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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998 Commission file number 000-24025
HORIZON MEDICAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1882343
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE HORIZON WAY
P.O. BOX 627
MANCHESTER, GEORGIA 31816
(Address of principal executive offices, including zip code)
(706) 846-3126
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $18,907,925 on March 15, 1999, based on the closing sale price of
such stock on the NASDAQ National Market System. The number of shares
outstanding of the Registrant's Common Stock, $.001 par value, as of March 15,
1999 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 1999 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
Item No. Page No.
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PART I
1. Business................................................................................ 3
2. Properties.............................................................................. 13
3. Legal Proceedings....................................................................... 13
4. Submission of Matters to a Vote of Security Holders..................................... 14
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters................................................................ 15
6. Selected Financial Data................................................................. 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 18
7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 31
8. Financial Statements and Supplementary Data............................................. 31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................................... 31
PART III
10. Directors and Executive Officers of the Registrant...................................... 31
11. Executive Compensation.................................................................. 31
12. Security Ownership of Certain Beneficial Owners and Management.......................... 32
13. Certain Relationships and Related Transactions.......................................... 32
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 32
SIGNATURES................................................................................................ 38
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PART I
ITEM 1. BUSINESS.
Horizon Medical Products, Inc. (including its subsidiaries, the "Company"),
headquartered in Manchester, Georgia, is a specialty medical device company
focused on manufacturing and/or marketing vascular products. The Company's
oncology product lines include implantable vascular ports, tunnelled catheters
and stem cell transplant catheters used primarily in cancer treatment
protocols. The Company has a complete line of acute and chronic dialysis
catheters and immediate access hemodialysis grafts used for kidney failure
patients, as well as balloon technology products for embolectomy catheters and
carotid shunts used for endarterectomy procedures. In addition, the Company
distributes certain specialty devices used primarily in general and emergency
surgery, radiology, anesthesiology, respiratory therapy, blood filtration and
critical care settings.
The Company was incorporated and began its operations in February 1990 as a
distributor of medical devices and began to distribute vascular access devices
in 1990. In November 1992, the Company entered into a collaborative effort with
a leading heart valve manufacturer to design and develop a new line of vascular
access ports for the Company. This new line of ports, the Triumph-1(R) line, was
introduced in September 1994. The Company continues to market the Triumph-1(R)
line of vascular access ports. In May 1995, the Company began to distribute the
NeoStar Medical(R) line of hemodialysis catheters. In March 1996, the Company
began construction of a 20,000 square foot manufacturing, distribution and
administrative facility in Manchester, Georgia. The Company began manufacturing
the NeoStar Medical(R) product line at this facility in October 1996 and
expanded this facility in 1998 to approximately 45,000 square feet. In July
1997, the Company acquired the port business of Strato(R)/Infusaid(TM). The
primary product lines obtained in the Strato(R)/Infusaid(TM) acquisition
included the LifePort(R) and Infuse-a-Port(R) vascular access ports, and the
Infuse-a-Cath(TM) line of catheters. In 1998, the Company made additional
product acquisitions and acquired the CVS and Stepic medical device distribution
businesses. See "--1998 Acquisitions and Distribution Agreements" below.
Distribution of medical devices currently comprises approximately 55% of the
Company's revenue.
1998 ACQUISITIONS AND DISTRIBUTION AGREEMENTS
Vascular Access Products
Norfolk. On June 2, 1998, the Company consummated the acquisition of
certain assets used in the human vascular access business of Norfolk Medical
Products, Inc. ("Norfolk"). The assets included all of the assets used by
Norfolk in manufacturing its human port products line. With the acquisition of
Norfolk, the Company acquired several human vascular products including the
Vortex(TM) port, the Titan(TM) port, the Omega(TM) port and other port
accessories. The Company (i) paid Norfolk and its sole shareholder approximately
$7.4 million in cash, and (ii) paid approximately $1.86 million in cash into an
escrow account, of which $930,000 was released in December 1998. The remaining
amount will be released upon the completion of certain tasks.
IFM. On May 19, 1998, Horizon acquired the vascular access port product
line of Ideas for Medicine, Inc. ("IFM"), a wholly owned subsidiary of Cryolife,
Inc., for approximately $100,000 in cash and a promissory note in the
amount of $482,110 (which is supported by a standby letter of credit). On
September 30, 1998, the Company consummated the acquisition of certain medical
device products, product lines and assets used in the manufacture and sale of
such medical devices by IFM. The assets acquired included certain of the assets
used by IFM to manufacture its product line. In this transaction, the Company
acquired several products including embolectomy catheters, carotid shunts,
occlusion catheters and surgical instruments. The Company paid IFM $15 million
in cash. In connection with the acquisition, the Company and IFM entered into a
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 acquired from IFM.
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Medical Device Distribution
Stepic and CVS. Effective as of September 1, 1998, the Company consummated
the acquisition of certain assets used in the distribution and sale of medical
devices by Columbia Vital Systems, Inc. ("CVS"). The Company (i) paid CVS $4
million in cash at closing, (ii) will pay $225,000 in September 2000 and (iii)
may pay up to an additional $4 million subject to the terms of the purchase
agreement, including the successful achievement of future sales targets.
Effective October 15, 1998, the Company consummated the acquisition of the
outstanding stock of Stepic Corporation ("Stepic"). The assets acquired included
primarily accounts receivable and inventory derived from and used in the
distribution of medical products. The Company paid Stepic's shareholders $8
million in cash at closing, is obligated to pay an additional $7.2 million, over
a three year period (which is supported by standby letters of credit), and paid
an additional amount after closing pursuant to a working capital adjustment. In
addition, the Company agreed to pay up to an additional $4.8 million under the
terms of the stock purchase agreement upon the successful achievement of certain
specified future earnings targets by Stepic. The CVS and Stepic acquisitions
allowed the Company to form a medical device distribution business currently
with an aggregate of 25 sales representatives ("sales reps") distributing
general and emergency surgery, radiology, anesthesiology, respiratory therapy,
blood filtration and critical care medical products.
Distribution Agreements
Perma-Seal Dialysis Access Graft. On December 11, 1998, the Company
announced it had executed a multi-year distribution agreement with Possis
Medical, Inc. for the Perma-Seal Dialysis Access Graft. The Perma-Seal Graft is
designed for immediate access and is capable of allowing the dialysis clinician
to access the patient the same day as the graft implant.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
Product Manufacturing
The Company manufactures and/or markets vascular access products including
implantable ports, hemodialysis catheters, central venous catheters, embolectomy
catheters, hemodialysis access grafts, carotid shunts and accessories used in
vascular procedures. Vascular access ports are implantable devices utilized for
the central venous administration of a variety of medical therapies and for
blood sampling and diagnostic purposes. Central venous access facilitates a more
systemic delivery of treatment agents, while mitigating certain of the harsh
side effects of certain treatment protocols and eliminating the need for
repeated access to peripheral veins. Once implanted in the body, a port can be
utilized for up to approximately 2,000 accesses. The Company's vascular access
ports are used primarily in systemic or regional short- and long-term cancer
treatment protocols that require frequent infusions of highly concentrated or
toxic medications (such as chemotherapy agents, antibiotics or analgesics) and
frequent blood samplings.
The Company's lines of vascular access ports consist of the following
families of products: (i) Triumph-1(R); (ii) LifePort(R); (iii)
Infuse-a-Port(R);
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(iv) Vortex(TM) port; (v) Titan(TM) port; and (vi) Omega(TM) port.
The Company produces and/or markets hemodialysis, apheresis and embolectomy
catheters. Hemodialysis catheters are used in the treatment of patients
suffering from renal failure who are required to undergo short-term (acute) care
or long-term (chronic) hemodialysis, a process involving the removal of waste
products from the blood by passing a patient's blood through a dialysis machine.
Stem cell apheresis is a protocol for treating certain forms of mid- and
late-stage cancers, particularly breast cancer. The typical apheresis procedure
involves the insertion of a catheter into a patient through which (i) blood is
withdrawn from the patient, cycled through an apheresis machine in which stem
cells (cells which perform a key role in the body's immune system) are removed
from the blood and the blood is reinfused into the body, (ii) high doses of
chemotherapy agents, as well as antibiotics and blood products, are administered
to the patient over extended periods of time, and (iii) the previously removed
stem cells are subsequently reintroduced into the patient. Embolectomy catheters
remove emboli from clotted hemodialysis grafts by using a balloon and catheter
system that helps prevent graft damage. The Company's catheters are used
primarily in hemodialysis and apheresis procedures.
The Company's catheters include the following families of products: (i)
dual lumen hemodialysis catheters; (ii) Pheres-Flow(R) triple lumen catheters;
and (iii) Infuse-a-Cath(TM) catheters. The Company expects that its specialty
hemodialysis and apheresis families of catheters will continue to benefit from
the unique Circle C(R) and Pheres-Flow(R) designs and the growth of underlying
markets.
The Company maintains a sales and marketing organization for its vascular
access products of approximately eighty full-time employees and five independent
specialty distributors employing over forty sales representatives. The Company's
direct sales force focuses primarily on vascular and general surgeons who
implant vascular access devices and other physicians and clinicians who utilize
vascular access devices in the delivery of treatments. The Company's marketing
strategy emphasizes the importance of building relationships with these medical
professionals in order to provide such professionals with the benefits of the
Company's broad knowledge of vascular access products and procedures and focused
clinical support. These relationships also facilitate the Company's ability to
modify its product lines in response to new clinical protocols and to meet its
customers' changing needs. The Company also has a network of 29 active
distributors in Europe and 65 active international distributors outside of
Europe.
Hospital chains and large buying groups have played, and are expected to
continue to play, an increasingly significant role in the purchase of medical
devices. In 1997, group purchasing organization ("GPO") purchasing accounted for
approximately $28 billion of sales in the medical products industry. In recent
years, these groups have sought to narrow their list of suppliers. By acting as
a supplier to a GPO the Company can operate its sales force much more
efficiently. As a result, the Company has increased its focus on marketing its
products to these buying groups. Simultaneously, the Company's direct sales
force continues to call on physicians associated with these buying groups in
order to improve compliance with these group purchasing agreements and improve
market share.
As a result of such efforts, in March 1998 the Company entered into a
purchasing agreement with Premier Purchasing Partners, a national purchasing
group that includes over 1,800 owned, leased,
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managed and affiliated members. Pursuant to the agreement, the Company is an
approved vendor for the hospitals participating in Premier's purchasing program.
The agreement was amended in March 1999 to extend the term of the agreement to
February 28, 2004. The Company's products approved for distribution under the
agreement are vascular access ports, port introducers and Huber needles. Premier
is entitled to receive an administrative fee of 2% on gross sales of the
Company's products to its members. In connection with the execution of the
purchasing agreement, the Company issued to Premier a warrant to purchase
500,000 shares of the Company's stock for $14.50 per share which vests as and
only if certain specific sales goals in the warrant are met.
The Company has also entered into group purchasing agreements with
AmeriNet, Inc., University Healthsystem Consortium; Health Services Corporation
of America; and Columbia Healthcare Corporation.
Product Distribution
Through the operations the Company acquired in the CVS and Stepic
acquisitions, distribution of medical devices currently is the largest revenue
generating segment of the Company's business. Subsequent to consummating the
Stepic acquisition, the Company consolidated the CVS operations into Stepic to
establish a centralized distribution operation. The Company distributes a broad
range of specialty medical products throughout the Midwest and Northeast United
States to hospitals and regional and hospital owned blood banks.
The product applications for the devices the Company distributes include
general and emergency surgery, radiology, anesthesiology, respiratory therapy,
blood filtration and critical care. The Company currently sells more than 1,200
SKUs from ten major product lines and distributes to over 950 customers.
Stepic has generated approximately 72% of its sales through distribution
of products of three major manufacturers: Arrow International, Ballard Medical,
and Pall Biomedical. Stepic is the top distributor in the country for each of
these manufacturers. The Arrow products include catheters and introducer kits
that are used for vascular access in surgical settings and for epidurals. The
Ballard product line primarily consists of low-tech products such as foam soap.
The majority of Pall products that Stepic distributes are blood filters used in
surgical procedures. Of these three manufacturers, only Pall has executed a
distribution agreement with Stepic. However, Stepic has distributed Arrow and
Ballard products for 21 years and 13 years, respectively. While Stepic's
supplier concentration is significant, the Company believes that it has good
relationships with each of its key suppliers, as evidenced by the fact that
Stepic has lost only one major product line in its 24 year history. See
"Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward Looking Statements -- Dependence on Key Suppliers."
The Company currently intends to construct a distribution warehouse
adjacent to its Manchester, Georgia manufacturing facility to centralize its
distribution capabilities. The administrative functions and certain distribution
capabilities for the Company's distribution business will remain in the New York
area.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including
revenues, operating profit or loss and identifiable assets attributable to each
segment for fiscal year 1998 is presented in Note 16 of notes to consolidated
financial statements included herein and beginning on page F-30.
MANUFACTURING
At its Manchester, Georgia facility, the Company manufactures its dual
lumen, Pheres-Flow(R), Infuse-a-Cath(TM), and other miscellaneous catheters,
dialysis accessories, certain of its vascular access ports and parts for certain
of its ports ("Norfolk Ports") acquired in the Norfolk acquisition. The parts
for the Norfolk Ports manufactured in Manchester are currently being shipped to
Norfolk for packaging and assembly.
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The Company's embolectomy and occlusion catheters, carotid shunts and
surgical instruments are produced at the IFM plant in Florida pursuant to a
manufacturing agreement. All models of the Company's Triumph-1(R) port are
produced by ACT Medical pursuant to two manufacturing agreements.
The Company has received certification as an ISO 9001 medical device
manufacturer for its Manchester facility. The Company also has obtained the
right to affix CE (Conformite Europeene) marking to its product lines
manufactured at its Manchester facility. CE marking is a European symbol of
conformance to strict product manufacturing and quality system standards. The CE
marking is affixed to the Company's products manufactured at the IFM plant.
While the Company believes it has a good relationship with each third party
that manufactures the Company's products, there can be no assurance that such
relationships will not deteriorate in the future. Deterioration in these
manufacturing relationships could cause the Company to experience interruptions
in its manufacturing and delivery processes and have a material adverse impact
on the Company's business, financial condition and results of operations.
Furthermore, when the manufacturing arrangements with these third parties
expire, the Company will have to make other manufacturing arrangements or
manufacture products at Company facilities. The failure to effectively plan for
the expiration of these agreements could also result in interruption of the
manufacturing and delivery processes for these products and have a material
adverse impact on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION
As a manufacturer and distributor of medical devices, the Company is
subject to regulation by, among other governmental entities, the U.S. Food and
Drug Administration (the "FDA") and the corresponding agencies of the states and
foreign countries in which the Company sells its products. These regulations
govern the introduction of new medical devices, the observance of certain
standards with respect to the manufacture, testing and labeling of such devices,
the maintenance of certain records, the tracking of devices, and other matters.
These regulations may have a material impact on the Company. Recently, the FDA
has pursued a more rigorous enforcement program to ensure that regulated
businesses, like the Company's, comply with applicable laws and regulations. The
Company believes that it is in substantial compliance with such governmental
regulations.
Pursuant to the Food, Drug and Cosmetic Act ("FDC Act"), medical devices
intended for human use are classified into three categories, Classes I, II and
III, on the basis of the controls deemed necessary by the FDA to reasonably
assure their safety and effectiveness. Class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to good
manufacturing practice regulations) and Class II devices are subject to general
and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval ("PMA") from the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Class I devices, unless exempt, and Class II devices require premarket
notification clearance pursuant to Section 510(k) of the FDC Act. Class III
devices are required to have a PMA. Obtaining a PMA can take up to several years
or more and involve preclinical studies and clinical testing. In contrast, the
process of obtaining a 510(k) clearance typically requires the submission of
substantially less data and generally involves a shorter review period, although
obtaining a 510(k) clearance may involve the submission of a substantial volume
of data, including clinical data, and may require a substantial review period. A
510(k) premarket notification clearance indicates that the FDA agrees with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another medical device that has been previously
marketed but does not indicate that the product is safe and effective. A PMA
indicates that the FDA has approved as safe and effective a product to be
marketed for the uses described in the approved labeling.
In addition to requiring clearance or approval for new products, the FDA
may require clearance or approval prior to marketing products that are
modifications of existing products. The FDC Act provides that new 510(k)
clearances are required when, among other things, there is a major change or
modification in the intended use of the device or a change or modification to a
legally marketed device
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that could significantly affect its safety or effectiveness. A manufacturer is
expected to make the initial determination as to whether a proposed change to a
cleared device or to its intended use is of a kind that would necessitate the
filing of a new 510(k) notification. The Company has made certain modifications
to its cleared devices for which it has determined that new 510(k) clearances
are not required. There can be no assurance, however, that the FDA would concur
with the Company's conclusion that a particular change does not necessitate a
new 510(k) application. If the FDA were to investigate and disagree with the
Company's determinations and conclude that one or more implemented changes
requires a new 510(k), the FDA could take regulatory actions such as issuance of
a warning letter or requiring that the Company cease marketing modified devices
until new 510(k) notifications are cleared.
In order to conduct clinical trials of an uncleared or unapproved device,
companies generally are required to comply with Investigational Device
Exemptions regulations ("IDE regulations"). For significant risk devices, the
IDE regulations require FDA approval before clinical study may begin. Devices
subject to the IDE regulations are subject to various restrictions imposed by
the FDA. In its approval letter for significant risk device IDE studies, the
agency may limit the number of patients that may be treated with the device
and/or the number of institutions at which the device may be used. Patients must
give informed consent to be treated with an investigational device. The
institutional review board of each institution where a study is being conducted
must also approve the clinical study. The device may not be advertised or
otherwise promoted. Unexpected adverse experiences must be reported to the FDA.
The company sponsoring the investigation must ensure that the investigation is
being conducted in accordance with the IDE regulations.
To date, the Company's products have received FDA marketing clearances only
through the 510(k) process. Certain future product applications, however, could
require approval through the PMA process. In addition, future products may
require approval of an IDE. There can be no assurance that all necessary 510(k)
clearances or PMA or IDE approvals will be granted on a timely basis or at all.
The FDA review process may delay the Company's product introductions in the
future. It is possible that delays in receipt of or failure to receive any
necessary clearance or approval could have a material adverse effect on the
Company.
