Closing Date. Based on the values of the inventory
following the IFM Closing Date, the Company recorded an additional purchase
price receivable of approximately $70,000 which is to be paid as part of the
Second Installment. In addition to the purchase of certain assets, the buyer
assumed the Company's sublease of the IFM facility and the related employees.

The Second Installment in the amount of approximately $220,000 was due from
the purchaser on September 30, 2001. As of December 31, 2001, the Second
Installment has not been paid, and the purchaser has sought indemnification
under the asset purchase agreement for the Company's alleged breach of its
representations and warranties set forth in the agreement. On September 24,
2001, the Company filed a Complaint for Declaratory Judgement and Breach of
Contract against the purchaser in the Superior Court of Fulton County in the
State of Georgia. As of December 31, 2001, the Company has fully reserved the
amount due from the purchaser of approximately $220,000.

15. 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.

F-24

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 (which include intersegment receivables) of the
Company's segments as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001.

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, 2001 is as follows:

A reconciliation of total segment assets to total consolidated assets of
the Company as of December 31, 2000 and 2001 is as follows:

F-25

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, 2001 is as follows:

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%, 6%, and 8% of total sales during each of the three
years in the period ended December 31, 2001, respectively. As of December 31,
2000 and 2001, 10%, and 15%, respectively, of the accounts receivable balance
consisted of amounts due from the Company's three largest customers.

16. 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, 2001.

17. SUBSEQUENT EVENT

The Company incurred a loss of approximately $5 million in 2001, and as
discussed in Note 6, the Company was in violation of the Forbearance Agreement
with Bank of America as of December 31, 2001 and continuing into 2002. As more
fully described below, the Company has completed a recapitalization transaction
that extinguished all of the Company's outstanding debt and warrants held by
Bank of America, entered into new financing facilities with new lenders and
substantially reduced the Company's total outstanding debt. The Company's senior
loan agreement contains certain requirements which are either determined at the
discretion of the lender or involve meeting financial covenants. The Company is
unable to objectively determine or measure whether it can comply with those
requirements. While there can be no assurance, it is the Company's expectation
to comply with these requirements and to have the financing facilities available
for its working capital needs throughout 2002. If the Company is unable to
comply with the requirements of the new financing facilities during 2002, the
Company may not be able to borrow under the senior loan agreement, and all
amounts may become immediately due.

On March 1, 2002, the Company entered into certain agreements with ComVest
Venture Partners, L.P. ("ComVest"), an affiliate of Commonwealth Associates LP
("Commonwealth") to recapitalize the Company (the "Recapitalization"). The
Company successfully completed the Recapitalization and the Forbearance
Agreement, as amended, with Bank of America was terminated as of March 15, 2002.

The details of the Recapitalization follow:

On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest, LaSalle Business Credit, Inc. ("LaSalle"), and
Medtronic Inc. ("Medtronic") to recapitalize the Company by extinguishing all of
the Company's senior debt and warrants held by Bank of America and substantially
reducing the Company's total outstanding debt. Pursuant to the Recapitalization,
the Company issued Senior

F-26

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Subordinated Convertible Notes ("Convertible Notes") in the amount of $15
million to ComVest, Medtronic and other investors, assumed a $2 million Junior
Subordinated Promissory Note payable to Bank of America (the "Junior Note"), and
entered into a new revolving and term loan facility ("the LaSalle Credit
Facility") for up to $22 million, of which approximately $8.8 million was
outstanding as of March 31, 2002. The following is a summary of key provisions
of the Recapitalization:

On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
America's interest in the BofA Credit Facility. The purchase price for the
assignment was $22 million in cash, plus the $2 million Junior Note. The Company
subsequently assumed the Junior Note pursuant to the Recapitalization, and
ComVest has been released from obligations under the Junior Note. Upon the
closing of the assignment on March 15, 2002, ComVest acquired all of Bank of
America's interest in the note outstanding under the BofA Credit Facility (the
"BofA Note"), the warrants issued to Bank of America pursuant to the BofA Credit
Facility were surrendered and cancelled, and the Forbearance Agreement was
terminated. The estimated fair value of the warrants on March 15, 2002 of
approximately $345,000 will be recorded in additional paid-in-capital, and the
existing value of the warrant of $260,000 will be extinguished.

