Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 001-15459

HORIZON MEDICAL PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 706-846-3126

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

Yes [X]         No [   ]

     The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, as of August 14, 2002 was 16,311,676.

Table of Contents

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended June 30, 2002

INDEX

-2-

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).

-3-

Table of Contents

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

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

-4-

Table of Contents

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

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

-5-

Table of Contents

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

     Supplemental disclosures of non-cash investing and financing activities:

		In connection with the March 2002 recapitalization transaction described in Note 4, the Company issued convertible notes that had a fair value of $33,343,685. The Company recorded these notes at their face value of $15,000,000, and the premium of $18,343,685 was recorded as an increase to additional paid-in-capital.

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

-6-

Table of Contents

HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

	The condensed consolidated balance sheet of Horizon Medical Products, Inc. and Subsidiaries (the “Company”) at December 31, 2001 has been derived from the Company’s audited consolidated financial statements at such date. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and instructions to Form 10-Q. The interim condensed consolidated financial statements at June 30, 2002, and for the three and six months ended June 30, 2002 and 2001 are unaudited; however, these statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature unless noted otherwise. The results of operations for the interim periods are not necessarily indicative of the results of the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “Form 10-K”), including, without limitation, the summary of accounting policies and notes and consolidated financial statements included therein.
	The Company has adopted 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 adoption of SFAS No. 141 did not have a material impact on the interim condensed 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. Upon the adoption of SFAS No. 142, the Company recognized an impairment loss of approximately $16.1 million related to its distribution reporting unit. In addition, the Company ceased amortization of its goodwill (See Note 10 to the interim condensed consolidated financial statements for further information and required disclosures).
	Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 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 sale, including segments of a business accounted for as discontinued operations. The impact of adopting SFAS No. 144 was not material to the Company’s interim condensed consolidated financial statements.
	In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Recision of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 (“Opinion No. 30”). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual and infrequent that meet criteria for classification as an extraordinary item. SFAS No. 145 is effective for the Company beginning January 1, 2003, but the Company may adopt the provisions of SFAS No. 145 prior to this date. The impact of SFAS No. 145 is not expected to be material to the Company’s interim condensed consolidated financial statements.
	In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including

-7-

Table of Contents

Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for the Company beginning January 1, 2003, but the Company may adopt the provisions of SFAS No. 146 prior to this date. The impact of SFAS No. 146 is not expected to be material to the Company’s interim condensed consolidated financial statements.

2. Inventories

     A summary of inventories is as follows:

3. Earnings Per Share

     A summary of the calculation of basic and diluted earnings per share (“EPS”) is as follows:

Options to purchase 7,153,570 shares of common stock and warrants to purchase 748,619 shares of common stock were outstanding as of June 30, 2002, but are not included in the computation of the June 30, 2002 diluted EPS because the effect would be anti-dilutive. The options have exercise prices ranging from $.44 to $15.50 and expire between 2008 and 2012. The warrants have an exercise price of $.01 per share and expire in 2012. Additionally, the grant of 1,250,000 of these options in the aggregate is expressly conditioned upon the affirmative vote of the Company’s shareholders, at its 2002 Annual Meeting of Shareholders, approving an increase in the number of shares authorized for issuance under the Company’s 1998 Stock Incentive Plan.

-8-

Table of Contents

	As discussed in Note 4 to these interim condensed consolidated financial statements contained elsewhere in this Form 10-Q, the Company has issued notes, a portion of which is convertible into a maximum of 27,000,000 shares of common stock. These shares are also excluded from the computation of the June 30, 2002 diluted EPS because the effect would be anti-dilutive.

Options to purchase 620,550 shares of common stock and warrants to purchase 735,157 shares of common stock were outstanding as of June 30, 2001, but are not included in the computation of the June 30, 2001 diluted EPS because the effect would be anti-dilutive. The options have exercise prices ranging from $.44 to $15.50 and expire between 2008 and 2011. Warrants to purchase 300,000 shares of common stock have an exercise price of $14.50 and expired in September 2001, as described in Note 11 to the Company’s consolidated financial statements included in the Form 10-K. Warrants to purchase 435,157 shares of common stock have an exercise price of $.05 per share and were terminated in March 2002 as a result of the Recapitalization as described in Note 4.