The Company is also required to register with the FDA as a device
manufacturer and to comply with the FDA's Good Manufacturing Practices under the
Quality System Regulations ("GMP/QSR"). These regulations require that the
Company manufacture its products and maintain its records in a prescribed manner
with respect to manufacturing, testing and control activities. Further, the
Company is required to comply with FDA requirements for labeling and promotion
of its products. For example, the FDA prohibits cleared or approved devices from
being marketed or promoted for uncleared or unapproved uses. The medical device
reporting regulation requires that the Company provide information to the FDA
whenever there is evidence to reasonably suggest that one of its devices may
have caused or contributed to a death or serious injury, or that there has
occurred a malfunction that would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur.
Medical device manufacturers and distributors are generally subject to
periodic inspections by the FDA. If the FDA determines that a company is not in
compliance with applicable laws and regulations, it can, among other things,
issue a warning letter apprising the company of violative conduct, detain or
seize products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the company, its officers or its employees. In
addition, clearances or approvals could be withdrawn in appropriate
circumstances. Failure to comply with regulatory requirements or any adverse
regulatory action could have a material adverse effect on the company's
business, financial condition and results of operations.
Subsequent to an FDA inspection in 1996, the Company received a warning
letter from the FDA Atlanta District Office alleging, among other things, its
failure to report to the FDA certain malfunctions and adverse events that may be
associated with its devices as required by the agency's MDR regulations.
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In response to this warning letter, the Company revised its MDR procedure
and submitted it with other corrective actions for review by the FDA. The FDA
responded that the corrective actions described by the Company appeared to
adequately address the agency's concerns. At the conclusion of a follow-up
inspection in 1997, the Company was advised of various inspectional
observations including its alleged failure to submit MDRs on 19 reportable
events. The Company responded to the inspectional observations in writing and
at a meeting with the FDA at the Atlanta District Office at which the
interpretation of the MDR regulations was discussed. The District submitted the
question of the interpretation of the regulations to FDA headquarters in
Washington, D.C. On March 10, 1998, the Company received a warning letter from
the Atlanta District Office reasserting its interpretation of the MDR
regulations and alleging the Company's failure to report 15 reportable events
and violation of two current GMP requirements. The Company responded to the
warning letter pledging to submit all substantive reports until it secures
exemptions from the agency on the submission of certain classes of reports and
describing corrective action taken on the alleged current GMP violations. The
FDA conducted a subsequent inspection between August 24 and September 15, 1998
which resulted in an FDA-483 (inspectional observations). The Company responded
on October 15, 1998 to the FDA-483, and the FDA replied that the Company's
response appeared to address the concerns raised during the inspection. In
addition, on November 20, 1998, the Company sent the FDA follow-up
documentation on the FDA-483 response. Again, on January 19, 1999, the FDA
responded that the documentation appeared to address the concerns raised in the
inspection. The Company believes that it has implemented corrective actions
that achieve substantial compliance with FDA requirements, but there can be no
assurance that an FDA enforcement action will not ensue at a future time or
will not materially adversely affect the Company's business, results of
operations and financial condition.
Medical device laws and regulations are also in effect in many of the
countries in which the Company does business outside the United States. These
range from comprehensive device approval requirements for some or all of the
Company's medical device products to simple requests for product data or
certifications. The number and scope of these requirements are increasing.
Medical device laws and regulations are also in effect in many of the states in
which the Company does business. State and foreign medical device laws and
regulations may have a material impact on the Company. In addition,
international sales of certain medical devices manufactured in the United States
but not approved by the FDA for distribution in the United States are subject to
FDA export requirements, which require the Company to obtain documentation from
the medical device regulatory authority of such country stating that the sale of
the device is not in violation of that country's medical device laws. This
documentation is then submitted to the FDA with a request for a permit for
export to that country.
Federal, state and foreign laws and regulations regarding the manufacture,
sale and distribution of medical devices are subject to future changes. For
example, Congress recently enacted the Food and Drug Administration
Modernization Act of 1997, which included several significant amendments to the
prior law governing medical devices. Additionally, the FDA has recently made
significant changes to its GMP regulations and may make changes to other
regulations as well. The Company cannot predict what impact, if any, such
changes might have on its business; however, such changes could have a material
impact on the Company and its business, financial condition and results of
operations.
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.
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HEALTHCARE REFORM; THIRD-PARTY REIMBURSEMENT
In recent years, several comprehensive healthcare reform proposals were
introduced in the United States Congress. The intent of the proposals was,
generally, to expand healthcare coverage for the uninsured and reduce the growth
of total healthcare expenditures. While none of the proposals were adopted,
healthcare reform may again be addressed by the current United States Congress.
Certain states have made significant changes to their Medicaid programs and have
adopted various measures to expand coverage and limit costs.
Implementation of government healthcare reform and other efforts to control
costs may limit the price of, or the level at which reimbursement is provided
for, the Company's products. In addition, healthcare reform may accelerate the
growing trend toward involvement by hospital administrators, purchasing managers
and buying groups in purchasing decisions. This trend would likely include
increased emphasis on the cost-effectiveness of any treatment regimen. These
changes may also cause the marketplace in general to place increased emphasis on
the utilization of minimally invasive surgical procedures and the delivery of
more cost-effective medical therapies. Regardless of which additional reform
proposals, if any, are ultimately adopted, the trend toward cost controls and
the requirements of more efficient utilization of medical therapies and
procedures will continue and accelerate. The Company is unable at this time to
predict whether any such additional healthcare initiatives will be enacted, the
final form such reforms will take or when such reforms would be implemented.
The Company's products are purchased principally by hospitals, hospital
networks and hospital buying groups. During the past several years, the major
third-party payors of hospital services (Medicare, Medicaid, private healthcare
indemnity insurance and managed care plans) have substantially revised their
payment methodologies to contain healthcare costs. These cost pressures are
leading to increased emphasis on the price and cost-effectiveness of any
treatment regimen and medical device. In addition, third-party payors, such as
governmental programs, private indemnity insurance and managed care plans which
are billed by hospitals for such healthcare services, are increasingly
negotiating the prices charged for medical products and services and may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payor, was experimental or
was used for an unapproved application. There can be no assurance that in the
future, hospital purchasing decisions or third party reimbursement levels will
not adversely affect the profitability of the Company's products.
INSURANCE
The Company maintains insurance in such amounts and against such risks as
it deems prudent, although no assurance can be given that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's business, financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.
PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company also relies upon trade secrets,
"know-how," continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
The Company currently owns numerous United States patents and patent
applications, as well as numerous foreign patents and patent applications, which
relate to aspects of the technology used in certain of the Company's products,
including the LifePort(R) family of vascular access ports, the Infuse-a-
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Cath(TM) family of hemodialysis catheters and the Bayonet locking system used in
the LifePort(R) family of products and in the Infuse-a-Cath(TM) family of
products. The Company also is a party to several license agreements with third
parties pursuant to which it has obtained, for varying terms, the right to make,
use and/or sell products that are covered under such license agreements in
consideration for royalty payments. Many of the Company's major products,
including its Circle C(R) acute and chronic catheters, its Infuse-a-Cath(TM)
catheters, carotid shunt, and cholangiogram catheters are subject to such
license agreements. There can be no assurance that the Company or its licensors
have or will develop or obtain additional rights to products or processes that
are patentable, that patents will issue from any of the pending patent
applications filed by the Company or that claims allowed will be sufficient to
protect any technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued or licensed to the Company or
other licensing arrangements will not be challenged, invalidated, infringed or
circumvented or that the rights granted thereunder will provide competitive
advantages for the Company's business or products. In such event the business,
results of operations and financial condition of the Company could be materially
adversely effected.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Although the
Company has not been a party to any material litigation to enforce intellectual
property rights held by the Company, or a party to any material litigation
seeking to enforce rights alleged to be held by others, future litigation may be
necessary to protect patents, trade secrets or "know-how" owned by the Company
or to defend the Company against claimed infringement of the rights of others
and to determine the scope and validity of the proprietary rights of the Company
and others. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions. Any such litigation could
result in substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
certain of its products, any of which could have a material adverse effect on
the business, results of operations and financial condition of the Company.
Accordingly, the Company may, in the future, be subject to legal actions
involving patent and other intellectual property claims.
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(TM),
LifePort(R), Pheres-Flow(R) Vortex(TM), Pruitt-Inhara(R) and Reddick product
lines. There can be no assurance that any registered or unregistered trademarks
or trade names of the Company will not be challenged, canceled, infringed or
circumvented, or be declared generic, or be declared infringing on other
third-party marks, or provide any competitive advantage to the Company.
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ENVIRONMENTAL COMPLIANCE
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storage and disposal of
materials which are classified as hazardous. The Company believes that its
operations comply in all material respects with applicable environmental laws
and regulations. While the Company continues to make capital and operational
expenditures for protection of the environment, it does not anticipate that
those expenditures will have a material adverse effect on its business,
financial condition and results of operations.
RAW MATERIALS
The Company has arrangements with various suppliers to provide it with the
quantity of component parts necessary to assemble its products. Almost all of
the components and materials used in its injection molding process are available
from a number of different suppliers, although certain components are purchased
from a limited number of sources. While the Company believes that there are
alternative and satisfactory sources for its components, a sudden disruption in
supply from one of the Company's existing suppliers could adversely affect the
Company's ability to deliver its products in a timely manner and could adversely
affect the Company's results of operations.
BACKLOG
Delivery lead times for the Company's products are very short at times and,
consequently, the Company routinely maintains an immaterial amount of order
backlog which is generally filled within 60 days of the order date. Management
currently believes that its backlog is not a reliable indicator of future
financial or operating performance.
RESEARCH AND PRODUCT DEVELOPMENT
The Company is engaged in limited ongoing research and development
activities. The principal focus of the Company's research and development effort
is 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.
In 1996, 1997 and 1998, research and development expenses accounted for
$58,700 (0.8% of net sales), $7,000 (0.04% of net sales), and $412,000 (1.1% of
net sales) respectively. Such amounts were used primarily to improve existing
products and implement new technology to produce these products. A portion of
the 1998 amount resulted from unexpected research and development expenses
relating to products sold in the Asian marketplace.
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COMPETITION
The markets for the Company's product lines are highly competitive. The
Company faces substantial competition from a number of other manufacturers and
suppliers of vascular access ports, dialysis and apheresis catheters and related
ancillary products, including companies with more extensive research and
manufacturing capabilities and greater technical, financial and other resources.
In response to increased concerns about the rising costs of healthcare, United
States hospitals and physicians are placing increasing emphasis on
cost-effectiveness in the selection of products to perform medical procedures.
The Company believes that its products compete primarily on the basis of: (i)
product design, development and improvement; (ii) customer support; (iii) brand
loyalty; and (iv) price. The Company's competitors in the vascular access
products business include Bard Access Systems, a division of C.R. Bard, Inc. and
Sims, a division of Smith Industries. In each of the product lines represented
by the Company's distribution business, the Company competes against
manufacturers selling directly to customers. Such manufacturers include Baxter
International Inc. and Abbott Laboratories.
EMPLOYEES
At December 31, 1998, the Company had approximately 200 full-time
employees.
ITEM 2. PROPERTIES.
The Company's principal executive and administrative offices and
manufacturing and development center is located in Manchester, Georgia in a
45,000 square foot facility. The Company leases the Manchester facility and the
10.5 acre lot on which it is located from the Development Authority of the City
of Manchester (the "Manchester Development Authority") pursuant to operating
leases which expire in 2009 and 2010 (collectively, the "Manchester Leases") and
under which the Company pays monthly lease payments of approximately $9,500 in
the aggregate. The Company has an option to extend each of the Manchester Leases
for an additional five-year term and 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 an office condominium located in Atlanta, Georgia (the
"Atlanta Office"). The Company utilizes approximately 3,300 square feet of the
Atlanta Office for administrative offices, and it leases approximately 3,100
square feet to a third party.
The Company occupies approximately 5,000 square feet of office space and
approximately 13,000 square feet of warehouse space in Long Island City, New
York for use in Stepic's distribution operation and warehousing of products
pursuant to a Transition Services Agreement. While the Company considers this
space to be in good condition and adequate to meet the present and foreseeable
needs of the Company, a significant increase in demand or inventory could render
the facilities inadequate.
ITEM 3. LEGAL PROCEEDINGS.
On October 30, 1998 and December 7, 1998, shareholder suits were filed
against the Company, Marshall B. Hunt, William E. Peterson, Jr., Roy C. Mallady,
Charles E. Adair, and Mark A. Jewett. An amended consolidated complaint, filed
on March 8, 1999, added as a defendant Cordova Capital Partners LP - Enhanced
Appreciation, one of the Company's institutional investors. The two lead
plaintiffs are Daniel E. Herlihy and Thomas L. O'Hara, Jr., and the other named
plaintiff is Jack Edery. The amended
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consolidated complaint, which is pending in the U.S. District Court for the
Northern District of Georgia (Atlanta Division), seeks class certification and
rescissory and/or compensatory damages as well as expenses of litigation. The
complaint alleges that the prospectus and registration statement used by the
Company in connection with the April 1998 initial public offering of the
Company's common stock contained material omissions and misstatements. The
defendants have until April 7, 1999 to answer, move to dismiss or otherwise
respond to the amended consolidated complaint. Although the Company believes the
suit is without merit, the outcome cannot be predicted at this time. If the
ultimate disposition of this matter is determined adversely to the Company, it
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also is a party from time to time to other actions arising in
the ordinary course of business which it deems immaterial. Although the Company
believes that it has defenses to the claims of liability or for damages in the
actions against it, there can be no assurance that additional lawsuits will not
be filed against the Company or its subsidiaries. Further, there can be no
assurance that the lawsuits will not have a disruptive effect upon the
operations of the business, that the defense of the lawsuits will not consume
the time and attention of the senior management of the Company and its
subsidiaries, or that the resolution of the lawsuits will not have a material
adverse effect on the operating results and financial condition of the Company.
The Company intends to vigorously defend or pursue each of the lawsuits.
The Company maintains insurance in such amounts and against such risks as
it deems prudent, although no assurance can be given that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages. The occurrence of a significant event not fully insured
against could materially and adversely affect the Company's business, financial
condition and results of operations. Moreover, no assurance can be given that
the Company will be able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to shareholders of the Company for a vote
in the Fourth Quarter of 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock trades on The NASDAQ Stock Market(R) under the
symbol "HMPS." The following table sets forth the high and low sales price of
the Common Stock as reported on the NASDAQ National Market System for the
periods indicated (from the inception of trading on April 15, 1998).
Calendar Year 1998 High Low
----- ---
Second Quarter (April 15 through June 30) 17.13 9.00
Third Quarter ........................... 13.38 5.38
Fourth Quarter .......................... 5.75 1.75
As of March 15, 1999, there were 70 record holders of the Company's Common
Stock. On March 15, 1999, the last reported sales price of the Common Stock on
the Nasdaq system was $5.00 per share.
The Company has not paid or declared any cash dividends on its capital
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. Accordingly,
the Company does not anticipate paying cash dividends on its common stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. The Company's credit agreement with its lenders currently prohibits
the payment of dividends on the Company's capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
In April 1998 Cordova Ventures, L.P. -- Enhanced Appreciation ("Cordova")
exercised certain anti-dilution rights relating to a warrant (and the shares
issued pursuant thereto) to purchase 15,550 shares of the Company's Class A
Common Stock for $.001 per share, for a nominal purchase price. Cordova is an
accredited investor, and thus this issuance to Cordova was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Section 4(2) Exemption").
On July 15, 1997, the Company issued to NationsCredit a warrant to purchase
765,000 shares of Common Stock. Concurrently with the consummation of the
Offering on April 20, 1998, the Company issued to NationsCredit 765,000 shares
of Common Stock upon exercise of warrants to purchase such stock for an
aggregate amount of $765. NationsCredit is an accredited investor, and thus this
issuance to NationsCredit was made in reliance on the Section 4(2) Exemption.
On March 20, 1998, the Company issued to Premier Purchasing Partners, L.P.
a warrant to purchase up to 500,000 shares of Common Stock, subject to certain
vesting requirements. The Company granted the warrant to Premier in partial
consideration for Premier executing a purchasing agreement with the Company. See
Item 1. "Business - Description of Business by Industry Segment." The right to
purchase shares of common stock under the warrant vests annually in increments
of 100,000 shares only upon the achievement of certain specified minimum annual
sales and/or minimum cumulative sales of the Company's products to participating
Premier shareholders. Premier is an accredited investor, and thus this issuance
to Premier was made in reliance on the Section 4(2) Exemption.
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On February 1, 1996, the Company entered into a Consulting and Services
Agreement with Healthcare Alliance, an affiliate of Robert J. Simmons, a
director of the Company. Pursuant to the agreement, Healthcare Alliance agreed
to assist the Company in marketing its products through the negotiation of
purchasing agreements with hospital purchasing groups, physicians' organizations
and other medical service and healthcare providers. In April 1998 and pursuant
to the agreement, Healthcare Alliance received 45,328 shares in exchange for
procuring the Premier account in March 1998.
All of the foregoing issuances were conducted without an underwriter or
placement agent.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company as of and for each of
the five years ended December 31, 1998 are derived from, and are qualified by
reference to the consolidated financial statements, including the notes
thereto, of the Company. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto of the Company included elsewhere in this Form 10-K.