On March 1, 2002, the Company entered into a Note Purchase Agreement with
ComVest and certain Additional Note Purchasers, as defined. Under the Note
Purchase Agreement, the Company agreed to issue $15 million of Convertible
Notes. Interest on the Convertible Notes is payable quarterly beginning in June
2002 and accrues at a rate of 6% per year for the first six months and 8% per
year thereafter until the notes are paid in full and mature on March 16, 2004.
The Company issued the Convertible Notes as follows: $4.4 million to ComVest, $4
million to Medtronic and $6.6 million to the Additional Note Purchasers.

The holders of the Convertible Notes have the right to convert in the
aggregate a total of $270,000 of the Convertible Notes into shares of the
Company's common stock at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon repayment of all or a
portion of the amounts due, as described below. Under the conversion terms, if
the principal amount of the Convertible Notes, together with all interest due is
paid in full on or before 30 days following March 16, 2002 (the "Closing Date"),
then the maximum aggregate number of shares of common stock that all the
Convertible Notes may be converted into is 22,500,000. If the principal amount
of all the Convertible Notes and all interest due is paid on or before March 16,
2004, then the maximum aggregate number of shares of the Company's common stock
that the Convertible Notes can be converted into is 19,500,000. The terms of the
applicable conversion periods and conversion amounts are as follows:

- Until April 16, 2002, ComVest has the right to convert 1.25% of the
Outstanding Balance (defined as principal plus accrued and unpaid
interest under the ComVest Convertible Note) held under its $4.4 million
Convertible Note plus 0.6% of the amount of principal repaid under the
Additional Notes;

- Until March 16, 2003, ComVest has the right to convert an additional
0.25% of the Outstanding Balance;

- Until March 16, 2004, Medtronic has the right to convert 1.5% of its $4
million Convertible Note;

- From March 16, 2003 through March 16, 2004, Medtronic has the right to
convert an additional 0.3% of $4 million if ComVest's Convertible Note
and the notes held by the Additional Note Purchasers have not been
repaid;

- Until April 16, 2002, the Additional Note Purchasers have the right to
convert 1.25% of the Additional Notes Outstanding Balance (defined as
principal plus accrued but unpaid interest under the Additional Notes)
held under their $6.6 million Convertible Note plus 0.6% of the amount of
principal repaid under ComVest's Convertible Note on or before April 16,
2002; and

F-27

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- Until March 16, 2003, the Additional Note Purchasers have the right to
convert an additional 0.25% of the Additional Notes Outstanding Balance.

The Company will record the value of the beneficial conversion feature at
the amount of proceeds allocated to the convertible instrument of $270,000 as a
credit to equity and as a debt discount and will amortize the debt discount over
the period to the Convertible Notes' earliest conversion date using the
effective interest method.

The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. The
Note Purchase Agreement also contains certain affirmative and negative
covenants, including, but not limited to, restrictions on indebtedness and
liens, business combinations, sale or discount of receivables, conduct of the
Company's business, transactions with affiliates, ability to enter into
contracts outside the ordinary course of business, and ability to pay dividends.
The Events of Default include, but are not limited to, failure to pay an
obligation when due, breach of any covenant that remains uncured for 15 days,
bankruptcy, change of control, and failure to obtain shareholder approval of the
Recapitalization within 105 days of the closing date of March 16, 2002. The
shareholder approvals that the Company agreed to obtain and will submit to the
shareholders at the 2002 Annual Meeting include issuances of common stock
pursuant to the Recapitalization, amendments to the Company's articles of
incorporation to increase the number of authorized shares of common stock from
50 million to 100 million and to declassify the staggered board, amendments of
the Bylaws to eliminate the fair price and business combinations provisions, and
the grant of options to the CEO and the Company's President (as described
below).

On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of the
BofA Note from $40.3 million to $22 million. As a result, the Company will
record a net extraordinary gain on the early extinguishment of debt of
approximately $11 million, net of tax of approximately $4 million, during the
first quarter of 2002. In exchange for funding a portion of the $22 million cash
purchase price paid to BofA, ComVest assigned $4 million in principal amount of
the BofA Note to Medtronic and $6.6 million in principal amount of the BofA Note
to the Additional Note Purchasers while retaining $11.4 million in principal
amount of the BofA Note itself. After such assignments, the Company issued the
Convertible Notes under the Note Purchase Agreement in the aggregate principal
amount of $15 million in exchange for the surrender of $15 million in principal
amount of the BofA Note held by ComVest, Medtronic and the Additional Note
Purchasers. The remaining $7 million in principal amount of the BofA Note was
repaid with the proceeds of a bridge loan from ComVest to the Company made on
March 15, 2002 (the "Bridge Loan").