4. Long-Term Debt

	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 completed the Recapitalization on March 16, 2002 and the Forbearance Agreement between the Company and Bank of America dated March 15, 2001, as subsequently amended (the “Forbearance Agreement”), was terminated as of March 15, 2002. The Forbearance Agreement is discussed below.
	The details of the Recapitalization follow:
	On March 19, 2002, the Company 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 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 warrants, which had previously been recorded in additional paid-in-capital at their estimated fair value at issuance of $260,000, were extinguished at their estimated fair value on the date of extinguishment of $345,000. As a result, $345,000 was included as a component of the extraordinary loss on early extinguishment of debt.
	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. If this $270,000 is converted, the Company will still be obligated to repay, in the aggregate, $14,730,000 to the holders of the Convertible Notes. The 27,000,000 shares also includes up to 3,300,000 shares which may be issued upon conversion of the Bridge Note (as described below). Under the conversion terms, if the principal amount of the Additional Notes, together with all interest due were paid in full on or before April 15, 2002, then the maximum aggregate number of shares of common stock that all the Convertible Notes may be converted into is 22,500,000. The Company did not repay any principal under the Convertible Notes by this date. If the principal amount of all the Convertible Notes and all interest due are paid on or before March 16, 2004, then the maximum aggregate number of shares of the

-9-

Table of Contents

	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 of the Convertible Notes (excluding the Bridge Note described below) are as follows:

	Pursuant to the rules and regulations of the American Stock Exchange, the Company may issue up to 19.9% of its common stock, including upon conversion of the Convertible Notes, without shareholder approval. The Company is seeking shareholder approval at its 2002 annual meeting of shareholders for the issuance of up to 27,000,000 shares of common stock issuable upon conversion of the Convertible Notes. If the Company does not obtain the requisite shareholder approvals relating to certain amendments to the Company’s articles of incorporation and the common stock issuable upon conversion of the Convertible Notes within 195 days from March 16, 2002, the closing date of the Recapitalization, the Company will be in default under the Note Purchase Agreement, which would require the Company to accelerate repayment of the Convertible Notes and may subject the Company to cross-default penalties pursuant to the Company’s senior credit facility.
	Additionally, in connection with the Bridge Loan, the Company issued a Convertible Bridge Note (the “Bridge Note”) to ComVest. As of June 30, 2002, ComVest had the right to convert this note into up to 3.3 million shares of the Company’s common stock. The number of shares of common stock issuable pursuant to conversion of the Bridge Note is subject to the thresholds outlined above in this Note 4. The conversion terms of the Bridge Note are as follows:

-10-

Table of Contents

	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 recorded an extraordinary loss on the early extinguishment of debt of approximately $6.6 million during the first quarter of 2002. This extraordinary loss was calculated by subtracting the fair value of the new debt of $42.6 million, which included the amount outstanding under the LaSalle Credit Facility ($7.3 million), the Convertible Notes ($33.3 million), and the BofA Junior Note ($2.0 million), from the amount outstanding under the BofA debt of $40.3 million. Also included in the extraordinary loss were various costs paid to ComVest/Commonwealth and LaSalle, as the lenders, to effect the recapitalization transaction of $4.3 million. Included as components of the additional $4.3 million of transaction expenses were the following: $570,000 in closing costs and due diligence fees paid to LaSalle; a warrant to purchase the Company’s common stock issued to LaSalle valued at approximately $695,000; approximately 2.7 million shares issued to ComVest valued at approximately $2.3 million; deferred loan costs from the original BofA debt of approximately $128,000, and $1.15 million paid to Commonwealth in closing costs and due diligence fees. Also included in the additional expenses, but offsetting these amounts are approximately $130,000 in fees and accrued interest forgiven by BofA and the fair value of the BofA warrant of $345,000 which was acquired and cancelled by ComVest.
	The Company also incurred numerous other costs that were either expensed as incurred or capitalized as debt issuance costs. Included in selling, general, and administrative expenses for the six-month period ended June 30, 2002 are approximately $2.8 million of expenses related to the recapitalization transaction. The primary components of those expenses are $2.4 million in stock compensation and bonuses to two of the Company’s executive officers, $168,000 in consulting fees, and $227,000 in legal and other fees. The Company capitalized approximately $1.5 million as debt issuance costs, consisting primarily of $906,000 in legal fees, $322,000 of consulting fees, and $222,000 of other miscellaneous fees paid for services rendered in connection with the recapitalization.
	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”).
	The fair value of the Convertible Notes, which was used in the determination of the extraordinary loss on early extinguishment of debt, was $33.3 million. As this value represents a substantial premium to the face value of the debt, the Company recorded the debt at its face value of $15 million, and recorded the premium of $18.3 million as an increase to additional paid-in-capital. The Company determined the fair value of the convertible notes by considering their two components, the non-convertible debt of $14,730,000 and the convertible debt of $270,000. The non-convertible debt component’s carrying value of $14,730,000 represents its fair value because, when considered with the convertible component, its terms yield a market rate of return. The convertible component’s fair value was determined by multiplying the fair value of the Company’s stock by the number of shares into which this component is convertible. Thus, 27 million shares multiplied by $0.68940 per share equals $18,613,685. The sum of the non-convertible component’s fair value of $14,730,000 and the convertible component’s fair value of $18,613,685 equals the total debt instrument’s fair value of $33,343,685.