Years ended December 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
Net sales................................................... $ 4,147 $ 5,003 $ 7,052 $ 15,798 $ 39,399
Cost of goods sold.......................................... 1,997 2,227 2,997 6,273 19,933
------- ------- ------- -------- --------
Gross profit................................................ 2,150 2,776 4,055 9,525 19,466
Selling, general and administrative expenses................ 2,421 2,921 4,560 6,476 13,597
------- ------- ------- -------- --------
Operating income (loss)..................................... (271) (145) (505) 3,049 5,869
Interest expense, net....................................... (160) (242) (733) (3,971) (3,103)
Accretion of value of put warrant repurchase
obligation (1)......................................... -- -- -- (8,000) --
Other income................................................ 101 -- 54 70 46
------- ------- ------- -------- --------
Income (loss) before income taxes and extraordinary
items....................................................... (330) (387) (1,184) (8,852) 2,812
Income tax benefit (expense)................................ -- 7 -- (320) (1,781)
Effect of conversion to C corporation status................ -- (7) -- -- --
Extraordinary gain on early extinguishment of
put feature(1)......................................... -- -- -- -- 1,100
Extraordinary losses on early extinguishments of debt....... -- (70) -- -- (83)
------- ------- ------- -------- --------
Net income (loss)........................................... $ (330) $ (457) $(1,184) $ (9,172) $ 2,048
======= ======= ======= ======== ========
Net income (loss) per share before extraordinary items --
basic and diluted...................................... $ -- $ (.04) $ -- $ -- $ .08
Net income (loss) per share -- basic and diluted ........... $ (.04) $ (.05) $ (.13) $ (.97) $ .17
Weighted average common shares outstanding -- basic......... 8,333 9,144 9,419 9,419 12,187
Weighted average common shares outstanding -- diluted....... 8,333 9,144 9,419 9,419 12,412
BALANCE SHEET DATA (end of year):
Cash and cash equivalents................................... $ 600 $ 394 $ 218 $ 2,894 $ 6,232
Working capital............................................. 238 1,500 1,018 6,842 28,767
Total assets................................................ 2,222 6,894 6,176 31,577 104,637
Long-term debt, net of current maturities................... 1,227 4,907 5,053 23,971 47,074
Total shareholders' (deficit) equity........................ (438) (1,024) (1,916) (11,150) 41,431
- -------------------------
1 See Note 9 to the Company's consolidated financial statements for a
discussion of these items.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto appearing
elsewhere herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Statements
regarding future events and developments and the Company's future performance,
as well as management's expectations, beliefs, plans, estimates or projections
relating to the future, are forward-looking statements within the meaning of
these laws. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected. Such risks and uncertainties include, among others, the Company's
limited manufacturing experience, the inability to efficiently manufacture
different products and to integrate newly acquired products with existing
products, the possible failure to successfully commence the manufacturing of new
products, the possible failure to maintain or increase production volumes of new
or existing products in a timely or cost-effective manner, the possible failure
to maintain compliance with applicable licensing or regulatory requirements, the
inability to successfully integrate acquired operations and products or to
realize anticipated synergies and economies of scale from acquired operations,
the dependence on patents, trademarks, licenses and proprietary rights, the
Company's potential exposure to product liability, the possible inadequacy of
the Company's cash flow from operations and cash available from external
financing, the inability to introduce new products, the Company's reliance on a
few large customers, the Company's dependence on key personnel, the fact that
the Company is subject to control by certain shareholders, the Company's ability
to address Year 2000 problems, pricing pressure related to healthcare reform and
managed care and other healthcare provider organizations, the possible failure
to comply with applicable federal, state or foreign laws or regulations,
limitations on third-party reimbursement, the highly competitive and fragmented
nature of the medical devices industry, risks relating to the pending
shareholder suit against the Company, deterioration in general economic
conditions, and the Company's ability to pay its indebtedness. Management
believes that these forward-looking statements are reasonable; however, you
should not place undue reliance on such statements. These statements are based
on current expectations and speak only as of the date of such statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of future events, new information
or otherwise. Additional information concerning the risk and uncertainties
listed above, and other factors that you may wish to consider, is contained
below in this Item under the sections entitled "Year 2000 Readiness Disclosure"
and "Risk Factors."
BACKGROUND
The Company is a specialty medical device company focused on manufacturing
and/or marketing vascular products. The Company's oncology product lines include
implantable vascular ports, tunnelled catheters and stem cell transplant
catheters used primarily in cancer treatment protocols. The Company has a
complete line of acute and chronic dialysis catheters and immediate access
hemodialysis grafts used for kidney failure patients, as well as balloon
technology products for embolectomy catheters and carotid shunts used for
endarterectomy procedures. In addition, the Company distributes certain
specialty devices used primarily in general and emergency surgery, radiology,
anesthesiology, respiratory therapy, blood filtration and critical care
settings. The Company was incorporated and began its operations in February 1990
as a distributor of medical devices and began to distribute vascular access
devices in 1990. In November 1992, the Company entered into a collaborative
effort with a leading heart valve manufacturer to design and develop a new line
of vascular access ports for the Company. This new line of ports, the
Triumph-1(R) line, was introduced in September 1994. The Company continues to
market the Triumph-1(R) line of vascular access ports. In May 1995, the Company
began to distribute the NeoStar Medical(R) line of hemodialysis catheters. In
March 1996, the Company began construction of a 20,000 square foot
manufacturing, distribution and administrative facility in Manchester, Georgia.
The Company began manufacturing the NeoStar Medical(R) product line at this
facility in October 1996 and expanded this facility in 1998 to approximately
45,000 square feet. In July 1997, the Company acquired the port business of
Strato(R)/Infusaid(TM). The primary product lines obtained in the
Strato(R)/Infusaid(TM) acquisition included the LifePort(R) and Infuse-a-Port(R)
vascular access ports, and the Infuse-a-Cath(TM) line of catheters. In 1998, the
Company made additional product acquisitions and acquired the CVS and Stepic
medical device distribution businesses. See "--1998 Acquisitions and
Distribution Agreements" below. Distribution of medical devices currently
comprises approximately 55% of the Company's revenue.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
contained in the Company's consolidated statements of operations expressed as a
percentage of net sales:
Years Ended December 31,
-------------------------------
1996 1997 1998
----- ----- -----
Net sales ................................................. 100.0% 100.0% 100.0%
Cost of goods sold ........................................ 42.5 39.7 50.6
----- ----- -----
Gross profit .............................................. 57.5 60.3 49.4
Selling, general and administrative expense ............... 64.6 41.0 34.5
----- ----- -----
Operating income (loss) ............................... (7.1) 19.3 14.9
Other income (expense)
Interest expense, net ................................. (10.4) (25.1) (7.9)
Accretion of value of put warrant repurchase obligation -- (50.6) --
Other income .......................................... 0.7 0.4 0.1
----- ----- -----
Income (loss) before income taxes and extraordinary item .. (16.8) (56.0) 7.1
Income tax expense ........................................ -- (2.0) (4.5)
Extraordinary gain on early extinguishment of put feature . -- -- 2.8
Extraordinary loss on early extinguishment of debt ........ -- -- (0.2)
----- ----- -----
Net income (loss) ......................................... (16.8)% (58.0)% 5.2%
===== ===== =====
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Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net Sales. Net sales increased 149.4% to $39.4 million in 1998 from $15.8
million in 1997. Approximately $21.8 million of this increase is attributable to
the 1998 acquisitions of Norfolk, IFM, CVS and Stepic ("the 1998 Acquisitions")
and the effect of owning Strato for a full year in 1998 versus five and a half
months in 1997. If the Company's sales were compared on a "same store" basis,
i.e., excluding the sales increase resulting from the 1998 Acquisitions and
owning Strato a full year in 1998, sales revenue increased approximately $1.83
million or 12%. This increase, which is attributable primarily to increased
volume in hemodialysis and triple lumen catheter sales, is largely due to an
expanded sales force. The allocation of 1998 net sales on a segment basis
resulted in net sales of $27.6 million from the manufacturing segment and $12
million from the distribution segment. There were no distribution segment sales
in 1997.
Gross Profit. Gross profit increased 104.4% to $19.5 million in 1998, from
$9.5 million in 1997. Gross margin decreased to 49.4% in 1998 from 60.3% in
1997. The decrease in gross margin is primarily the result of the acquisition of
CVS and Stepic, the distribution segment of the business, which produces a
significantly lower profit margin on products manufactured by companies other
than Horizon. Excluding the 1998 acquisitions and the five and a half month
effect of the Strato acquisition, gross profit on a "same store" basis increased
from 60.3% or $9.5 million in 1997 to 63.1% or $11.1 million in 1998. This
increase is primarily attributable to improved production efficiencies at the
Manchester facility. The increase is also due to increased sales and the effect
of increased volume of higher margin catheter products as part of the overall
sales mix. The breakout of 1998 gross margin on a segment basis resulted in
gross profit of $16.4 million or 59.3% from the manufacturing segment and $3.1
million or 25.8% from the distribution segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (S,G & A) increased $7.1 million or 110% to $13.6
million in 1998 from $6.5 million in 1997. Approximately $3.6 million of this
increase is due to the expenses incurred in operating the businesses acquired in
the 1998 Acquisitions and the additional five and a half months of owning
Strato. On a "same store" basis, SG&A costs increased $3.5 million. The increase
was partly attributable to a consultant fee of $657 thousand paid in relation to
the Premier agreement, which was the fair market value of stock issued to
Premier pursuant to the agreement. Additionally, the increase is due to
increased research and development fees and increased compensation expenses
associated with the expansion of the sales force and the development of an
adequate infrastructure to manage the rapid growth through acquisitions. SG&A
expenses decreased as a percentage of net sales to 34.5% in 1998 from 41.0% in
1997 due to substantial revenue growth in 1998.
Interest Expense. Interest expense, net of interest income, decreased
approximately $868,000 or 22% from $4 million in 1997 to $3.1 million in 1998.
Excluding the effects of the accelerated amortization of debt issue costs and
debt discount related to the NationsCredit debt and warrant (more fully
discussed in Note 9 to the Company's consolidated financial statements included
elsewhere in this Form 10-K), interest expense decreased approximately $133,000
in 1998. The accelerated amortization was approximately $1.4 million in 1998
compared to $2.3 million in 1997. The decrease is due primarily to the improved
cash position of the Company for much of 1998 as a result of the Initial Public
Offering (the "IPO") proceeds. "See also Liquidity and Capital Resources."
Accretion of Value of Put Warrant Repurchase Obligation. This item
represented a one-time charge of $8 million in 1997 as a result of the estimated
increase in the original $3 million value assigned to the NationsCredit Warrant,
which included a put feature. The put feature was rescinded by NationsCredit in
January 1998 which resulted in an extraordinary gain of $1.1 million and a
reclassification of $9.9 million from a put warrant repurchase obligation
liability to additional paid-in capital. This transaction is more fully
described in Note 9 to the Company's consolidated financial statements contained
elsewhere in this Form 10-K.
Extraordinary Items. During 1998, the Company incurred extraordinary net
losses of approximately $83,000, net of applicable income tax benefit of
approximately $53,300, associated with the early extinguishment of certain debt,
which the Company repaid using proceeds from the IPO. In addition, as discussed
previously, the Company recorded an extraordinary gain of $1.1 million in 1998
due to the rescission of a put feature associated with the NationsCredit Warrant
that was issued in 1997. These transactions are more fully described in Notes 6
and 9 to the Company's consolidated financial statements contained elsewhere in
this Form 10-K.
Income Taxes. Income tax expense increased approximately $1.5 million or
457% from an approximate $320,000 in 1997 to approximately $1.8 million in 1998.
The increase in expense is attributable to increased pre-tax income and the full
year impact of the non-deductible goodwill amortization expense related to the
Strato acquisition. It should be noted that the 1997 expense was also lower due
to the utilization of net operating loss carryforwards for which there
previously had been a full valuation allowance. These carryforwards were fully
utilized in 1997.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Sales. Net sales increased 124.0% to $15.8 million in 1997, from $7.1
million in 1996. This increase is primarily attributable to (i) an overall
increase in sales of ports of $7.3 million, with $7.0 million of this increase
from sales of the port product lines acquired in the Strato(R)/Infusaid(TM)
Acquisition, and (ii) an overall increase in sales of catheters of $1.3 million,
with triple lumen catheter sales increasing $900,000, primarily due to the
expansion of this product to the Company's full sales force in 1996. The overall
increase in sales of catheters is primarily the result of a sales volume
increase and to a lesser extent a slight price increase.
Gross Profit. Gross profit increased 134.9% to $9.5 million in 1997, from
$4.1 million in 1995. Gross margin increased to 60.3% in 1997, from 57.5% in
1996. The margin increase is attributable to the port product line acquired in
the Strato(R)/Infusaid(TM) Acquisition having a higher margin than the Company's
existing port product line and an increase in sales of triple lumen catheter
which have a higher margin than the Company's other catheters. This margin
increase was offset somewhat by increased overall international sales, which
generally have lower profit margins than domestic sales.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 42.1% to $6.5 million in 1997, from $4.6
million in 1996. This increase is primarily attributable to increased
compensation expenses associated with the development of the Company's sales
force. Selling, general and administrative expenses declined as a percentage of
net sales to 41.0% in 1997 from 64.6% in 1996 due to substantial revenue growth
in 1997.
Interest Expense. Net interest expense increased to $4 million in 1997 from
$700,000 in 1996. Such expense increased as a percentage of net sales to 25.1%
in 1997 from 10.4% in 1996. The increase is primarily a result of the
amortization of deferred loan costs and interest expense in connection with the
previous credit facility with NationsCredit, including $1.8 million of
amortization related to the debt discount associated with the NationsCredit
Warrant.
Accretion of Value of Put Warrant Repurchase Obligation. In connection with
the Credit Facility, the Company issued the NationsCredit Warrant which
contained a put feature. The Company recorded a charge of $8 million equaling
the estimated increase in the value of the NationsCredit Warrant from its
original estimated value of $3 million. On January 29, 1998 the Company
entered into an agreement with NationsCredit which rescinded the put feature of
the NationsCredit Warrant. This resulted in a $1.1 million decrease in the
liability to be reflected as an increase to income in 1998. The remaining $9.9
million was reclassified from the liability to additional paid in capital. Such
adjustments were reflected in the Company's first quarter 1998 results. See
Notes 6 and 9 of the notes to the consolidated financial statements of the
Company.
Taxes. Income taxes increased to $300,000 in 1997 from $0 in 1996. Prior to
1997, the Company recorded a full valuation allowance against its net deferred
tax assets which were primarily attributable to its net operating loss
carryforwards. During 1997, the Company generated taxable income sufficient to
fully utilize the net operating loss carryforwards. The provision for income
taxes in 1997 differs from the amount which would have been calculated by
applying the federal statutory rate of 34% due primarily to nondeductible
interest and accretion of the put warrant repurchase obligation of approximately
$9.8 million.
QUARTERLY RESULTS
The following table sets forth quarterly statement of operations data for
1997 and 1998. 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.
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Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1997 1997 1997 1997
---- ---- ---- ----
(In Thousands, except per share data)
Net sales ........................................ $ 1,941 $ 2,216 $ 5,161 $ 6,480
Costs of goods sold .............................. 814 990 2,005 2,464
------- ------- ------- -------
Gross profit ..................................... 1,127 1,226 3,156 4,016
Selling, general and administrative expenses ..... 1,116 1,194 1,958 2,208
------- ------- ------- -------
Operating income ................................. 11 32 1,198 1,808
Interest expense, net ............................ (175) (172) (1,668) (1,956)
Accretion of value of put warrant repurchase
obligation ................................... -- -- (3,636) (4,364)
Other income ..................................... 11 11 36 12
------- ------- ------- -------
Loss before income taxes ......................... (153) (129) (4,070) (4,500)
Income tax expense ............................... -- -- -- (320)
------- ------- ------- -------
Net loss ......................................... $ (153) $ (129) $(4,070) $(4,820)
======= ======= ======= =======
Net loss per share -- basic and diluted .......... $ (.02) $ (.01) $ (.43) $ (.51)
======= ======= ======= =======
Three Months Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- -------------
1998 1998 1998 1998
---- ---- ---- ----
(In Thousands, except per share data)
Net sales ........................................ $ 6,709 $ 6,859 $ 8,064 $ 17,767
Costs of good sold ............................... 2,534 2,500 3,485 11,414
------- ------- ------- --------
Gross profit ..................................... 4,175 4,359 4,579 6,353
Selling, general and administrative expenses ..... 2,963 2,439 3,244 4,951
------- ------- ------- --------
Operating income ................................. 1,212 1,920 1,335 1,402
Interest expense, net ............................ (1,942) (299) (30) (832)
Other income ..................................... 11 11 11 13
------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item .......................... (719) 1,632 1,316 583
Income tax expense ............................... (209) (681) (576) (314)
------- ------- ------- --------
Income (loss) before extraordinary items ......... (928) 951 740 269
Extraordinary gain on early extinguishment of put
feature ..................................... 1,100 -- -- --
Extraordinary losses on early extinguishments of
debt, net of income tax benefit of $53,330 .. -- (83) -- --
------- ------- ------- --------
Net income ....................................... $ 172 $ 868 $ 740 $ 269
======= ======= ======= ========
Net income (loss) per share before extraordinary
item -- basic and diluted ................... $ (.10) $ .08 $ .06 $ .02
======= ======= ======= ========
Net income per share -- basic and diluted ........ $ .02 $ .07 $ .06 $ .02
======= ======= ======= ========
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund capital
expenditures for its existing facility and to fund new business acquisitions.
Historically, the Company has used cash generated by operations, bank financing,
and, in 1998, proceeds from its public equity offering to fund its capital
requirements. Additionally, the Company requires capital to finance accounts
receivable and inventory. The Company's working capital requirements vary from
period to period depending on its production volume, the timing of shipments and
the payment terms offered to its customers.
Net cash provided by (used in) operations was approximately ($706,000) in
1998, as compared with approximately $112,000 and $2.7 million in 1996 and 1997,
respectively. The decrease in cash from operations during 1998 was primarily the
result of higher accounts receivable and inventory balances in 1998, as well as
the reduction of certain liabilities related to acquisition expenses slightly
offset by an increase in trade accounts payable.
Net cash used in investing activities was approximately $38.2 million
during 1998, as compared with approximately $84,000 and $20.4 million in 1996
and 1997, respectively. Substantially all of the investing activities were for
acquisitions and capital expenditures for the Company's Manchester facility. The
most significant of the capital expenditures during 1998 was the purchase of the
Company's office in Atlanta as well as certain furnishings and equipment in the
amount of approximately $584,000. Cash paid for acquisitions was approximately
$19.5 million and $36.1 million during 1997 and 1998, respectively. The Company
made no acquisitions during 1996. In addition, the Company issued notes payable
related to the 1998 Acquisitions of approximately $7.9 million.
The Company has established a capital expenditure budget in 1999 of
approximately $2.5 million, including $1.5 million for the construction of a
distribution warehouse adjacent to its manufacturing facility in Manchester,
Georgia.
Net cash provided by (used in) financing activities was $42.1 million in
1998, as compared with approximately ($204,000) and $20.4 million in 1996 and
1997, respectively. Financing activities in 1998 include approximately $39.9
million provided by the Company's IPO of its common stock as well as additional
borrowings under the Company's new credit facility, discussed below, primarily
to finance certain of the Company's fiscal year 1998 acquisitions as well as
fund to operations. Specifically, the proceeds from the Company's initial public
offering were used, in 1998, to repay the Company's existing debt of
approximately $25 million that was outstanding, purchase the Company's office in
Atlanta, Georgia, and fund the acquisition of Norfolk. In 1997, the borrowings
of $23.5 million were used to fund business expansion through the acquisition of
Strato, to retire approximately $1.7 million of existing debt and to purchase
warrants issued in connection with a previous debt agreement for a price of
$400,000.
As previously noted, the Company's previous credit facility and certain
other indebtedness were repaid during 1998 with proceeds from the IPO as was
required by the respective agreements. On May 26, 1998, the Company entered into
a $50 million amended and restated credit facility ("the New Credit Facility")
with NationsCredit to be used for working capital purposes and to fund future
acquisitions. The New Credit Facility bears interest, at the option of the
Company as defined in the agreement. At December 31, 1998, the Company's
interest rate was 8.1701%. Portions of the amounts outstanding under the New
Credit Facility are payable in 16 quarterly installments beginning October 1,
2000 in amounts representing 6.25% of the principal amounts outstanding on the
payment due dates. The remaining portion is due on the date of the expiration of
the New Credit Facility, which is July 1, 2004. The total balance outstanding
under the New Credit Facility was approximately $42 million and no funds were
available for borrowing under the New Credit Facility at December 31, 1998. In
addition, the Company had outstanding standby letters of credit at December 31,
1998 of approximately $7.7 million, which collateralize the Company's
obligations to third parties in connection with its 1998 acquisitions. The
Company's New Credit Facility contains certain restrictive covenants that
require a minimum net worth and EBITDA as well as specific ratios such as total
debt service coverage, leverage, interest coverage and debt to capitalization.
The covenants also place limitations on capital expenditures, other borrowings,
operating lease arrangements, and affiliate transactions. The Company is in
compliance with or has received appropriate waivers of these covenants as of the
date of this filing. The New Credit Facility is described more fully in Note 6
of the consolidated financial statements of the Company included elsewhere in
this Form 10-K. The Company and NationsCredit amended the New Credit Facility on
March 31, 1999, to adjust certain of the financial ratio covenants and increase
the interest rate.
The Company is currently negotiating with its lenders for an increase in
its credit facility which, together with its cash flows from operations, the
Company believes will be sufficient to satisfy its future working capital and
capital expenditure requirements.
IMPACT OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of the Company's operations for the periods discussed have not
been significantly affected by inflation or foreign currency fluctuations. The
New Credit Facility costs result primarily from interest and principal and are
not affected by inflation. Further, although the Company often sells products
on a fixed cost basis, the average time between the receipt of any order and
delivery is generally only a few days. While the Company has not historically
been adversely affected by increases in the cost of raw materials and
components, several GPO agreements to which the Company is a party limit the
Company's ability to raise prices. Thus, future increases in the cost of raw
materials and components could adversely affect the Company's business,
financial condition and results of operations. This could change in situations
in which the Company is producing against a substantial backlog and may not be
able to pass on higher costs to customers. In addition, interest on a portion of
the Company's debt is variable (approximately $13.3 million is subject to an
interest rate cap) and therefore may increase with inflation.
The Company makes all sales of foreign customers in U.S. dollars. Thus,
notwithstanding fluctuation of foreign currency exchange rates, the Company's
profit margin for any purchase order is not subject to change due to exchange
rate fluctuations after the time the order is placed.
YEAR 2000 READINESS DISCLOSURE
Some computer systems use only two digits to represent the year, and they
may be unable to process accurately certain data before, during or after the
year 2000. This phenomenon is commonly known as the Year 2000 ("Y2K") issue. The
Y2K issue can arise at any point in the Company's supply, manufacturing or
distribution network. Based on the Company's review of its business and
operating systems, the Company does not expect to incur material costs with
respect to assessing and remediating Y2K problems; however, there can be no
assurance that such problems will not be encountered or that the costs incurred
to resolve such problems will not be material.
The Company is in the process of implementing a Y2K program with the
objective of having all significant systems Y2K compliant by the third quarter
of 1999. The Company is currently in the process of implementing new
Manufacturing Materials Requirement Planning ("MRP") and Accounting computer
systems. Both of these systems are Y2K compliant. Part of the Y2K program
includes identifying and prioritizing
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significant vendors and suppliers and attempting to reasonably ascertain their
stage of Y2K readiness. The Company is in the process of surveying its vendors
and significant customers as to their state of Y2K readiness. The Company
believes its manufacturing equipment is Y2K compliant.
The implementation of the new computer systems described above were planned
and are considered part of the Company's normal business.
The Company's embedded systems (primarily consisting of telephone and voice
mail systems) at its Manchester facility are substantially Y2K compliant.
However, those systems at its Atlanta office are not Y2K compliant and must be
replaced or upgraded.
The Company's Medical Device Reporting software will be upgraded to comply
with FDA Y2K requirements. The upgrade will also comply with International
Regulatory Affairs Y2K requirements.
The Company's primary computer system utilized in its New York distribution
business is currently in the final modification phase for Y2K compliance, and
the modifications are expected to be completed by June 30, 1999.
The Company currently does not have a contingency plan for Y2K problems.
The Company intends to develop a contingency plan by the end of the third
quarter of 1999. The manager responsible for overseeing the Company's Y2K
program recently left the Company. The responsibility for overseeing the Y2K
program is being reassigned to another manager.
According to recent reports, the healthcare industry lags behind other
industries in Y2K preparedness. The reports indicate that the progress of health
claim billing systems of third party payors is progressing slowly. To the extent
the Company's customers experience problems with their payment collections, the
Company's ability to collect payments from its customers could be adversely
affected and could have a material adverse affect on the Company's business,
liquidity, financial condition and results of operations.
The Company relies on third party vendors and suppliers for raw materials,
utilities, transportation and other key services. Interruption of vendor or
supplier operations could materially adversely affect Company operations. The
Company's manufacturing and distribution operations rely in part on
computerized systems. Failure to identify and correct any Y2K sensitive systems
could adversely affect the Company's business, financial condition and results
of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, that requires the use of the management
approach in identifying operating segments of the Company. Under the management
approach, operating segments of an enterprise are identified in a manner
consistent with how the Company makes operating decisions and assesses
performance. SFAS No. 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position but did affect the disclosure
of segment information. See Note 16 of the Company's consolidated financial
statements included elsewhere in this Form 10-K.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which requires the reporting and
display of comprehensive income and its components in an entity's financial
statements. The Company adopted SFAS 130 during 1998, and for the years ending
December 31, 1998, 1997, and 1996, there were no differences between net income
and comprehensive income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. Changes in such fair value are required to be recognized
immediately in net income (loss) to the extent the derivatives are not effective
as hedges. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and is effective for interim periods in the initial year of adoption. The
Company does not expect the adoption of SFAS No. 133 to have a material impact.
RISK FACTORS
LIMITED MANUFACTURING EXPERIENCE
The Company's success will depend in part on its ability to manufacture
its products in compliance with international and domestic standards such as ISO
9001, the FDA's Good Manufacturing Practices ("GMP") regulations and other
applicable licensing and regulatory requirements in sufficient quantities and on
a timely basis, while maintaining product quality and acceptable manufacturing
costs. The Company has historically outsourced the manufacturing of most of its
product lines to third parties while remaining responsible for that work. In the
fourth quarter of 1996, the Company transitioned the manufacturing of its Circle
C(R) and Pheres-Flow(TM) specialty catheter product lines into its manufacturing
facility in Manchester, Georgia. During 1998, the Company transitioned the
manufacturing of its LifePort(TM), Infuse-a-Port(R) and Infuse-a-Cath(TM)
product lines to the Manchester facility from a facility in Norwood,
Massachusetts. The Company has undergone and expects to continue to undergo
regular GMP inspections in connection with the manufacture of its products at
the Company's facilities. The Company's success will depend, among other things,
on its ability to efficiently manufacture different products and to integrate
newly acquired products with existing products. The Company's failure to
successfully commence the manufacturing of new products, to maintain or increase
production volumes of new or existing products in a timely or cost-effective
manner or to maintain compliance with ISO 9001, the CE Mark, GMP regulations or
other applicable licensing or regulatory requirements could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH ACQUISITIONS
The rapid growth experienced by the Company to date has placed, and
could continue to place, significant demands on the Company's management,
operational and financial resources. From time to time, the Company may pursue
additional strategic acquisitions of complementary businesses, products or
technologies as a means of expanding its existing product lines and distribution
channels. As the medical devices industry continues to consolidate, the Company
expects to face increasing competition from other companies for available
acquisition opportunities. There can be no assurance that suitable acquisition
candidates will be available, that financing for such acquisitions will be
obtainable on terms acceptable to the Company or that such acquisitions will be
successfully completed. Acquisitions entail numerous risks, including (i) the
potential inability to successfully integrate acquired operations and products
or to realize anticipated synergies, economies of scale or other value, (ii)
diversion of management's attention, (iii) responsibility for undiscovered or
contingent liabilities and (iv) loss of key employees of acquired operations.
The relocation of manufacturing operations for acquired product lines to the
Company's manufacturing facility in Manchester, Georgia may also result in
interruptions in production and back orders. No assurance can be given that the
Company will not incur problems in integrating any future acquisition and there
can be no assurance that any future acquisition will increase the Company's
profitability. Further, the Company's results of operations in fiscal quarters
immediately following a material acquisition may be materially adversely
affected while the Company integrates the acquired business into its existing
operations. Any such problems could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
future acquisitions by the Company may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time charges and the
creation of goodwill or other intangible assets that could result in significant
amortization expense.
DEPENDENCE ON PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS
The Company believes that its competitive position and success has
depended, in part, on and will continue to depend on the ability of the Company
and its licensors to obtain patent protection for its products, to defend
patents once obtained, to preserve its trade secrets and to operate without
infringing upon patents and proprietary rights held by third parties, both in
the United States and in foreign countries. The Company's policy is to protect
its proprietary position by, among other methods, filing United States and
foreign patent applications relating to technology, inventions and improvements
that are important to the development of its business. The Company owns numerous
United States and foreign patents and United States and foreign patent
applications. The Company also is a party to license agreements with third
parties pursuant to which it has obtained, for varying terms, the right to make,
use and/or sell products that are covered under such license agreement in
consideration for royalty payments. Many of the Company's major products are
subject to such license agreements. There can be no assurance that the Company
or its licensors have or will develop or obtain additional rights to products or
processes that are patentable, that patents will issue from any of the pending
patent applications filed by the Company or that claims allowed will be
sufficient to protect any technology that is licensed to the Company. In
addition, no assurances can be given that any patents issued or licensed to the
Company or other licensing arrangements will not be challenged, invalidated,
infringed or circumvented or that the rights granted thereunder will provide
competitive advantages for the Company's business or products. In such event the
business, results of operations and financial condition of the Company could be
materially adversely affected.
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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.
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SHAREHOLDER LITIGATION
In the fourth quarter of 1998, shareholder suits were filed against the
Company and certain of its officers, directors and shareholders. See Item 3.
"Legal Proceedings." Although the Company believes the suits are without merit,
the outcome cannot be predicted at this time. If the ultimate disposition of
this matter is determined adversely to the Company, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Although the Company believes that it has defenses to the claims of
liability and for damages in the action against it, there can be no assurance
that additional lawsuits will not be filed against the Company or its
subsidiaries. Further, there can be no assurance that the 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.
POTENTIAL PRODUCT LIABILITY
Because its products are intended to be used in healthcare settings on
patients who are physiologically unstable and may be seriously or critically
ill, the Company's business exposes it to potential product liability risks
which are inherent in the medical devices industry. In addition, many of the
medical devices manufactured and sold by the Company are designed to be
implanted in the human body for extended periods of time. Component failures,
manufacturing flaws, design defects or inadequate disclosure of product-related
risks with respect to these or other products manufactured or sold by the
Company could result in injury to, or death of, a patient. The occurrence of
such a problem could result in product liability claims and/or a recall of,
safety alert relating to, or other FDA or private civil action affecting one or
more of the Company's products or responsible officials. The Company maintains
product liability 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.
FUTURE CAPITAL REQUIREMENTS
There can be no assurance that the Company's cash flow from operations
and cash available from external financing will be sufficient to meet the
Company's future cash flow needs, in which case the Company would need to obtain
additional financing. The Company currently has limited availability of funds
under the New Credit Facility. Any additional financing could involve issuances
of debt or issuances of equity securities which would be dilutive to the
Company's stockholders, and any debt facilities could contain covenants that may
affect the Company's operations, including its ability to make future
acquisitions. Adequate additional funds, whether from the financial markets or
from other sources, may not be available on a timely basis, on terms acceptable
to the Company or at all. Insufficient funds may cause the Company difficulty in
financing its accounts receivables and inventory and may result in delay or
abandonment of some or all of the Company's product acquisition, licensing,
marketing or research and development programs or opportunities, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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.
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CUSTOMER CONCENTRATION
The Company's net sales to its three largest customers accounted for
8%, 14%, and 7% of total sales during 1996,1997 and 1998, 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 approximately 72% of its sales through distribution of products of
three major manufacturers. See "Business -- Description of Business by Industry
Segment -- Product Distribution." The loss of a major supplier, the
deterioration of the Company's relationship with a major supplier, changes by a
major supplier in the specifications of the components used in the Company's
products, or the failure of the Company to establish good relationships with
major new suppliers could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success is substantially dependent on the performance,
contributions and expertise of its executive officers and key employees. The
Company's success to date has been significantly dependent on the contributions
of Marshall B. Hunt, its Chairman and Chief Executive Officer, and William E.
Peterson, Jr., its President, each of whom have entered into an employment
agreement with the Company at the time of the Offering and on each of whom the
Company maintains key man life insurance in the amount of $1 million. The
Company is wholly dependent on certain key employees to manage its distribution
business. The Company is also dependent on its ability to attract, retain and
motivate additional personnel. The loss of the services of any of its executive
officers or other key employees or the Company's inability to attract, retain or
motivate the necessary personnel could have a material adverse effect on the
Company's business, results of operations and financial condition.
CONTROL BY CERTAIN SHAREHOLDERS
Marshall B. Hunt, William E. Peterson, Jr., and Roy C. Mallady, Jr. own
more than 50% of the Company's outstanding common stock. These shareholders, if
they were to act together, would have the power to elect all of the members of
the Company's Board of Directors, amend the Amended and Restated Articles of
Incorporation of the Company (the "Articles") and the Amended and Restated
Bylaws of the Company (the "Bylaws") and effect or preclude fundamental
corporate transactions involving the Company, including the acceptance or
rejection of proposals relating to a merger of the Company or the acquisition of
the Company by another entity. Accordingly, these shareholders are able to exert
significant influence over the Company, including the ability to control
decisions on matters on which shareholders are entitled to vote.
YEAR 2000 ISSUES
The approaching year 2000 could result in challenges related to the
Company's computer software, accounting records and relationships with suppliers
and customers. Management of the Company is studying year 2000 issues and is
seeking to avoid such problems. Based on the Company's review of its business
and operating systems, the Company does not expect to incur material costs with
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respect to assessing and remediating year 2000 problems. However, there can be
no assurance that the Company will identify all year 2000 problems in its
computer systems or those of its customers, vendors or resellers in advance of
their occurrence or that the Company will be able to successfully remedy any
problems that are discovered. The expenses of the Company's efforts to identify
and address such problems, or the expenses or liabilities to which the Company
may become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The revenue stream and financial stability of existing customers may be
adversely impacted by year 2000 problems, which could cause fluctuations in the
Company's revenue. In addition, failure of the Company to identify and remedy
year 2000 problems could put the Company at a competitive disadvantage relative
to companies that have corrected such problems.
HEALTHCARE REFORM/PRICING PRESSURE
The healthcare industry in the United States continues to experience
change. In recent years, several healthcare reform proposals have been
formulated by members of Congress. In addition, state legislatures periodically
consider healthcare reform proposals. Federal, state and local government
representatives will, in all likelihood, continue to review and assess
alternative healthcare delivery systems and payment methodologies, and ongoing
public debate of these issues can be expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement by
both government and third-party payors to persons providing medical services. In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and pricing involved
in the purchase of medical devices, including certain of the products sold by
the Company, which is expected to exert downward pressure on product margins.
Both short- and long-term cost containment pressures, as well as the possibility
of continued regulatory reform, may have an adverse impact on the Company's
business, results of operations and financial condition.
GOVERNMENT REGULATION
The Company's products and operations are subject to extensive
regulation by numerous governmental authorities, including, but not limited to,
the FDA and state and foreign governmental authorities. In particular, the
Company must obtain specific clearance or approval from the FDA before it can
market new products or certain modified products in the United States. The FDA
administers the FDC Act. Under the FDC Act, medical devices must receive FDA
clearance through the Section 510(k) notification process ("510(k)") or the more
lengthy PMA process before they can be sold in the United States. To obtain
510(k) marketing clearance, a company must show that a new product is
"substantially equivalent" to a product already legally marketed and which does
not require a PMA. Therefore, it is not always necessary to prove the safety and
effectiveness of the new product in order to obtain 510(k) clearance for such
product. To obtain a PMA, a company must submit extensive data, including
clinical trial data, to prove the safety, effectiveness and clinical utility of
its products. FDA regulations also require companies to adhere to certain GMP's,
which include testing, quality control, storage, and documentation procedures.
Compliance with applicable regulatory requirements is monitored through periodic
site inspections by the FDA. The process of obtaining such clearances or
approvals can be time-consuming and expensive, and there can be no assurance
that all clearances or approvals sought by the Company will be granted or that
FDA review will not involve delays adversely affecting the marketing and sale of
the Company's products. In addition, the Company is required to comply with FDA
requirements for labeling and promotion of its products. The Federal Trade
Commission also regulates most device advertising.
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In addition, international regulatory bodies often establish varying
regulations governing product testing and licensing standards, manufacturing
compliance (e.g., compliance with ISO 9001 standards), packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. The inability or failure of
the Company to comply with the varying regulations or the imposition of new
regulations could restrict the Company's ability to sell its products
internationally and thereby adversely affect the Company's business, results of
operations and financial condition.
Failure to comply with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement actions, including, but not
limited to, product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties against the Company or its responsible officials,
any one or more of which could have a material adverse effect on the Company's
business, results of operations and financial condition. Federal, state and
foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes, as are administrative interpretations of
regulatory agencies. No assurance can be given that such changes will not have a
material adverse effect on the Company's business, results of operations and
financial condition. From time to time, the Company has received Section 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 warning letters in
the future or that it will be able to reach an acceptable resolution of the
issues raised in such letters.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
In the United States, the Company's products are purchased primarily by
hospitals and medical clinics, which then bill various third-party payors, such
as Medicare, Medicaid and other government programs and private insurance plans,
for the healthcare services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the United States Health Care
Financing Administration ("HCFA"). The fixed rate of reimbursement is based on
the procedure performed and is unrelated to the specific devices used in that
procedure. If a procedure is not covered by a DRG, payors may deny
reimbursement. In addition, third-party payors may deny reimbursement if they
determine that the device used in a treatment was unnecessary, inappropriate or
not cost-effective, experimental or used for a non-approved indication.