On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to a loan and security agreement (the "Loan Agreement") with Standard
Federal Bank National Association ("SFB"), acting by and through LaSalle, as
SFB's agent (collectively the "Lender"). Under the Loan Agreement, the Lender
has provided a $20 million senior revolving loan facility (the "Revolving Loan")
and a $2 million term loan facility ("Term Loan"). The Company used the proceeds
to repay the Bridge Loan and expenses related to the Recapitalization and will
use the remaining proceeds for working capital and general corporate purposes.
Both loan facilities will bear interest at the LaSalle Bank Prime Rate plus 2%,
subject to an additional 2% that would be added to the interest rate upon the
occurrence of an Event of Default (as discussed below).

As collateral, the Company granted a security interest in all of the
Company's present and future assets, whether now or hereafter owned, existing,
acquired or arising and wherever now or hereafter located, including, but not
limited to: all accounts receivable; all chattel paper, instruments, documents
and general intangibles including patents, patent applications, trademarks,
trademark applications, trade secrets, trade names, goodwill, copyrights,
copyright applications, registrations, licenses, software, franchises, customer
lists, tax refund claims, claims against carriers and shippers, guaranty claims,
contract rights, payment intangibles, security interests, security deposits, and
indemnification rights; all inventory; all goods including equipment,
F-28

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

vehicles, and fixtures; all investment property; all deposit accounts, bank
accounts, deposits and cash; all letter-of-credit rights; certain commercial
tort claims; all property of the Company in control of the Lender or any
affiliate of the Lender; and all additions, substitutions, replacements,
products, and proceeds of the aforementioned property including proceeds from
insurance policies and all books and records relating to the Company's business.

The Loan Agreement contains affirmative and negative covenants. The
affirmative covenants require the Company to, among other things, maintain
accurate and complete records, notify the Lender of major business changes,
comply with relevant laws, maintain proper permits, conduct relevant inspections
and audits, maintain adequate insurance with the Lender named as loss payee,
keep collateral in good condition, use proceeds only for business purposes, pay
required taxes, maintain all intellectual property, maintain a checking account
with LaSalle, hire a Chief Operating Officer with experience in the medical
products industry within 90 days of the date of the Loan Agreement, grant the
Lender the right to conduct appraisals of the collateral on a bi-annual basis,
and deliver a survey of the property located at the Company's offices on
Northside Parkway in Atlanta within 60 days of the date of the Loan Agreement.
The negative covenants restrict the Company's ability to, among other things,
make any guarantees, incur additional indebtedness, grant liens on its assets,
enter into business combinations outside the ordinary course of business, pay
dividends, make certain investments or loans, allow its equipment to become a
fixture to real estate or an accession to personal property, alter its lines of
business, settle accounts, or make other fundamental corporate changes.

The Loan Agreement also contains financial maintenance covenants,
including, but not limited to, the following:

- maintaining Minimum Availability at all times of at least $4 million
under the Minimum Availability Test. "Minimum Availability" is defined as
(a) the lesser of: (i) the Revolving Loan Limit (which is up to 85% of
the face amount of the Company's eligible accounts receivable; plus the
lesser of (x) up to 55% of the lower of cost or market value of the
Company's eligible inventory or up to 85% of the net orderly liquidation
value of eligible inventory, whichever is less, or (y) $11 million; plus
such reserves as the Lender may establish) and (ii) the Maximum Revolving
Loan Limit of $20 million minus (b) the sum of (i) the amount of all then
outstanding and unpaid Liabilities (to Lender, as defined) plus (ii) the
aggregate amount of all then outstanding and unpaid trade payables and
other obligations more than 60 days past due; plus (iii) the amount of
checks issued by the Company which are more than 60 days past due but not
yet sent and the book overdraft of the Company plus (iv) $4,000,000 owed
by the Company to Arrow International;

- maintaining Tangible Net Worth of $7,698,000 for the quarter ending
December 31, 2002, $8,522,000 for the quarter ending March 31, 2003,
$9,475,000 for the quarter ending June 30, 2003, $10,544,000 for the
quarter ending September 30, 2003, $11,728,000 for the quarter ending
December 31, 2003 and each quarter thereafter (Tangible Net Worth is
defined as shareholders' equity including retained earnings less the book
value of all intangible assets, prepaid and non-cash items arising from
the transactions contemplated by the Loan Agreement and goodwill
impairment charges recorded as a result of FASB No. 142 as determined
solely by Lender plus the amount of any LIFO reserve plus the amount of
any debt subordinated to the Lender);

- maintaining fixed charge coverage (ratio of EBITDA to fixed charges) of
1.10 to 1.0 from April 1, 2002 through December 31, 2002, 1.20 to 1.0
from April 1, 2002 through March 30, 2003, 1.40 to 1.0 for the quarter
ending June 30, 2003 and for the immediately preceding four fiscal
quarters, and 1.50 to 1.0 for the quarter ending September 30, 2003 and
for the immediately preceding four fiscal quarters and each fiscal
quarter thereafter;

F-29

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- maintain EBITDA, based on the immediately preceding four fiscal quarters,
of $4,000,000 on December 31, 2002, $5,437,000 on March 31, 2003,
$6,605,000 on June 30, 2003, $7,374,000 on September 30, 2003 and
$7,482,000 on December 31, 2003 and each fiscal quarter thereafter; and

- limit capital expenditures to no more than $500,000 during any fiscal
year.

The Loan Agreement also specifies certain Events of Default, including, but
not limited to, failure to pay obligations when due, failure to direct its
account debtors to make payments to an established lockbox, failure to make
timely financial reports to the Lender, the breach by the Company or any
guarantor of any obligations with any other Person (as defined in the Loan
Agreement) if such breach might have a material adverse effect on the Company or
such guarantor, breach of representations, warranties or covenants, loss of
collateral in excess of $50,000, bankruptcy, appointment of a receiver,
judgments in excess of $25,000, any attempt to levy fees or attach the
collateral, defaults or revocations of any guarantees, institution of criminal
proceedings against the Company or any guarantor, occurrence of a change in
control, the occurrence of a material adverse change or a default or an event of
default under certain subordinated debt documents. Upon the occurrence of any
Event of Default, the Lender may accelerate the Company's obligations under the
Loan Agreement.

The Company must repay the Revolving Loan on or before March 17, 2005, the
Termination Date, unless the Loan Agreement is renewed and the repayment period
is extended through a new Termination Date. The Company must repay the Term Loan
in 36 equal monthly installments of $55,556. The Loan Agreement will
automatically renew for one-year terms unless the Lender demands repayment prior
to the Termination Date as a result of an Event of Default, the Company gives
90-days notice of its intent to terminate and pays all amounts due in full, or
the Lender elects to terminate on or after February 1, 2004 as a result of a
Termination Event. A Termination Event is defined as the failure of Medtronic,
ComVest or any Additional Note Purchaser to extend the maturity date of the
Convertible Notes at least thirty days past the date of the original term or any
applicable renewal term.

Pursuant to the LaSalle Credit Facility, the Company also issued to LaSalle
and SFB warrants to purchase up to an aggregate of 748,619 shares of common
stock at an exercise price of $.01 per share. The Company will record the
estimated fair value of the warrant as of March 18, 2002 of approximately
$695,000, determined using the Black-Scholes model (using weighted average
assumptions as follows: dividend yield of 0%, expected life of 3 years, expected
volatility of 112.2% and a risk free interest rate of 2.43%) as a reduction of
the gain on early extinguishment of debt.

The Junior Note in the amount of $2 million bears interest at a rate of 6%
per annum, payable monthly beginning April 2002, and matures on March 15, 2007.
Beginning on May 1, 2003, a principal payment on the Junior Note of $22,500 is
payable on the first day of each month until maturity of the Junior Note.

As a condition to closing, the Company also agreed to enter into a
Securityholders Agreement dated March 16, 2002 with ComVest, Medtronic, LaSalle,
the CEO and the Company's President (together ComVest, Medtronic, LaSalle, the
CEO and the Company's President are the "Investors") under which the Company
granted certain registration rights, rights of first refusal and corporate
governance rights to the Investors. The registration rights require the Company
to file a shelf registration statement covering the resale of certain shares of
common stock issuable pursuant to the Recapitalization and to include, at the
Investors' option, certain of the Investors' shares of common stock in any
registration statement undertaken by the Company, at the Company's expense.
Pursuant to the Securityholders Agreement, ComVest and Medtronic have been
granted (i) a right of first refusal to purchase all or part of their pro rata
share of new securities which the Company may propose to sell or issue, (ii) the
right of first refusal to participate in any sale of the CEO's and/or the
Company's President's shares of common stock of the Company to third parties
upon the same terms and conditions, (iii) the co-sale right of first refusal to
participate in sales of shares of the Company's common stock by the CEO and/or
the Company's President and (iv) the "bring-along right" to require the CEO and
the Company's President to sell the same percentage of shares of common stock as
the

F-30

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

holders of the rights propose to sell in the event that the rights holders
propose to sell 51% or more of their common stock. The corporate governance
rights include, but are not limited to, the following: (i) granting ComVest the
right to designate one ComVest director and two additional independent
directors, (ii) requiring that certain actions of the Board of Directors include
the affirmative vote of the ComVest director, (iii) requiring the Company to
establish and maintain an Executive Committee consisting of the ComVest director
as Chairman, one of the independent directors designated by ComVest, and the
CEO, and (iv) requiring that the Executive Committee approve certain actions.
Failure to comply with the Securityholders Agreement is considered an Event of
Default under the Note Purchase Agreement.

On March 15, 2002, the Company entered into a Co-Promotion Agreement with
Medtronic under which the Company will promote and provide technical advice for
Medtronic's implantable drug delivery systems which are used for the treatment
of hepatic arterial infusion and malignant pain. After basic sales training,
sales representatives of the Company and of its distributors will promote the
sale of such systems, identify appropriate patients for such systems, and after
additional training provide assistance in the implantation and refill procedure
for such systems, for which identification and assistance the Company will be
compensated by Medtronic. If the Company breaches or fails to comply with its
obligations under the Co-Promotion Agreement (after giving effect to any
applicable cure periods), then Medtronic or 51% of the holders of the aggregate
principal amount of the Convertible Notes may accelerate the due date for
payment of the Convertible Notes.

To effect the Recapitalization, the Company also entered into certain
ancillary agreements including the following: (i) a voting agreement under which
the CEO and the Company's President have agreed to vote their shares in favor of
all proposals relating to the Recapitalization; (ii) a new employment agreement
and option agreements with the CEO that grants him options to purchase an
aggregate of 3,500,000 shares of common stock (The new employment agreement
replaced the CEO's previous employment agreement and reduced the previous term
of employment and the previous severance compensation and benefits from
approximately four years to twelve months.); (iii) a new employment agreement
and an option agreement with the Company's President that grants him options to
purchase 1,000,000 shares of common stock (The new employment agreement replaced
the President's previous employment agreement and reduced the previous term of
employment from approximately four years to six months and reduced the previous
severance compensation and benefits from approximately four years to twelve
months.); (iv) an advisory agreement with an affiliate of ComVest under which
the affiliate received 2,645,398 shares of common stock and a cash fee of
$750,000; (v) a note with ComVest under which ComVest received 75,000 shares in
exchange for advancing certain transaction expenses associated with the
Recapitalization; (vi) an expense guaranty with the CEO under which he received
150,000 shares of common stock in exchange for agreeing to reimburse ComVest for
certain of its transaction expenses in the event that the Recapitalization were
not consummated; and (vii) an advance note with the CEO under which he received
75,000 shares of common stock in exchange for advancing to the Company certain
transaction expenses associated with the Recapitalization. The Company will
recognize compensation expense of approximately $1,400,000 during the first
quarter of 2002 related to 2,500,000 of the options granted to the CEO and all
of the options granted to the Company's President. The remaining 1,000,000
options that were granted to the CEO are performance-based, and the Company will
measure and recognize compensation as the options are earned. The Company will
record the estimated fair value of the shares of the common stock issued to
ComVest of approximately $2,500,000, as well as the cash fee of $750,000, as a
reduction of its extraordinary gain on early extinguishment of debt. The Company
will record the value of the shares of the common stock issued to the CEO of
approximately $152,000 as debt cost and amortize over the terms of the related
agreements.

The auditor's opinion accompanying these financial statements states that
there is substantial doubt as to the Company's ability to continue as a going
concern. Delivery of this opinion would have triggered an Event of Default under
the Loan Agreement and the Note Purchase Agreement as originally executed
because both agreements require audited financial statements to be delivered
within 90 days of December 31, 2001 with an

F-31

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

auditor's opinion that does not contain such going concern language. However,
the default provisions relating to the audit opinion in the Loan Agreement and
the Note Purchase Agreement have been waived.

As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments were
terminated.

F-32

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders
Horizon Medical Products, Inc. and Subsidiaries

Our audits of the consolidated financial statements referred to in our
report dated February 26, 2002, except for Notes 6, 9, 12 and 17, as to which
the date is April 15, 2002, 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(a)(2) 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
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 15, 2002

F-33

SCHEDULE II

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

- ---------------
(1) Other consists of reclassifications made to the previous year's consolidated
financial statements in order to make them comparable to the current
presentation.

F-34