-11-

Table of Contents

	The Company determined the fair value of its stock in a multiple-step process. First, the Company computed its assumed fair value of $13,762,977 at the date of the transaction by multiplying the number of outstanding shares (16,311,676) by the then current market price per share of $0.84375, which resulted in a fair value of the Company prior to any conversion of the convertible portion of the notes. The Company then added to this computed fair value $16,095,909, which represents the difference between the extinguished Bank of America debt of $40,320,909 and the face value of the new debt of $24,225,000. This $16,095,909 difference was credited to additional paid-in-capital. Thus, the new fair value of the Company, prior to any conversion, is $29,858,886. The Company then assumed full conversion of the convertible portion of the notes, which resulted in an additional 27,000,000 shares becoming outstanding. After conversion, the Company would have 43,311,676 shares outstanding, which when divided into the new fair value of $29,858,886, yields a new per share market value of $0.68940.
	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, 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 (which has been done), 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 (which has been done). 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:

-12-

Table of Contents

	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.
	As of the date of this filing, 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.
	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 recorded 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

-13-

Table of Contents

	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 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 recognized 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 recorded 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 component of its extraordinary loss on early extinguishment of debt. The Company recorded the value of the shares of the common stock issued to the CEO of approximately $152,000 as debt cost and will be amortized over the terms of the related agreements.
	The auditor’s opinion accompanying the consolidated financial statements in the Form 10-K 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 in the Loan Agreement and the Note Purchase Agreement relating to the audit opinion for the Company’s 2001 financial statements have been waived.

-14-

Table of Contents

	As a result of the Recapitalization, the BofA Credit Facility, the Forbearance Agreement with Bank of America, and all subsequent amendments were terminated. Because those agreements were significant to the capitalization of the Company prior to the Recapitalization, 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 forborne 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.
	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 to the Company’s consolidated financial statements contained in the 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. 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 to the Company’s Consolidated Financial Statements included in the 10-K). 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).

-15-

Table of Contents

	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.
	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 with the BofA Credit Facility and other related agreements, 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 7 to the Company’s interim condensed consolidated financial statements contained elsewhere in this Form 10-Q 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 7).
	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 6 to the Company’s consolidated financial statements in the Form 10-K).
	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.
	As of December 31, 2001, $3,465,874 was outstanding under the Working Capital Loans, and $36,518,039 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. In addition, the Company had an outstanding standby letter of credit of $144,000 as of December 31, 2001. The letter of credit, which had terms through January 2002, collateralized the Company’s obligations to a third party in connection with an acquisition (see Note 12 to the consolidated financial statements included in the Form 10-K).
	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%.
	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 the stock of the Company’s subsidiaries. The Company’s obligations under the BofA Credit Facility were also guaranteed individually by each of the

-16-

Table of Contents

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.