Reimbursement of procedures implanting the Company's vascular access ports and
catheter products is currently covered under a DRG. There can be no assurance
that reimbursement for such implantation will continue to be available, or that
future reimbursement policies of third-party payors will not adversely affect
the Company's ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION
The medical devices industry is highly competitive and fragmented. The
Company currently competes with many companies in the development, manufacturing
and marketing of vascular access ports, dialysis and apheresis catheters and
related ancillary products and in the distribution of medical devices. Some of
these competitors have substantially greater capital resources, management
resources, research and development staffs, sales and marketing organizations
and experience in the medical devices industry than the Company. These
competitors may succeed in marketing their products more effectively, pricing
their products more competitively, or developing technologies and products that
are more effective than those sold or produced by the Company or that would
render some products offered by the Company noncompetitive.
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FACTORS INHIBITING TAKEOVER
Certain provisions of the Articles and Bylaws may delay or prevent a
takeover attempt that a shareholder might consider in its best interest. Among
other things, these provisions establish certain advance notice procedures for
shareholder proposals to be considered at shareholders' meetings, provide for
the classification of the Board of Directors, provide that only the Board of
Directors or shareholders owning 70% or more of the outstanding Common Stock may
call special meetings of the shareholders and establish supermajority voting
requirements with respect to the amendment of certain provisions of the Articles
and Bylaws. In addition, the Board of Directors can authorize and issue shares
of Preferred Stock, no par value (the "Preferred Stock"), issuable in one or
more series, with voting or conversion rights that could adversely affect the
voting or other rights of holders of the Common Stock. The terms of the
Preferred Stock that might be issued could potentially prohibit the Company's
consummation of any merger, reorganization, sale of all or substantially all of
its assets, liquidation or other extraordinary corporate transaction without the
approval of the holders of the outstanding shares of such stock. Furthermore,
certain provisions of the Georgia Business Corporation Code may have the effect
of delaying or preventing a change in control of the Company.
DETERIORATION IN GENERAL ECONOMIC CONDITIONS
The sales of the products manufactured and distributed by the Company
may be adversely impacted by a deterioration in the general economic conditions
in the markets in which the Company's products are sold. Likewise, a
deterioration in general economic conditions could cause the Company's customers
and/or third party payors to choose cheaper methods of treatment not utilizing
the Company's products. A decline in the Company's sales attributable to these
factors could have a material adverse effect on the Company's business, results
of operations and financial condition.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Like other companies, the Company is exposed to market risks relating to
fluctuations in interest rates. The Company's objective of financial risk
management is to minimize the negative impact of interest rate fluctuations on
the Company's earnings and cash flows.
To manage this risk, the Company has entered into an interest rate cap
agreement ("the Cap Agreement") with NationsBank, a major financial institution,
to minimize the risk of credit loss. The Company uses this Cap Agreement to
reduce risk by essentially creating offsetting market exposures. The Cap
Agreement is not held for trading purposes.
At December 31, 1998, the Company had approximately $42 million outstanding
under its New Credit Facility, which expires in July 2004. Amounts outstanding
under the New Credit Facility of approximately $13.3 million were subject to the
Cap Agreement, which expires in October 2002. The fair value of the Cap
Agreement, as determined by NationsBank, was $151 as of December 31, 1998. The
Cap Agreement settles quarterly and the cap rate is 8.8%.
For more information on the Cap Agreement, see Notes 1 and 6 to the
Company's consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements are listed under Item 14(a)
and appear beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the captions
"Directors Standing for Election," "Directors Continuing in Office," and
"Executive Officers" in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
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?" and "Executive Compensation" in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders.
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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 1999 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 this information under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Page
----
1. Financial Statements
Consolidated Financial Statements
Report of Independent Accountants.................F-1
Consolidated Balance Sheets as of
December 31, 1997 and 1998......................F-2
Consolidated Statements of Operations
for the Years Ended December 31,
1996, 1997 and 1998.............................F-3
Consolidated Statements of Shareholders'
(Deficit) Equity for the Years Ended
December 31, 1996, 1997, and 1998...............F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31,
1996, 1997, and 1998............................F-5
Notes to Consolidated Financial Statements........F-7
2. Financial Statement Schedules
Report of Independent Accountants on Supplementary
Information.........................................F-32
Schedule II -- Valuation and Qualifying Accounts.......F-33
3. Exhibits
Included as exhibits are the items listed on the Exhibit Index below.
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1 Amended and Restated Articles of Incorporation of the Company,
filed as Exhibit 3.1 to the Registrant's Form S-1 dated April 14,
1998 (SEC File No. 333-46349) and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of the Company, filed as Exhibit 3.2
to the Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
4.1 See Articles II, III, VII and IX of the Amended and Restated
Articles of Incorporation filed as Exhibit 3.1 and Articles I,
VII, VIII and IX of the Amended and Restated Bylaws filed as
Exhibit 3.2, filed as Exhibit 4.1 to the Registrant's Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
4.2 Specimen Common Stock Certificate, filed as Exhibit 4.2 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
4.3 Rights Agreement dated April 9, 1998 by and between the Company
and Tapir Investments (Bahamas) Ltd.
10.1 Promissory Note dated September 28, 1995 made by Marshall B. Hunt
to the order of the Company in the principal amount of $77,612.43,
as amended by Amendment to Promissory Note dated September 28,
1996, filed as Exhibit 10.1 to the Registrant's Form S-1 dated
April 14, 1998 (SEC File No. 333-46349) and incorporated herein by
reference.
10.2 Promissory Note dated September 28, 1995 made by William E.
Peterson, Jr. to the order of the Company in the principal amount
of $77,612.43, as amended by Amendment to Promissory Note dated
September 28, 1996, filed as Exhibit 10.2 to the Registrant's Form
S-1 dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
10.3 Promissory Note dated September 28, 1995 made by Roy C. Mallady,
Jr. to the order of the Company in the principal amount of
$77,612.43, filed as Exhibit 10.3 to the Registrant's Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
10.4 Promissory Note dated October 12, 1995 made by Marshall B. Hunt to
the order of the Company in the principal amount of $35,000.00, as
amended by Amendment to Promissory Note dated October 12, 1995,
filed as Exhibit 10.4 to the Registrant's Form S- 1 dated April
14, 1998 (SEC File No. 333-46349) and incorporated herein by
reference.
10.5 Promissory Note dated October 12, 1995 made by William E.
Peterson, Jr. to the order of the Company in the principal amount
of $35,000.00, as amended by Amendment to Promissory Note dated
October 12, 1995, filed as Exhibit 10.5 to the Registrant's Form
S- 1 dated April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.6 Promissory note dated October 12, 1995 made by Roy C. Mallady, Jr.
to the order of the Company in the principal amount of
$35,000.00, as amended by Amendment to Promissory
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Note dated October 12, 1995, filed as Exhibit 10.6 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.7 Amended and Restated Credit Agreement dated as of May 26, 1998
among the Company, the Lenders referred to therein and
NationsCredit Commercial Corporation, as Agent, filed as Exhibit
10.1 to the Registrant's Form 10-Q dated May 29, 1998 (SEC File
No. 000-24025) and incorporated herein by reference.
10.8 Lease Agreement dated as of July 1, 1996 between The Development
Authority of the City of Manchester and the Company, filed as
Exhibit 10.9 to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein by reference.
10.9 Lease Agreement dated as of August 29, 1997 between The
Development Authority of the City of Manchester and the Company,
filed as Exhibit 10.10 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and incorporated herein by
reference.
10.10 1998 Stock Incentive Plan, filed as Exhibit 10.11 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.11 Stock Purchase Agreement dated June 20, 1997 among the Company,
Pfizer, Inc., Arrow International, Inc. and Strato(R)/Infusaid(TM)
Inc., as amended by Amendment to Purchase Agreement, dated June
20, 1997, filed as Exhibit 10.14 to the Registrant's Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
34
35
10.12 Agreement dated January 13, 1995 between the Company and ACT
Medical, Inc., filed as Exhibit 10.21 to the Registrant's Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
10.13 Horizon Plastic Ports: Term Sheet dated March 18, 1997, filed as
Exhibit 10.22 to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein by reference.
10.14 Letter Agreement to Supply Agreement between CarboMedics, Inc. and
the Company, dated February 17, 1993, as amended, Development
Agreement, dated February 17, 1993, by and between CarboMedics,
Inc. and the Company, as amended, and Equity Agreement, dated as
of February 17, 1993, by and between CarboMedics, Inc. and the
Company, as amended, filed as Exhibit 10.23 to the Registrant's
Form S-1 dated April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.
10.15 Agreement dated May 8, 1997 between the Company and Robert Cohen,
filed as Exhibit 10.24 to the Registrant's Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and incorporated herein by
reference.
10.16 Consulting and Services Agreement dated February 1, 1996 between
the Company and Healthcare Alliance, Inc. as amended, filed as
Exhibit 10.25 to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein by reference.
10.17 Second Amended License Agreement dated January 1, 1995 between Dr.
Sakharam D. Mahurkar and NeoStar Medical(R) Technologies, filed as
Exhibit 10.26 to the Registrant's Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein by reference.
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10.18 License Agreement dated July 1995 between Dr. Sakharam D. Mahurkar
and Strato(R)/Infusaid(TM) Inc., filed as Exhibit 10.27 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.19 Additional License Agreement dated January 1, 1997 between Dr.
Sakharam D. Mahurkar and the Company, filed as Exhibit 10.28 to
the Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.20 Atlanta Office Purchase Agreement, filed as Exhibit 10.29 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.21 Employment Agreement, dated as of April 3, 1998, between Marshall
B. Hunt and the Company, filed as Exhibit 10.30 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.22 Employment Agreement, dated as of April 3, 1998, between William
E. Peterson, Jr. and the Company, filed as Exhibit 10.31 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.23 Premier Warrant, filed as Exhibit 10.32 to the Registrant's Form
S-1 dated April 14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
10.24 Premier Group Purchasing Agreement, filed as Exhibit 10.33 to the
Registrant's Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.
10.25 Amendment Number 1 to Premier Group Purchase Agreement dated
March 1, 1999.
10.26 Asset Purchase Agreement, by and among the Company and Norfolk
Medical Products, Inc. and Michael J. Dalton dated June 2, 1998,
filed as Exhibit 2 to the Registrant's Form 8-K dated June 16,
1998 (SEC File No. 000-24025) and incorporated herein by
reference.
10.27 Asset Purchase Agreement, by and among the Company, Columbia Vital
Systems, Inc., William C. Huck and R. Gregory Huck dated September
21, 1998, filed as Exhibit 2 to the Registrant's Form 8-K dated
October 5, 1998 (SEC File No. 000-24025) and incorporated herein
by reference.
10.28 Asset Purchase Agreement, by and between Ideas for Medicine, Inc.
and the Company, dated September 30, 1998, filed as Exhibit 2 to
the Registrant's Form 8-K dated October 14, 1998 (SEC File No.
000-24025) and incorporated herein by reference. Pursuant to
Item 601(b) of Regulation S-K, the Company has omitted certain
Schedules and Exhibits to the Asset Purchase Agreement (all of
which are listed therein) from this Exhibit.
10.29 Stock Purchase Agreement, by and among the Company, Steven
Picheny, Howard Fuchs, Christine Selby and Stepic Corporation,
effective October 15, 1998, filed as Exhibit 2 to the Registrant's
Form 8-K dated October 30, 1998 (SEC File No. 000-24025) and
incorporated herein by reference. Pursuant to Item 601(b) of
Regulation S-K, the Company has omitted certain Schedules and
Exhibits to the Stock Purchase Agreement (all of which are listed
therein) from this Exhibit.
10.30 Manufacturing Agreement dated as of September 30, 1998 by and
between the Company and Ideas for Medicine, Inc.
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10.31 Consulting and Services Agreement dated January 1, 1999 by and
between the Company and Healthcare Alliance, Inc.
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule (for SEC filing purposes only)
(b) Reports on Form 8-K
Three reports on Form 8-K and three reports on Form 8-K/A were filed during
the quarter ended December 31, 1998:
Financial Date of
Item Reported Statements Filed Report
------------- ---------------- ------
Acquisition of the outstanding No October 30, 1998
stock of Stepic Corporation
Acquisition of certain assets No October 14, 1998
used in the manufacture and
sale of medical devices by
Ideas for Medicine, Inc., a
wholly owned subsidiary of
CryoLife, Inc.
Acquisition of certain assets No October 5, 1998
used in the distribution and
sale of medical devices by
Columbia Vital Systems, Inc.
Amendment to Form 8-K filed Yes December 4, 1998
October 5, 1998 to include
financial statements
previously omitted
Amendment to Form 8-K filed Yes December 14, 1998
October 14, 1998 to include
financial statements
previously omitted
Amendment to Form 8-K filed Yes December 30, 1998
October 30, 1998 to include
financial statements
previously omitted
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
31, 1999.
HORIZON MEDICAL PRODUCTS, INC.
By: /s/ MARSHALL B. HUNT
-------------------------
Marshall B. Hunt
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARSHALL B. HUNT Chairman, Chief Executive Officer and Director March 31, 1999
- -------------------------------------------- (Principal Executive Officer)
Marshall B. Hunt
/s/ WILLIAM E. PETERSON, JR. President and Director March 31, 1999
- -------------------------------------------- (Principal Financial and
William E. Peterson, Jr. Principal Accounting Officer)
/s/ CHARLES E. ADAIR Director March 31, 1999
- -------------------------------------------
Charles E. Adair
/s/ ROBERT COHEN Director March 31, 1999
- -------------------------------------------
Robert Cohen
/s/ LYNN DETLOR Director March 31, 1999
- -------------------------------------------
Lynn Detlor
/s/ ROBERT J. SIMMONS Director March 31, 1999
- -------------------------------------------
Robert J. Simmons
/s/ A. GORDON TUNSTALL Director March 31, 1999
- -------------------------------------------
A. Gordon Tunstall
38
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Report of Independent Accountants
To the Shareholders
Horizon Medical Products, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, shareholders' (deficit) 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, 1997 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
February 17, 1999, except for Note 6
as to which the date is March 31, 1999
F-1
40
Horizon Medical Products, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1998
1997 1998
ASSETS
Current assets:
Cash and cash equivalents $ 2,893,924 $ 6,232,215
Accounts receivable - trade (net of allowance for doubtful accounts
of $308,239 and $535,512 in 1997 and 1998, respectively) 3,720,031 16,925,487
Inventories 5,405,861 19,358,423
Prepaid expenses and other current assets 366,942 1,636,779
Deferred taxes 569,393 582,346
------------ ------------
Total current assets 12,956,151 44,735,250
Property and equipment, net 2,341,508 4,043,200
Intangible assets, net 15,726,406 55,494,414
Deferred taxes 254,988 116,970
Other assets 297,852 247,279
------------ ------------
Total assets $ 31,576,905 $104,637,113
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable - trade $ 1,726,395 $ 9,775,420
Accrued salaries and commissions 240,682 257,341
Accrued royalties 109,304 127,375
Accrued interest 218,525 318,476
Accrued acquisition liabilities 762,859 165,058
Other accrued expenses 350,344 1,248,158
Income taxes payable 409,726 1,343,473
Current portion of long-term debt 1,959,482 2,733,138
Current portion of payable under non-compete and consulting agreements 336,268
------------ ------------
Total current liabilities 6,113,585 15,968,439
Long-term debt, net of current portion 23,970,805 47,073,716
Payable under non-compete and consulting agreements, net of current portion 1,463,319
Put warrant repurchase obligation (Note 9) 11,000,000
Other liabilities 178,951 164,152
------------ ------------
Total liabilities 42,726,660 63,206,307
------------ ------------
Commitments and contingent liabilities (Notes 9, 12, 13, and 15)
Shareholders' (deficit) equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued
and outstanding
Common Stock, $.001 par value per share; 50,000,000 shares authorized,
9,419,450 and 13,366,278 shares issued and outstanding in
1997 and 1998, respectively 9,419 13,366
Additional paid-in capital 1,270,771 51,826,125
Shareholders' notes receivable (398,525) (425,553)
Accumulated deficit (12,031,420) (9,983,132)
------------ ------------
Total shareholders' (deficit) equity (11,149,755) 41,430,806
------------ ------------
Total liabilities and shareholders' (deficit) equity $ 31,576,905 $104,637,113
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
41
Horizon Medical Products, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1996, 1997, and 1998
1996 1997 1998
Net sales $ 7,051,858 $ 15,798,123 $ 39,399,361
Cost of goods sold 2,996,741 6,273,418 19,932,953
------------ ------------ ------------
Gross profit 4,055,117 9,524,705 19,466,408
Selling, general and administrative expenses 4,559,700 6,475,827 13,597,097
------------ ------------ ------------
Operating income (loss) (504,583) 3,048,878 5,869,311
------------ ------------ ------------
Other income (expense):
Interest expense (733,961) (3,970,734) (3,103,222)
Accretion of value of put warrant repurchase obligation (Note 9) (8,000,000)
Other income 54,333 69,727 46,262
------------ ------------ ------------
(679,628) (11,901,007) (3,056,960)
------------ ------------ ------------
Income (loss) before income taxes and extraordinary items (1,184,211) (8,852,129) 2,812,351
Provision for income taxes 319,831 1,780,649
------------ ------------ ------------
Income (loss) before extraordinary items (1,184,211) (9,171,960) 1,031,702
Extraordinary gain on early extinguishment of put feature (Note 9) 1,100,000
Extraordinary losses on early extinguishments of debt,
net of income tax benefit of $53,330 (Notes 6 and 13) (83,414)
------------ ------------ ------------
Net income (loss) $ (1,184,211) $ (9,171,960) $ 2,048,288
============ ============ ============
Net income (loss) per share before extraordinary items -
basic and diluted $ (.13) $ (.97) $ .08
============ ============ ============
Net income (loss) per share - basic and diluted $ (.13) $ (.97) $ .17
============ ============ ============
Weighted average common shares outstanding - basic 9,419,089 9,419,450 12,187,070
============ ============ ============
Weighted average common shares outstanding - diluted 9,419,089 9,419,450 12,412,394
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
42
Horizon Medical Products, Inc. and Subsidiaries
Consolidated Statements of Shareholders' (Deficit) Equity
for the years ended December 31, 1996, 1997, and 1998
Number Additional Shareholders'
of Par Paid-In Notes Accumulated
Shares Value Capital Receivable Deficit Total
--------- ------ ----------- ------------- ----------- ----------
Balance, December 31, 1995 101,900 $ 102 $ 595,088 $(344,396) $(1,275,249) $(1,024,455)
Issuance of common stock 19 0
Net increase in shareholders'
notes receivable (27,101) (27,101)
Contributed services (Note 12) 320,000 320,000
Net loss (1,184,211) (1,184,211)
---------- ----- ---------- --------- ----------- -----------
Balance, December 31, 1996 101,919 102 915,088 (371,497) (2,459,460) (1,915,767)
Net increase in shareholders'
notes receivable (27,028) (27,028)
Repurchase of stock warrants
(Note 6) (400,000) (400,000)
Contributed services (Note 12) 365,000 365,000
Net loss (9,171,960) (9,171,960)
Issuance of shares to effect a
stock split (Note 8) 9,317,531 9,317 (9,317) 0
---------- ----- ---------- --------- ----------- -----------
Balance, December 31, 1997 9,419,450 9,419 1,270,771 (398,525) (12,031,420) (11,149,755)
Issuance of common stock 3,120,950 3,121 39,907,591 39,910,712
Net increase in shareholders'
notes receivable (27,028) (27,028)
Contributed services (Note 12) 91,250 91,250
Consulting services (Note 12) 45,328 45 657,211 657,256
Exercise of warrants (Note 9) 780,550 781 (698) 83
Extinguishment of put feature
(Note 9) 9,900,000 9,900,000
Net income 2,048,288 2,048,288
---------- ------- ----------- --------- ----------- -----------
Balance, December 31, 1998 13,366,278 $13,366 $51,826,125 $(425,553) $(9,983,132) $41,430,806
========== ======= =========== ========= =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
43
Horizon Medical Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1997, and 1998
1996 1997 1998
Cash flows from operating activities:
Net income (loss) $ (1,184,211) $ (9,171,960) $ 2,048,288
------------ ------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary losses on early extinguishments of debt 136,744
Extraordinary gain on early extinguishment of put feature (1,100,000)
Depreciation 128,500 199,450 487,674
Amortization 337,136 1,009,180 1,787,964
Amortization of discount 254,490 2,160,153 1,266,319
Accretion of value of put warrant repurchase obligation 8,000,000
Gain on sale of property and equipment (5,829)
Deferred income taxes, net change (90,299) 200,330
Non-cash officer compensation 320,000 365,000 91,250
Non-cash consulting expense 657,256
(Increase) decrease in operating assets, net:
Accounts receivable - trade (186,593) (947,075) (4,436,228)
Inventories 85,668 183,557 (4,718,470)
Prepaid expenses and other assets 173,574 (205,585) 1,221,005
Increase (decrease) in operating liabilities:
Accounts payable - trade (196,328) 858,734 5,201,530
Income taxes payable 409,726 933,747
Accrued expenses and other liabilities 385,050 (49,569) (4,483,751)
------------ ------------ ------------
Net cash provided by (used in) operating activities 111,457 2,721,312 (706,342)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (91,846) (899,563) (1,845,561)
Proceeds from sale of property and equipment 7,800
Other nonoperating assets, net (120,666)
Payment for acquisitions, net of cash acquired (19,500,000) (36,120,798)
------------ ------------ ------------
Net cash used in investing activities (84,046) (20,399,563) (38,087,025)
------------ ------------ ------------
Cash flows from financing activities:
Debt issue costs (674,750) (293,916)
Cash overdraft (44,511) (31,637)
Proceeds from issuance of long-term debt 23,500,000 41,812,039
Principal payments on long-term debt (132,282) (2,012,163) (27,305,465)
Payment of acquired debt (10,000,000)
Payment of non-compete and consulting agreements (1,964,767)
Proceeds from issuance of common stock 39,910,712
Proceeds from exercise of warrants 83
Payment for warrants (400,000)
Notes receivable - shareholders (27,101) (27,028) (27,028)
------------ ------------ ------------
Net cash (used in) provided by financing activities (203,894) 20,354,422 42,131,658
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (176,483) 2,676,171 3,338,291
Cash and cash equivalents, beginning of year 394,236 217,753 2,893,924
------------ ------------ ------------
Cash and cash equivalents, end of year $ 217,753 $ 2,893,924 $ 6,232,215
============ ============ ============
F-5
44
Horizon Medical Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1996, 1997, and 1998
1996 1997 1998
Supplemental disclosure of cash flow information:
Cash paid for interest $423,766 $1,173,992 $1,335,405
======== ========== ==========
Cash paid for taxes $587,019
==========
See Notes 14 and 15 for additional supplemental disclosures of cash flow
information.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
45
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Horizon Medical Products, Inc. and subsidiaries (the "Company") is a
specialty medical device company focused on manufacturing and marketing
vascular access products and the distribution of specialty medical
products. The Company manufactures, markets and distributes four product
categories: (i) implantable vascular access ports, tunneled catheters and
stem cell transplant catheters, which are used primarily in cancer
treatment protocols for the infusion of highly concentrated toxic
medications (such as chemotherapy agents, antibiotics or analgesics) and
blood samplings; (ii) acute and chronic hemodialysis catheters, which are
used primarily in treatments of patients suffering from renal failure;
(iii) embolectomy catheters and carotid shunts, utilizing the Company's
balloon technology for endarectomy procedures; and (iv) specialty devices
used primarily in general and emergency surgery, radiology, anesthesiology,
respiratory therapy, blood filtration and critical care.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies utilized in
the consolidated financial statements which were prepared in accordance
with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements and
notes to consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION - The Company records sales upon shipment of the
related product, net of any discounts.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less at the time
of purchase to be cash equivalents.
INVENTORIES - Purchased finished goods are valued at the lower of cost or
market using the specific identification method for determining cost. Raw
materials, work in process, and manufactured ports and catheters are valued
at the lower of average cost or market.
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.
F-7
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Property and equipment acquired under capital lease agreements are carried
at cost less accumulated depreciation. These assets are depreciated in a
manner consistent with the Company's depreciation policy for purchased
assets.
INTANGIBLE ASSETS - Goodwill, the excess of purchase price over the fair
value of net assets acquired in purchase transactions, is being amortized on
a straight-line basis over periods ranging from 15 to 30 years. Amounts paid
or accrued for non-compete and consulting agreements are amortized using the
straight-line method over the term of the agreements. Patents are being
amortized on a straight-line basis over the remaining lives of the related
patents which range from six to 15 years. Debt issuance costs are amortized
using the straight-line method, which approximates the effective interest
method, over the estimated term of the related debt issues.
LONG-LIVED ASSETS - The Company recognizes impairment losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Goodwill is also evaluated for
recoverability utilizing a fair value approach. There were no such losses
recognized during the years ended December 31, 1996, 1997 and 1998.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred and were approximately $59,000, $7,000, and $412,000 in
1996, 1997 and 1998, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes interest rate cap
agreements to limit the impact of increases in interest rates on its
floating rate debt. The differential is accrued as interest rates change and
recognized over the life of the cap as adjustments to interest expense.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the tax basis 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. The Company's deferred tax assets and liabilities
relate primarily to differences in the book and tax basis of property and
equipment, intangible assets, and accrued liabilities.
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 Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under
the provisions of APB 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
F-8
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
is measured each period based on the settlement value with changes in such
value recorded as compensation cost over the service period.
Stock based transactions with other than employees are measured at fair
value and are reported as expense or an exchange of assets, as appropriate,
under the provisions of SFAS No. 123.
EARNINGS PER SHARE - Earnings per common share and earnings per common share
assuming dilution are computed in compliance with SFAS No. 128, Earnings Per
Share, which the Company adopted during fiscal year 1997. SFAS No. 128
requires a calculation of basic and diluted earnings per share. The
calculation of basic earnings per share only takes into consideration income
(loss) available to common shareholders and the weighted average of shares
outstanding during the period while diluted earnings per share takes into
effect the impact of all additional common shares that would have been
outstanding if all potential common shares related to options, warrants, and
convertible securities had been issued, as long as their effect is dilutive.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996 and
1997 consolidated financial statements to make them comparable to the 1998
presentation. These reclassifications had no impact on previously reported
net loss, shareholders' deficit, or operating cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS - In 1998, the Company adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
that requires the use of the management approach in identifying operating
segments of the Company. Under the management approach, operating segments
of an enterprise are identified in a manner consistent with how the Company
makes operating decisions and assesses performance. SFAS No. 131 also
requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see Note 16).
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which requires the reporting and
display of comprehensive income and its components in an entity's financial
statements. The Company adopted SFAS 130 during 1998, and for the years
ending December 31, 1996, 1997, and 1998, there were no differences between
net income and comprehensive income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to
be measured at fair value and recognized as either assets or liabilities on
the balance sheet. Changes in such fair value are required to be recognized
immediately in net income (loss) to the extent the derivatives are not
F-9
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
effective as hedges. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and is effective for interim periods in the initial year
of adoption. The Company does not expect the adoption of SFAS No. 133 to
have a material impact.
3. INVENTORIES
A summary of inventories at December 31 is as follows:
1997 1998
Raw materials $ 2,300,745 $ 5,336,210
Work in process 692,054 1,984,133
Finished goods 2,662,995 12,797,898
----------- -----------
5,655,794 20,118,241
Less inventory reserves 249,933 759,818
----------- -----------
$ 5,405,861 $19,358,423
=========== ===========
4. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 is as follows:
1997 1998
Building and improvements $1,271,309 $ 1,965,874
Office equipment 669,316 1,781,841
Plant equipment 781,737 1,101,991
Transportation equipment 13,283 75,305
----------- -----------
2,735,645 4,925,011
Less accumulated depreciation 394,137 881,811
----------- -----------
$2,341,508 $ 4,043,200
========== ===========
F-10
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INTANGIBLE ASSETS
A summary of intangible assets at December 31 is as follows:
1997 1998
Goodwill $13,283,787 $47,168,853
Patents 1,635,000 8,284,656
Non-compete and consulting agreements 1,473,091 1,850,592
Debt issuance costs 738,697 297,917
Other 449,286
----------- ----------
17,130,575 58,051,304
Less accumulated amortization 1,404,169 2,556,890
----------- -----------
$15,726,406 $55,494,414
=========== ===========
The expected amortization charges related to these intangibles are as
follows:
1999 $ 2,636,435
2000 2,634,966
2001 2,612,178
2002 2,557,393
2003 2,361,612
Thereafter 42,691,830
-----------
$55,494,414
===========
6. LONG-TERM DEBT
In connection with the acquisition of Strato/Infusaid Inc. ("Strato")
discussed in Note 15, the Company entered into a $26.5 million Credit
Facility with NationsCredit on July 15, 1997 (the "Credit Facility"). The
Credit Facility consisted of two term loans and a revolving line of credit
and was repayable in various installments through 2004. Borrowings under the
Credit Facility bore interest based on NationsCredit's Commercial Paper Rate
and ranged from 9.836% to 10.836% at December 31, 1997. As of December 31,
1997, there was $23.5 million outstanding under the Credit Facility.
In addition to the acquisition of Strato, the Company used proceeds from the
Credit Facility to retire approximately $1,700,000 of the Company's existing
debt. The Company also used proceeds of $400,000 to purchase the warrants
issued in connection with a previous debt agreement ("the Sirrom Note") from
Sirrom thereby terminating all of Sirrom's rights under the warrants. This
purchase resulted in a direct charge to the Company's accumulated deficit.
NationsCredit also effectively purchased the $1,500,000 Sirrom Note from
Sirrom. The Sirrom Note bore interest at the rate of 13.75% per annum and
was to mature September 25, 2000.
F-11
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In conjunction with the financing, the Company issued a warrant to
NationsCredit to acquire shares of non-voting Class B Common Stock of the
Company, which then represented 15% of the outstanding common shares of the
Company. The number of shares subject to such warrant was to be reduced as
follows: (1) to 7.5% of the outstanding common shares of the Company on a
fully diluted basis in the event the Company completed an initial public
offering for its shares prior to January 1, 1999 (where the net proceeds to
the Company were in excess of $25 million) or achieved minimum earnings
before interest, taxes, depreciation, and amortization ("EBITDA") of not
less than $10 million for its 1998 fiscal year or (2) to 10% of the
outstanding common shares of the Company on a fully diluted basis in the
event the Company completed an initial public offering of its shares during
1999 but prior to July 16, 1999 (where the net proceeds to the Company were
in excess of $25 million) or achieved EBITDA of not less than $14 million
for the twelve months ending June 30, 1999. The warrant was exercisable at
$.0l per share pursuant to the warrant agreement and was to expire on July
15, 2007. NationsCredit could require the Company to repurchase the warrant
at the earliest repurchase date (July 15, 2001 or upon repayment of the
associated debt) at the redemption price as defined in the warrant agreement
(see Note 9).
In April 1998, all amounts outstanding under the Company's Credit Facility
and the Sirrom Note were paid off with the proceeds from the Company's
initial public offering ("IPO") of its common stock (see Note 8). As a
result, the Company recorded an extraordinary loss on the early
extinguishment of debt of $15,711, net of income tax benefit of $10,045.
NationsCredit exercised its warrants immediately prior to the IPO and sold
the related shares in the offering as well.
The Company entered into a $50 million amended and restated credit facility
("the New Credit Facility") with NationsCredit on May 26, 1998 to be used
for working capital purposes (the "Working Capital Loans") and to fund
future acquisitions (the "Acquisition Loans"). The New Credit Facility
provides a sublimit of $10 million as it relates to the Working Capital
Loans. The Working Capital Loans and the Acquisition Loans are collectively
referred to herein as the Revolving Credit Loans. The availability of funds
under the Acquisition Loans terminates on May 26, 2000 and the New Credit
Facility expires on July 1, 2004. In addition, the Company had outstanding
standby letters of credit at December 31, 1998 of $7,682,110. These letters
of credit, which have terms through January 2002, collateralize the
Company's obligations to third parties in connection with acquisitions (see
Note 15).
Amounts outstanding under the Acquisition Loans are payable in 16 quarterly
installments beginning October 1, 2000 in amounts representing 6.25% of the
principal amounts outstanding on the payment due dates. Amounts outstanding
under the Working Capital Loans are due on July 1, 2004. As of December 31,
1998, $5,000,000 was outstanding under the Working Capital Loans and
$37,037,039 was outstanding under the Acquisition Loans.
F-12
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Subject to certain limitations, amounts outstanding under the Revolving
Credit Loans may be prepaid at the Company's option. Further, amounts
outstanding under Revolving Credit Loans are mandatorily prepayable annually
in an amount equal to 50% of the Excess Cash Flow for such year, as defined
in the agreement, beginning with fiscal year December 31, 2000, as well as
upon the occurrence of certain other events as defined in the Agreement.
The New Credit Facility bears interest, at the option of the Company, at the
Index Rate, as defined in the agreement, plus 3.25%; adjusted LIBOR, as
defined in the agreement, plus 3.25%; or NationsBank N.A.'s prime rate plus
.5%. At December 31, 1998, the Company's interest rate was based on the
Index Rate with a resulting interest rate of 8.1701%. The Company has
entered into an interest rate cap agreement with NationsBank. The Company
utilizes interest rate cap agreements to limit the impact of increases in
interest rates on its floating rate debt. The interest rate cap agreement
entitles the Company to receive from NationsBank the amounts, if any, by
which the floating rate, as defined in the agreement, exceeds the strike
rates (or cap rates) stated in the agreement. At December 31, 1998, the
Company had an interest rate cap with a notional amount of $13,312,500.
Under this agreement, the interest rate on the notional amount is capped at
8.8%. The agreement matures in October 2002. The Company has received no
payments from NationsBank under the agreement during 1998.
The New Credit Facility calls for an unused commitment fee payable
quarterly, in arrears, at a rate of .375% as well as a letter of credit fee
payable quarterly, in arrears, at a rate of 2%. Both fees are based on a
defined calculation in the agreement. In addition, the New Credit Facility
requires an administrative fee in the amount of $30,000 to be paid annually.
The Company's New Credit Facility contains certain restrictive covenants
that require a minimum net worth and EBITDA as well as specific ratios such
as total debt service coverage, leverage, interest coverage and debt to
capitalization. The covenants also place limitations on capital
expenditures, other borrowings, operating lease arrangements, and affiliate
transactions. The Company is in compliance with or has received appropriate
waivers of these covenants.
The Company's obligations under the New Credit Facility are collateralized
by liens on substantially all of the Company's assets, including inventory,
accounts receivable and general intangibles and a pledge of the stock of the
Company's subsidiaries. The Company's obligations under the New Credit
Facility are also guaranteed individually by each of the Company's
subsidiaries (the "Guarantees"). The obligations of such subsidiaries under
the Guarantees are collateralized by liens on substantially all of their
respective assets, including inventory, accounts receivable and general
intangibles.
On July 31, 1997, the Company's Acquisition Note related to the 1995
purchase of Neostar Medical Technologies, Inc. ("Neostar") was amended to
reduce total payments due in 1997 from $212,235 to $175,000. The payment of
the remaining amount of $37,235 was deferred until the final payment date of
this note of October 31, 2003. The amendment also required quarterly
payments of interest on the deferred amount at prime plus 1% (9.50% at
December 31, 1997). The Acquisition Note was paid in full in April 1998 with
proceeds from the Company's IPO (see Note 8). The total amount required to
be paid was $1,483,665 calculated per the terms of the Acquisition Note
agreement.
F-13
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31 long-term debt consists of the following:
1997 1998
New Credit Facility $ 42,037,039
Note payable for the purchase of Stepic requiring three annual payments of $2,400,000
through October 2001. 7,200,000
Note payable for the purchase of IFM requiring monthly payments of approximately
$26,780 through November 1999, including interest at 9%. 302,034
Note payable for the purchase of CVS due in September 2000. - 225,000
Credit Facility less unamortized discount of $1,166,667 at December 31, 1997. $ 22,333,333
Note payable bearing interest payable monthly at a fixed rate of 13.75%
due September 25, 2000; collateralized by inventory, accounts
receivable, equipment, general intangibles, trademarks and copyrights
(the "Sirrom Note"). 1,500,000
Note payable (the "Acquisition Note"), non-interest bearing (less
unamortized discount of $774,264 at December 31, 1997; based on an
imputed interest rate of 10%), with payments due monthly beginning
January 31, 1997 (see above) and continuing through June 30, 2000 and
5 payments on various dates through October 31, 2003. The payments are
subordinated to the Sirrom Note. 1,511,749
Note payable, bearing interest at a variable rate (9.5% at December 31,
1997); payable in monthly payments of interest and principal through
May 25, 2000; collateralized by a building. 342,588
Note payable, bearing interest at a fixed rate of 7.9%, interest and principal payable
monthly through May 11, 2000. 9,286 1,743
Note payable, bearing interest at a fixed rate of 7.84%, interest and principal payable
monthly through September 30, 1998. 161,719
Miscellaneous capital lease obligations for office equipment, requiring
monthly payments ranging from $133 to $2,729, including principal and
interest at 9.25%, and maturing at dates ranging from 1999 to 2001.
These obligations are collateralized by equipment with a net book
value of approximately $89,000 and $70,600 at December 31, 1997
and 1998, respectively. 71,612 41,038
------------- ------------
25,930,287 49,806,854
Less current portion 1,959,482 2,733,138
------------- ------------
$ 23,970,805 $ 47,073,716
============= ============
Future maturities of long-term debt are as follows:
1999 $ 2,733,138
2000 4,947,747
2001 11,663,005
2002 9,259,260
2003 9,259,260
Thereafter 11,944,444
------------
$ 49,806,854
============
F-14
53
Notes to Consolidated Financial Statements, Continued
7. Income Taxes
There was no provision or benefit for income taxes during 1996 due to
the Company recording a full valuation allowance. The components of
the provision (benefit) for income taxes in 1997 and 1998 consist of
the following:
1997 1998
Current:
Federal $ 681,209 $ 1,301,484
State 102,237 278,835
----------- -----------
783,446 1,580,319
Deferred tax (benefit) expense (90,299) 200,330
----------- -----------
693,147 1,780,649
Change in valuation allowance (373,316)
----------- -----------
Provision for income taxes before extraordinary items 319,831 1,780,649
Income tax benefit of extraordinary items (53,330)
----------- -----------
Total $ 319,831 $ 1,727,319
=========== ===========
Deferred tax assets and liabilities at December 31, 1997 and 1998 are
comprised of the following:
1997 1998
Deferred tax assets:
Allowance for doubtful accounts and returns $ 127,482 $ 225,129
Inventory reserve 105,071 357,217
Intangible assets 413,874 289,934
Accrued liabilities 336,840
--------- ---------
Total gross deferred tax assets 983,267 872,280
Deferred tax liability:
Property and equipment (158,886) (172,964)
--------- ---------
Net deferred tax asset $ 824,381 $ 699,316
========= =========
No valuation allowance has been recorded against the deferred tax
assets at December 31, 1997 and 1998 as the Company believes that it
is more likely than not that all of the net deferred tax assets will
be realized through carrybacks to years in which it paid tax or
through future taxable income.
F-15
54
Notes to Consolidated Financial Statements, Continued
The provision for income taxes differs from the amount which would be
computed by applying the federal statutory rate of 34% to income (loss)
before income taxes and extraordinary items as indicated below:
1996 1997 1998
Income tax provision (benefit) at statutory federal
income tax rate $ (402,632) $(3,009,724) $ 956,199
Increase (decrease) resulting from:
Non-deductible meals and entertainment expense 21,849 28,698 39,282
State income taxes 64,353 208,052
Non-deductible interest and accretion of put
warrant repurchase obligation 3,343,333 396,667
Non-deductible amortization of goodwill 59,985 136,309
Non-deductible officer compensation 108,800 124,100 31,025
Change in valuation allowance 271,983 (373,316) -
Other, net 82,402 13,115
----------- ----------- -----------
Provision for income taxes before extraordinary items $ 0 $ 319,831 $ 1,780,649
=========== =========== ===========
8. Common and Preferred Stock
The Company sold 3,120,950 shares of common stock for $14.50 per share
in April 1998 in connection with the IPO of its common stock. In
anticipation of the IPO, the Company's Board of Directors increased the
number of authorized common shares to 50,000,000. In addition,
immediately prior to the IPO, the Company effected an approximate
92.42-for-one stock split. The par value of the common stock remained
unchanged. All share and per share amounts herein reflect the stock
split except with respect to periods presented in the consolidated
statements of shareholders' (deficit) equity prior to December 31,
1997.
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-16
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMON STOCK WARRANTS
At December 31, 1997, the Company had a 1.99% owner (Cordova) which had
antidilution rights. All of Cordova's antidilution rights were
terminated in connection with the IPO.
As discussed in Note 6, in connection with the Credit Facility, the
Company issued a warrant to NationsCredit to acquire shares of
non-voting Class B Common Stock, representing 15% of outstanding
shares. This percentage reduced to 7.5% under certain conditions
including completion of an initial public offering by the Company
prior to January 1, 1999 where the net proceeds were in excess of $25
million. The warrant also contained a put feature which allowed the
holder to put the warrant to the Company for cash at an amount
calculated as the greater of several financial tests and at dates
which varied as to actions of the Company, the earliest of which was
repayment of the associated debt, or July 15, 2001. Further, the
related warrant contained antidilution provisions. NationsCredit
exercised all of its warrants immediately prior to the IPO and sold
the related shares in the offering as well. As a result, there are no
remaining outstanding warrants with NationsCredit.
The Company recorded the estimated value of the warrant with the put
feature on July 15, 1997 of $3,000,000 as a discount to the related
debt and as a put warrant repurchase obligation. Subsequent to issuance
of the warrant, the Company's operations and other factors indicated
that an initial public offering of stock could be pursued, and the
Company began intense efforts to accomplish such an offering. The
Company and its prospective underwriters anticipated a public offering
in April 1998. A portion of the proceeds were to be used to pay off the
Credit Facility as required by the credit agreement upon successful
completion of an initial public offering. Additionally, the integration
of Strato, medical device market trends, and potential access to the
public capital markets lead management to believe the estimated value
of the put warrants had increased. Therefore, the value assigned to
such put warrant was recorded at $11,000,000 at December 31, 1997. The
change in value from date of issue of $8,000,000 was recorded as
non-cash expense for the accretion of value of put warrant repurchase
obligation in the accompanying consolidated statement of operations for
the year ended December 31, 1997. Additionally, due to the expected
date of debt repayment of April 1998, the debt discount established at
issue date and the associated debt issue costs were amortized over a
nine month period beginning July 15, 1997. This amortization resulted
in charges to interest expense of approximately $2,300,000 and
$1,447,000 in 1997 and 1998, respectively, resulting in an effective
rate of interest on the underlying debt of approximately 31% (exclusive
of the $8,000,000 put warrant charges).
F-17
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Effective January 29, 1998, NationsCredit and the Company amended the
warrant agreement such that NationsCredit's right to put the warrant
to the Company for cash was rescinded. This constituted a forgiveness
of the put obligation estimated at $1,100,000 which was recorded as an
extraordinary gain at the date of rescission and the net recorded
value of the warrant of $9,900,000 was reclassed to additional paid-in
capital.
In connection with the Premier Purchasing Agreement, the Company
entered into a related Warrant Agreement during 1998 with Premier
pursuant to which the Company has granted Premier a warrant to acquire
up to 500,000 shares of the Company's common stock for $14.50 per
share. Shares of common stock issuable under such warrant will vest
annually in increments of 100,000 only upon the achievement of certain
specified minimum annual sales (the "Minimum Annual Sales Targets")
and/or minimum cumulative sales (the "Cumulative Sales Targets") of the
Company's products to participating Premier hospitals. The vesting of
the warrant will automatically accelerate in any given year in the
event that both the Minimum Annual Sales Targets and Cumulative Sales
Targets with respect to such year are achieved. The right to purchase
shares of the Company's common stock under the Warrant Agreement
vesting at the end of the first year of the Warrant Agreement (June 30,
1999), if earned, will become exercisable on the third anniversary of
such date. Shares vesting in subsequent years will become exercisable
one year after their respective vesting dates. All unexercised warrant
exercise rights will expire on the fifth anniversary of their
respective vesting dates. None of these warrants are vested or
exercisable as of December 31, 1998. The Company will record the
estimated fair value of the warrant and related expense as the warrant
becomes vested, as previously discussed, in accordance with SFAS No.
123.
10. STOCK-BASED COMPENSATION
Pursuant to the Company's 1995 Stock Appreciation Rights Plan (the
"SAR" Plan), the Company granted SARs to eligible employees and
eligible sales representatives based on their achievement of certain
performance targets. Upon consummation of the Company's IPO, 99,600
SARs were outstanding. At that time, (i) all outstanding SARs were
canceled, (ii) options to purchase shares of the Company's common stock
(the "SAR Conversion Options") were granted to holders of SARs who were
employed by the Company, and (iii) cash compensation equal to one
dollar was due to be paid for each SAR held by persons who were no
longer employed by the Company upon the Company's IPO as defined in the
SAR Plan. In connection with the IPO, 84,100 SAR Conversion Options
were granted and none of the remaining 15,500 units were eligible for
payment. The SAR Conversion Options will become exercisable in
increments of 25% per year over four years beginning one year from the
date of issue at an exercise price of $14.50.
F-18
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Transactions under the SAR Plan are summarized as follows for the
years ended December 31:
1996 1997 1998
Outstanding, beginning of year 29,750 40,900 99,600
Granted (at $1.00 per unit) 30,050 64,200
Canceled (18,900) (5,500) (99,600)
------ ------ ------
40,900 99,600 0
====== ====== ======
The cumulative expense recorded by the Company with respect to the SAR
Plan through December 31, 1997 was approximately $35,000.
During 1998, the Company's Board of Directors approved the Stock
Incentive Plan for key employees and outside directors (the "Incentive
Plan") which provides for the grant of incentive stock options,
restricted stock, stock appreciation rights, or a combination thereof,
as determined by the Compensation Committee of the Board of Directors.
Only non-incentive stock options may be granted to outside directors
under the Incentive Plan. Under the Incentive Plan 500,000 shares of
the Company's common stock have been reserved for issuance. Options
under the Incentive Plan provide for the purchase of the Company's
common stock at not less than the fair market value on the date the
option is granted.
In conjunction with the Company's IPO, options for 144,100 shares of
common stock, including the 84,100 SAR Conversion Options, were
granted at $14.50 per share. The options generally become exercisable
over periods ranging from six months to four years and have terms
ranging from five to ten years.
Transactions under the Incentive Plan are summarized as follows:
Weighted-
Number Range of Average
of Options Exercise Prices Exercise Price
---------- ---------------- --------------
Options outstanding, January 1, 1998 0 -- --
Granted 196,700 $1.875 - $ 15.50 $13.80
Canceled (11,850) $1.875 - $14.625 $ 9.97
---------
Options outstanding, December 31, 1998 184,850 $1.875 - $15.50 $14.04
=========
Weighted - average fair value of options
granted during the year $ 12.38
=========
F-19
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Number Average Number
Outstanding Remaining Exercisable
Exercise December 31, Contractual December 31, Exercise
Price 1998 Life 1998 Price
-------- ------------ ----------- ------------ --------
$ 1.875 4,500 9.17
$ 9.25 5,200 9.33
$ 13.75 15,250 9.58
$ 14.50 144,100 9.67 10,000 $ 14.50
$ 14.625 5,800 9.67
$ 15.50 10,000 9.67
------------ ------------
184,850 10,000
============ ============
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its stock option plan. Accordingly,
no compensation expense has been recognized for its stock option
plan. Had compensation expense for the Company's stock option plan
been determined based on the fair value at the grant dates for awards
under this plan consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
December 31,
1998
------------
Net income:
As reported $ 2,048,288
Pro forma $ 1,798,423
Net income per share - basic and diluted:
As reported $ 0.17
Pro forma $ 0.15
The pro forma amounts reflected above are not representative of the
effects on reported net income in future years because, in general,
the options granted have different vesting periods and additional
awards may be made each year.
F-20
59
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:
December 31,
1998
------------
Dividend yield 0%
Expected life (years) 7
Expected volatility 114%
Risk-free interest rate 5.54%
11. EARNINGS (LOSS) PER SHARE
A summary of the calculation of basic and diluted earnings per share
(EPS) for the years ended December 31, 1996, 1997, and 1998 is as
follows:
For the Year ended December 31, 1996
-----------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
EPS - basic and diluted $(1,184,211) 9,419,089 $ (0.13)
=========== ========== ========
For the Year ended December 31, 1997
-----------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
EPS - basic and diluted $(9,171,960) 9,419,450 $ (0.97)
=========== ========== ========
For the Year ended December 31, 1998
-----------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
EPS - basic: $ 2,048,288 12,187,070 $ 0.17
========
Effect of diluted common shares:
Stock Options 225,241
Warrants 83
----------- ----------
EPS - diluted $ 2,048,288 12,412,394 $ 0.17
=========== ========== ========
The EPS impact of the extraordinary items for the year ended
December 31, 1998 was approximately $.09.
The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing
gross proceeds from all weighted average stock options outstanding
during the period, as if exercised, by the average common share market
price during the period. The average common share market price used in
the above calculation was $7.94 for the year ended December 31, 1998.
F-21
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock options to purchase shares of common stock at prices greater than
the average market price of the common shares during that period are
considered antidilutive. There were approximately 180,350 options that
expire in 2008 with exercise prices ranging from $9.25 to $15.50 that
were outstanding during the year ended December 31, 1998 but were not
included in the computation of diluted EPS because the exercise price
of the options was greater than the average market price of the common
shares in 1998. There were no options outstanding for the years ended
December 31, 1997 and 1996.
The Company had warrants to purchase common stock outstanding in 1996
and 1997. Inclusion of the warrants in 1996 in weighted average shares
outstanding for diluted EPS would be antidilutive due to losses in
those years. Warrants outstanding at December 31, 1997 (see Notes 6 and
9) were convertible to an estimated 765,000 shares (335,762 on a
weighted average basis). Additionally, if included in the diluted EPS
calculation, $8,000,000 has been added to the numerator as expenses
recorded in 1997 associated with the warrants. These calculations would
also result in an antidilutive effect and, therefore, are excluded. A
shareholder had antidilutive rights which called for a constant 1.99%
ownership. This feature was also antidilutive for all years presented.
As discussed in Note 9, both the warrants and the antidilution rights
that were outstanding at December 31, 1997 were terminated in
connection with the Company's IPO.
12. RELATED-PARTY TRANSACTIONS
The Company and Cardiac Medical, Inc. ("CMI") were related parties due
to common stock ownership by certain officers and shareholders. The
Company and CMI shared office space and certain administrative
employees. The Company recorded expenses of $50,000 during each of 1996
and 1997 related to these shared services. During 1998, the Company
purchased from CMI the portion of the shared office space owned by CMI
as well as certain furnishings and equipment for approximately
$584,000. CMI previously guaranteed the Sirrom Note; however, on July
15, 1997, in connection with the Credit Facility, NationsCredit
effectively purchased the Sirrom Note, and CMI's guarantee with respect
thereto was terminated.
F-22
61
Notes to Consolidated Financial Statements, Continued
The development of the Company's Manchester, Georgia facility was financed
with approximately $705,000 in proceeds of an industrial development revenue
bond issuance in July 1996 by the Manchester Development Authority for the
benefit of the Company. In connection with and as a condition to such bond
financing, the Company entered into an operating lease with the Manchester
Development Authority. All payments due on the bonds have been and continue
to be guaranteed, jointly and severally, by CMI and the former majority
stockholders of the Company.
At December 31, 1997 and 1998, the Company has unsecured loans to the former
majority shareholders in the form of notes receivable in the amount of
$337,837. The notes require annual payments of interest at 8% beginning on
September 28, 1997 and are due September 2000 through October 2000. The
Company recognized interest income of $27,101, $27,028, and $27,028 during
1996, 1997 and 1998, respectively, related to the notes. The notes and
related accrued interest are recorded as contra-equity in the consolidated
balance sheets.
Prior to April 1998, the CEO and the President of the Company did not draw a
salary or other form of compensation from the Company. Estimated fair value
compensation for 1996, 1997, and for the period January 1998 through March
1998 of $320,000, $365,000, and $91,250, respectively, has been recorded in
the consolidated financial statements of the Company with a corresponding
credit to additional paid-in capital.
The CEO and President of the Company each own a 50% interest in the capital
stock of HP Aviation, Inc., an entity that provides the use of an airplane
to the Company. During 1998, the Company paid HP Aviation, Inc.
approximately $38,900 for use of the airplane. In addition, the CEO and
President of the Company each own a 50% interest in a real estate property
which is used by the Company for various management related functions.
During 1998, the Company paid to these officers approximately $17,300 for
use of the beach house.
On January 1, 1999, the Company amended its Consulting and Services
Agreement with Healthcare Alliance (the "Alliance Agreement"), an affiliate
of one of the Company's directors. The Alliance Agreement provides for (i)
the payment to Healthcare Alliance of an annual consulting fee of $36,000,
(ii) the payment to Healthcare Alliance of an annual performance incentive
fee equal to 5% of any annual sales increase achieved by the Company that
results from Healthcare Alliance's efforts and (iii) the grant of options to
purchase up to 1% of the Company's outstanding common stock, which will vest
and become exercisable by Healthcare Alliance only if it procures group
purchasing agreements with certain Group Purchasing Organizations ("GPO")
and the Company achieves amounts of incremental sales revenue under its
agreement with the particular GPO (at an exercise price of the closing stock
price of the Company's common stock on the effective date of the purchasing
agreement). In addition, under the amended agreement, the Company has
granted an option to Healthcare Alliance for the purchase of 45,000 shares
of common stock of the Company. Such options will become vested and
exercisable by Healthcare Alliance only if the Company achieves certain
amounts of incremental sales revenue under the Company's group purchasing
agreement with Premier Purchasing Partners, L.P., (the "Premier Agreement"
-- see below). The exercise price for these shares shall be the closing
stock price of the Company's common stock on the day that the options vest.
The options are exercisable for a period of five years upon vesting. The
Alliance Agreement terminates on December 31, 2001. The Company incurred
expense of $30,000, $36,000, and $36,000 related to the annual consulting
fee under the Alliance Agreement during the years ended December 31, 1996,
1997, and 1998, respectively. In addition, during 1998, the Company issued
45,328 shares of the Company's common stock to Healthcare Alliance in
connection with the signing of the Premier Agreement. The Company recognized
consulting expense of approximately $657,300 related to this transaction
based on
F-23
62
Notes to Consolidated Financial Statements, Continued
the fair value of the Company's stock of $14.50 per share at the time of
issuance. There were no incentive fee amounts paid during the years ended
December 31, 1996, 1997, and 1998, nor were there any grants of Company
stock during the years ended December 31, 1996 and 1997.
On May 8, 1997, the Company entered into an agreement (the "Agreement")
with a director of the Company (the "Director") in which the Director was
to provide acquisition consulting and related services to the Company. The
Director receives a fee (the "General Consulting Fee") equal to 2.5% of the
acquisition purchase price (i) payable by the Company with respect to a
company acquired by the Company or (ii) payable to the Company or its
shareholders in the event the Company is acquired. Such General Consulting
Fee was conditioned upon, and was not payable until, there had occurred an
initial public offering of the Company's capital stock or substantially all
of the Company's business or outstanding shares of capital stock is
acquired. Such General Consulting Fee was payable, at the Director's
option, (i) in shares of the Company's common stock after an initial public
offering, (ii) by the Company's issuance to the Director of warrants or
options to purchase, at a nominal exercise price, that number of shares of
common stock (valued at the initial public offering price) which equaled
the General Consulting Fee, (iii) in shares of the company, which acquired
the Company, in the event the Company was acquired, or (iv) in cash. The
Agreement also provided for payment to the Director for his services in
connection with the Strato Acquisition of $375,000 (the "Consulting Fee").
The Consulting Fee was payable upon the initial public offering at the
option of the Director, in shares of the Company's stock or warrants or
options to purchase, at a nominal exercise price, that number of shares of
the common stock (valued at the initial public offering price) which
equaled $375,000. At December 31, 1997, accrued expenses included $375,000
due to the Director. The Agreement also provides for payment of $250,000
(the "Second Consulting Fee") to the Director for services provided in
connection with a second strategic venture. The Second Consulting Fee is
payable upon the completion of the second strategic venture and is payable
in warrants or options to purchase, at a nominal exercise price, that
number of shares of the Company's stock (valued at the initial public
offering price) which equals $250,000. As of December 31, 1997 and 1998, no
amounts have been earned by the Director relating to the Second Consulting
Fee. Both Consulting Fees are to be in lieu of and not in addition to the
General Consulting Fee.
An affiliate of one of the Directors of the Company provided consulting
services to the Company in 1997 and 1998 which were expensed in the amounts
of approximately $235,700 and $40,600, respectively.
13. Commitments and Contingent Liabilities
Concurrent with the 1995 acquisition of Neostar the Company entered into
non-compete and consulting agreements with four previous shareholders of
Neostar. The agreements are non-interest bearing and were recorded at their
net present values based on an imputed interest rate of 10%. These
non-compete and consulting agreements were paid in full during 1998 with
proceeds from the Company's IPO. The total amount required to be paid was
F-24
63
Notes to Consolidated Financial Statements, Continued
$1,876,078 as was calculated per the terms of the non-compete and consulting
agreements. The Company recorded an extraordinary loss on the early
extinguishment of debt of $67,703, net of income tax benefit of $43,285.
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 $117,000, $85,000, and $180,000
during the years ended December 31, 1996, 1997 and 1998, respectively.
Approximate minimum future rental payments under operating leases having
remaining terms in excess of one year are as follows:
1999 $ 202,200
2000 161,500
2001 130,500
2002 130,500
2003 124,900
Thereafter 636,000
----------
$1,385,600
==========
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.
On October 30, 1998 and December 7, 1998, shareholder suits were filed
against the Company, certain officers and directors of the Company, and one
former officer and director of the Company. In addition, an amended
consolidated complaint has added one of the Company's institutional
investors as a defendant. The amended consolidated complaint, which is
pending in the U.S. District Court for the Northern Division of Georgia
(Atlanta Division), seeks class certification and rescissory and/or
compensatory damages as well as expenses of litigation. The complaint
alleges that the prospectus and registration statement used by the Company
in connection with the April 1998 initial public offering of the Company's
common stock contained material omissions and misstatements. Although the
Company believes the suit is without merit, the outcome cannot be predicted
at this time. If the ultimate disposition of this matter is determined
adversely against the Company, it could have a material adverse effect on
the Company's consolidated results of operations and cash flows. Further,
there can be no assurance that additional lawsuits will not be filed against
the Company or its subsidiaries or that the resolution of those lawsuits
will not have a material adverse effect on the results of operations and
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
F-25
64
Notes to Consolidated Financial Statements, Continued
covering each product under the agreements. Payments under these license
agreements totaled approximately $241,000, $249,000, and $439,000 in 1996,
1997, and 1998, respectively.
In connection with the acquisition of IFM discussed in Note 15, the Company
assumed certain license agreements with individuals (the "IFM Licensors")
for the right to manufacture and sell suture needles, suture introducers,
surgical retractors, vein strippers, non-traumatic vascular occlusive
devices, ports, aortic catheters, and other medical instruments covered by
the IFM Licensors' patents or derived from the IFM Licensors' confidential
information. Payments under these agreements vary, depending on the
individual products produced, and range from 1% to 5% of the Company's net
sales of such licensed products, with initial payments on some agreements of
up to $5,000. Such payments shall continue until the expiration date of each
corresponding Licensed Patent Right covering each product under the
agreements. The Company made no payments under these license agreements
during 1998.
Additionally, the Company has entered into a long-term manufacturing
agreement ("the Manufacturing Agreement") with the seller of IFM ("the
Seller"). The Manufacturing Agreement provides for the Seller to supply and
the Company to purchase certain minimum levels of the Seller's products for
a term of four years. The Agreement requires that the annual sales of the
products to the Company shall equal at least $6,000,000 during each 12-month
period under this Manufacturing Agreement. The agreement is cancelable at
the option of the Seller if the Company fails to meet the quotas required
under the Distribution Agreement.
On December 11, 1998, the Company entered into a long-term distribution
agreement ("the Distribution Agreement") with a medical devices
manufacturer. The Distribution Agreement provides for the manufacturer to
supply and the Company to purchase certain minimum levels of vascular grafts
for an initial term of three years. The Distribution Agreement may be
automatically extended up to two additional years upon the achievement of
annual minimum purchase targets as defined in the Distribution Agreement.
The Agreement requires the Company to purchase a minimum of 4,500 units,
6,300 units and 8,800 units in the first 3 years, respectively, following
December 11, 1998. The agreement is cancelable at the option of the
manufacturer if the Company fails to meet the quotas required under the
Distribution Agreement.
F-26
65
Notes to Consolidated Financial Statements, Continued
14. Supplemental Disclosure of Cash Flow Information
The following represent noncash investing and financing activities for the
years ended December 31:
1996 1997 1998
Capital lease obligations for property and equipment $ 114,158
Short-term debt issued for certain prepaid insurance
coverage $ 111,707 $ 161,719
Increase to goodwill related to inventory $ 52,169 $ 351,104
Note issued for trade-in of transportation equipment $ 11,641
Increase to property and equipment and accounts payable $ 101,460
Discount recorded on credit facility $3,000,000
Increase to additional paid in capital for:
Contributed services $ 320,000 $ 365,000 $ 91,250
Consulting services $ 657,256
Extinguishment of put feature of warrant $9,900,000
Change in value of put warrant $8,000,000 $(1,100,000)
15. Acquisitions
On June 20, 1997, the Company, together with Arrow Interventional, Inc.
("Arrow"), an unrelated entity, entered into a joint purchase agreement (the
"Stock Purchase Agreement") to acquire all of the stock of Strato, located
in Norwood, Massachusetts, for a purchase price of $21,250,000 plus the
assumption by the Company and Arrow of certain of Strato's trade debts and
accrued expenses. Strato produces and distributes vascular access products
(the "Port Business") and implantable infusion pump products (the "Pump
Business"). Under the Stock Purchase Agreement, the Company acquired 275,294
shares of Strato's stock for $19,500,000, and Arrow acquired 24,706 shares
of Strato's stock (the "Arrow Shares") for $1,750,000.
The transaction was completed on July 15, 1997. On that date, the Company
and Arrow entered into an asset purchase and stock redemption agreement (the
"Arrow Agreement") wherein the Company, as beneficial owner of a majority of
the stock of Strato, sold the Pump Business and its related assets to Arrow
in exchange for the Arrow Shares and Arrow's assumption of certain
liabilities of Strato. The assets acquired and liabilities assumed under the
Stock Purchase Agreement were divided between the Company and Arrow as
outlined in the Arrow Agreement.
The Company has accounted for the acquisition under the purchase method of
accounting.
F-27
66
Notes to Consolidated Financial Statements, Continued
The estimated fair values of assets acquired and liabilities assumed in the
Strato acquisition are as follows:
Accounts receivable, net $ 1,813,863
Inventories 4,434,204
Other current assets 101,775
Property and equipment 758,356
Intangibles and other assets 13,183,033
Deferred income tax asset 734,082
Accounts payable and accrued expenses (1,525,313)
-----------
Purchase price $19,500,000
===========
On May 19, 1998, the Company completed the purchase of certain assets used
in the manufacture and sale of the port product line of Ideas for Medicine,
Inc. (the "IFM Port Line"), a wholly-owned subsidiary of CryoLife, Inc. for
$100,000 in cash and a note payable in the amount of $482,110 (which is
supported by a standby letter of credit) that is due in November 1999. The
acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the net assets of
IFM based on their estimated fair values at the date of acquisition.
Operating results of IFM since May 19, 1998 are included in the Company's
consolidated financial statements.
On June 2, 1998, the Company completed the purchase of certain assets used
in the human vascular access business of Norfolk Medical Products, Inc.
("Norfolk") for $7,440,000 in cash and $1,860,000 in cash placed in escrow,
which will be released upon the successful transition by the seller of the
acquired manufacturing line to Manchester, Georgia. Approximately $930,000
of the escrowed cash was released prior to December 31, 1998. The
acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the net assets of
Norfolk based on their estimated fair values at the date of acquisition.
Operating results of Norfolk since June 2, 1998 are included in the
Company's consolidated financial statements.
Effective September 1, 1998, the Company completed the purchase of the net
assets of Columbia Vital Systems, Inc. ("CVS") for $4 million in cash and a
note payable for $225,000 due in September 2000. In addition, the purchase
agreement provides for an increase in the purchase price of up to $4 million
if CVS meets certain criteria over a two year period. Any additional
payments made will be accounted for as additional costs of acquired assets
and amortized over the remaining life of the assets. The acquisition has
been accounted for under the purchase method of accounting and, accordingly,
the purchase price has been allocated to the net assets of CVS based upon
their estimated fair values at the date of acquisition.
On September 30, 1998, the Company completed the purchase of the net assets
(other than ports) of Ideas for Medicine, Inc. ("IFM"), a wholly-owned
subsidiary of CryoLife Inc., for $15 million in cash. Through this
acquisition and the acquisition of the IFM Port Line, the Company has
purchased substantially all of the operations of IFM. The acquisition has
been
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67
Notes to Consolidated Financial Statements, Continued
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the net assets of IFM based on their
estimated fair values at the date of acquisition. Operating results of IFM
since September 30, 1998 are included in the Company's consolidated
financial statements.
Effective October 15, 1998, the Company completed the purchase of the
outstanding stock of Stepic Corporation ("Stepic") for $8 million in cash
and a note payable for $7.2 million over a three year period (which is
supported by standby letters of credit). In addition, the Company agreed to
pay Stepic up to an additional $4.8 million upon the successful achievement
of certain specified future earnings targets by Stepic. Any additional
payments made will be accounted for as additional costs of acquired assets
and amortized over the remaining life of the assets. The acquisition has
been accounted for under the purchase method of accounting and, accordingly,
the purchase price has been allocated to the net assets of Stepic based upon
their estimated fair values at the date of acquisition.
The estimated fair values of assets acquired and liabilities assumed in each
of the 1998 acquisitions are as follows:
IFM Port
Line Norfolk CVS IFM Stepic
---- ------- --- --- ------
Cash $ 279,202
Accounts receivable, net 8,878,486
Inventories $ 26,146 $ 714,075 $1,658,025 $ 825,253 6,361,697
Other current assets 2,211,269
Deferred income taxes 45,200
Property and equipment 91,000 5,000 19,024 228,781
Intangibles 703,478 8,872,112 2,659,349 14,234,320 14,241,334
Other assets 4,000
Accounts payable (2,847,495)
Accrued expenses (147,514) (422,387) (97,374) (78,597) (4,157,274)
Long-term debt (10,000,000)
--------- ---------- ---------- ----------- ------------
Purchase price $ 582,110 $9,300,000 $4,225,000 $15,000,000 $ 15,200,000
========= ========== ========== =========== ============
The following unaudited pro forma summary for the year ended December 31,
1997 combines the results of the Company with the acquisitions of the Port
Business of Strato, Norfolk, IFM, CVS, and Stepic as if the acquisitions had
occurred at the beginning of 1997. For the year ended December 31, 1998, the
pro forma summary presents the results of operations of the Company as if
the acquisition of Norfolk, IFM, CVS, and Stepic had occurred at the
beginning of 1998. Certain adjustments, including interest expense on the
acquisition debt, amortization of intangible assets, and income tax effects,
have been made to reflect the impact of the purchase transactions. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions
been made at the beginning of 1997 and 1998, or of results which may occur
in the future.
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68
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
-------------------------
1998 1997
(Unaudited) (Unaudited)
----------- -----------
in thousands, except per share
Sales $82,753 $83,871
Net income (loss) before extraordinary items $ 667 $(3,512)
Net income (loss) $ 1,684 $(3,512)
Net income (loss) per share before extraordinary items $ .05 $ (.34)
Net income (loss) per share - basic and diluted $ .14 $ (.34)
Pro forma earnings per share - basic for the years ended December 31, 1998
and 1997 is calculated by dividing pro forma net income by the basic
weighted average shares outstanding of 12,187,070 and 9,419,450,
respectively. Pro forma earnings per share - diluted for the years ended
December 31, 1998 and 1997 is calculated by dividing pro forma net income by
the diluted weighted average shares outstanding of 12,412,394 and 9,419,450,
respectively.
16. Segment Information and Major Customers
As of December 31, 1998, the Company operates two reportable segments-(1)
Manufacturing and (2) Distribution. The Manufacturing segment includes
products manufactured by the Company as well as products manufactured by
third parties on behalf of the Company through manufacturing and supply
agreements. Prior to the acquisitions of CVS and Stepic in 1998 discussed in
Note 15, the Company operated as one segment, Manufacturing. Thus, segment
information for 1996 and 1997 will not be included in the tables below.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" (see Note 1) to the extent
that such policies affect the reported segment information. The Company
evaluates the performance of its segments based on gross profit; therefore,
selling, general, and administrative costs, as well as research and
development, interest income/expense, and provision for income taxes, are
reported on an entity wide basis only.
The table below presents information about the reported sales (which include
intersegment revenues), gross profit and identifiable assets of the
Company's segments as of and for the year ended December 31, 1998.
1998
-------------------------------------------------------
Gross Identifiable
Sales Profit Assets
----- ------- ------------
Manufacturing $ 27,584,756 $ 16,359,469 $ 65,360,263
Distribution 12,020,468 3,106,939 40,049,107
------------ ------------ -------------
$ 39,605,224 $ 19,466,408 $105,409,370
============ ============ ============
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69
Notes to Consolidated Financial Statements, Continued
A reconciliation of total segment sales to total consolidated sales of the
Company for the year ended December 31, 1998 is as follows:
Total segment sales $ 39,605,224
Elimination of intersegment sales (205,863)
------------
Consolidated sales $ 39,399,361
============
A reconciliation of total segment assets to total consolidated assets of
the Company as of December 31, 1998 is as follows:
Total segment assets $105,409,370
Elimination of intersegment receivables (1,471,573)
Assets not allocated to segments 699,316
------------
Consolidated assets $104,637,113
============
The Company's operations are located in the United States. Thus, all of the
Company's assets are located domestically. Sales information by geographic area
for the years ended December 31 is as follows:
1996 1997 1998
---------- ----------- -----------
United States $5,865,957 $13,144,972 $35,665,412
Foreign 1,185,901 2,653,151 3,733,949
---------- ----------- -----------
$7,051,858 $15,798,123 $39,399,361
========== =========== ===========
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 8%, 14%, and 7% of total sales during
the years ended December 31, 1996, 1997, and 1998, respectively. At December
31, 1996, 1997, and 1998, respectively, 9%, 25%, and 17% of the accounts
receivable balance consisted of amounts due from the Company's three largest
customers.
17. Financial Instruments
Financial instruments consisted of the following:
December 31, 1997 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Accounts receivable - trade, net $ 3,720,031 $ 3,720,031 $16,925,487 $16,925,487
Accounts payable - trade $ 1,726,395 $ 1,726,395 $ 9,775,420 $ 9,775,420
Interest rate cap agreement $ 151
Long-term debt and non-compete payable $27,729,874 $27,864,642 $49,806,854 $48,694,813
Put warrant repurchase obligation $11,000,000 $11,000,000
Off-balance sheet financial instruments:
Letters of credit $ 7,682,110 $ 7,682,110
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximate
fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for the credit facility
approximates fair value because the underlying instrument is at a variable
interest rate which reprices frequently. Fair value for the fixed rate long
term debt was estimated using the current rates offered to the Company for
debt with similar maturities. The Acquisition Note and the non-compete
payable were recorded at fair value using either the market prices for the
same or similar issues or the current rates offered to the Company for debt
with similar maturities. The fair value of the interest rate cap agreement
is estimated based on valuations received from NationsBank. 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.
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70
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTARY INFORMATION
To the Shareholders
Horizon Medical Products, Inc. and Subsidiaries
Our report on the consolidated financial statements of Horizon Medical
Products, Inc. and subsidiaries is included in this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 17, 1999
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71
SCHEDULE II
Horizon Medical Products, Inc. and Subsidiaries
Valuation and Qualifying Accounts
for the years ended December 31, 1996, 1997, and 1998
Beginning Charged to Ending
Balance Expense Write Offs Deductions Other(1) Balance
--------- ---------- ---------- ---------- -------- -------
Year ended December 31, 1996:
Allowance for returns and doubtful accounts $1,162 $5,835 - - - $6,997
Inventory Reserve $0 - - - - $0
Year ended December 31, 1997:
Allowance for returns and doubtful accounts $6,997 $58,018 - $(210,098) $453,322 $308,239
Inventory Reserve $0 $125,000 $225,118 - $350,051 $249,933
Year ended December 31, 1998:
Allowance for returns and doubtful accounts $308,239 $445,060 - $(217,787) - $535,512
Inventory Reserve $249,933 $367,919 $209,138 - $351,104 $759,818
(1) Other consists of allowances and reserves acquired through acquisitions and
adjustments to these reserves through goodwill.
F-33