5. Related-Party Transactions

	As discussed in Note 6 to the Company’s consolidated financial statements in the Form 10-K, 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, 2001, 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 to the Form 10-K). During 2001, the CEO paid the Shareholder Bridge Loan obligation of $900,000 as described in Note 6 to the Form 10-K. Accrued interest of $109,305 related to the Shareholder Bridge Loan was outstanding as of December 31, 2001 and recorded as contra-equity. The accrued interest was paid to the Company by the CEO in June 2002.
	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, collectively in the amount of $112,613 and $337,837, plus accrued interest receivable of $58,218 and $168,800 as of June 30, 2002 and December 31, 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 notes and related accrued interest are recorded as contra-equity in the consolidated balance sheets. In March of 2002, 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.
	During 2001, Tunstall Consulting, Inc., an affiliate of Gordon Tunstall, a director of the Company, provided consulting services to the Company with respect to financial and certain related matters, including the Recapitalization. In 2001, the Company incurred fees of $484,013 in consideration for such services. In the six months ended June 30, 2002, the Company incurred fees of $318,185 to Tunstall Consulting for consulting services rendered to the Company in connection with the Recapitalization.
	See Note 11 of the Company’s consolidated financial statements included in the Form 10-K for description of the Company’s other related party transactions.

6. Commitments and Contingencies

	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.
	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.

-17-

Table of Contents

	Effective November 15, 2001, the exclusive distributor agreement between Stepic Corporation, the Company’s wholly owned distributor subsidiary (“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, Stepic has returned for credit substantially all remaining Pall inventory.
	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 $579,000 and $649,000 as of June 30, 2002 and December 31, 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 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”). All additional payments made have been accounted for as additional costs of acquired assets and amortized over the remaining life of the assets.
	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.
	Pursuant to the terms of the Note Purchase Agreement, 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. See Note 4 to these interim condensed consolidated financial statements.
	As described in Note 4 to the interim condensed consolidated financial statements contained in this Form 10-Q, the Loan Agreement sets forth certain Events of Default, the occurrence of which would allow the Lender to accelerate the Company’s obligations under the Loan Agreement. See Note 4 to these interim condensed consolidated financial statements.
	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. 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. See Note 4 to these unaudited interim condensed consolidated financial statements.

-18-

Table of Contents

7. 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 of the consolidated financial statements contained in the Form 10-K), 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 purchaser 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 June 30, 2002, 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 June 30, 2002 and December 31, 2001, the Company has fully reserved the amount due from the purchaser of approximately $220,000. The Company and IFM settled this lawsuit in August 2002.

8. Segment Information

	The Company operates two reportable segments, manufacturing and distribution. The manufacturing segment includes products manufactured by the Company as well as products manufactured by third parties on behalf of the Company through manufacturing and supply agreements.
	The 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) and gross profit (which include intersegment gross profit) of the Company’s segments as of and for the three and six months ended June 30, 2002 and 2001.

-19-

Table of Contents

	A reconciliation of total segment sales to total consolidated sales and total segment gross profit to total consolidated gross profit of the Company for the three and six months ended June 30, 2002 and 2001 is as follows:

	A reconciliation of total segment assets to total consolidated assets of the Company as of June 30, 2002 and December 31, 2001 is as follows:

	Except for a sales office located in Belgium, the Company’s operations are located in the United States. Thus, substantially all of the Company’s assets are located domestically. Sales information by geographic area for the three and six months ended June 30, 2002 and 2001, is as follows:

9. Liquidity

The Company incurred a loss of approximately $5 million in 2001, and as discussed in Note 6 of the consolidated financial statements included in the 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 in Note 4 of the interim condensed consolidated financial statements contained elsewhere in this Form 10-Q, the Company has completed a recapitalization transaction that extinguished all

-20-

Table of Contents

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, raising substantial doubt about the Company’s ability to continue as a going concern. 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.

10. Goodwill and Other Intangible Assets

	The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets” effective January 1, 2002. SFAS No. 142 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. Upon the adoption of SFAS No. 142, the Company recorded an impairment loss of $16.1 million.
	In accordance with SFAS No. 142, prior period amounts were not restated. A reconciliation of the previously reported net income and earnings per share for the three and six months ended June 30, 2001 to the amounts adjusted for the reduction of amortization expense, net of the related income tax effect, is as follows: