<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-24025
---------
HORIZON MEDICAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1882343
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Horizon Way
P.O. Box 627
Manchester, Georgia 31816
------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 706-846-3126
------------
Indicate by check mark whether the registrant: (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of August 13, 1999, was 13,366,278.
<PAGE> 2
HORIZON MEDICAL PRODUCTS, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.................................................................3
Condensed Consolidated Balance Sheets................................................4
Condensed Consolidated Statements of Operations..................................5 & 6
Condensed Consolidated Statements of Cash Flows......................................7
Notes to Condensed Consolidated Financial Statements.................................8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..........................21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................................22
ITEM 4. Submission of Matters to a Vote of Security Holders.................................22
ITEM 6. Exhibits and Reports on Form 8-K....................................................23
SIGNATURE........................................................................................24
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements listed below are included on the following
pages of this Report on Form 10-Q (unaudited):
Condensed Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 (audited).
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and June 30, 1998.
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998.
Notes to Condensed Consolidated Financial Statements.
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<PAGE> 4
HORIZON MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 1,127,277 $ 6,232,215
Account receivable - trade, net ........................................... 17,193,012 16,925,487
Inventories ............................................................... 23,425,595 19,358,423
Prepaid expenses and other current assets ................................. 1,911,779 1,636,779
Deferred taxes ............................................................ 582,346 582,346
------------- -------------
Total current assets ................................................... 44,240,009 44,735,250
Property and equipment, net ................................................... 3,938,945 4,043,200
Intangible assets, net ........................................................ 55,853,384 55,494,414
Deferred taxes ................................................................ 116,970 116,970
Other assets .................................................................. 222,961 247,279
------------- -------------
Total assets ........................................................... $ 104,372,269 $ 104,637,113
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade .................................................. $ 8,054,983 $ 9,775,420
Accrued salaries and commissions .......................................... 114,149 257,341
Accrued royalties ......................................................... 168,000 127,375
Accrued interest .......................................................... 420,885 318,476
Accrued acquisition liabilities ........................................... 29,268 165,058
Other accrued expenses .................................................... 495,239 1,248,158
Income taxes payable ...................................................... 272,287 1,343,473
Current portion of long-term debt ......................................... 4,264,419 2,733,138
------------- -------------
Total current liabilities .............................................. 13,819,230 15,968,439
Long-term debt, net of current portion ........................................ 47,144,009 47,073,716
Other liabilities ............................................................. 166,594 164,152
------------- -------------
Total liabilities ...................................................... 61,129,833 63,206,307
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value per share; 5,000,000 shares authorized,
none issued and outstanding ............................................ -- --
Common stock, $.001 par value per share; 50,000,000 shares authorized,
13,366,278 shares issued and outstanding in 1999 and 1998 .............. 13,366 13,366
Additional paid-in capital ................................................ 51,826,125 51,826,125
Shareholders' notes receivable ............................................ (438,956) (425,553)
Accumulated deficit ....................................................... (8,158,099) (9,983,132)
------------- -------------
Total shareholders' equity ............................................. 43,242,436 41,430,806
------------- -------------
Total liabilities and shareholders' equity ............................. $ 104,372,269 $ 104,637,113
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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<PAGE> 5
HORIZON MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales ..................................................................... $ 18,878,176 $ 6,858,690
Cost of goods sold ............................................................ 11,476,571 2,499,667
------------- -------------
Gross profit .................................................................. 7,401,605 4,359,023
Selling, general and administrative expenses .................................. 4,849,858 2,439,122
------------- -------------
Operating income .............................................................. 2,551,747 1,919,901
------------- -------------
Other income (expense):
Interest expense .......................................................... (1,043,863) (299,247)
Other income .............................................................. 42,747 11,138
------------- -------------
(1,001,116) (288,109)
------------- -------------
Income before income taxes and extraordinary item ......................... 1,550,631 1,631,792
Income tax expense ............................................................ (664,891) (680,719)
------------- -------------
Income before extraordinary item .......................................... 885,740 951,073
Extraordinary loss on early extinguishments of debt, net of income
tax benefit of $53,330 .................................................... -- (83,414)
------------- -------------
Net income .................................................................... $ 885,740 $ 867,659
============= =============
Net income per share before extraordinary item - basic and diluted ............. $ .07 $ .08
============= =============
Net income per share - basic and diluted ....................................... $ .07 $ .07
============= =============
Weighted average common shares outstanding - basic ............................ 13,366,278 12,534,467
============= =============
Weighted average common shares outstanding - diluted .......................... 13,374,749 12,663,129
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HORIZON MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales ..................................................................... $ 38,319,517 $ 13,567,559
Cost of goods sold ............................................................ 23,532,466 5,033,223
------------- -------------
Gross profit .................................................................. 14,787,051 8,534,336
Selling, general and administrative expenses .................................. 9,692,412 5,401,997
------------- -------------
Operating income .............................................................. 5,094,639 3,132,339
------------- -------------
Other income (expense):
Interest expense .......................................................... (1,956,073) (2,241,319)
Other income .............................................................. 54,220 22,276
------------- -------------
(1,901,853) (2,219,043)
------------- -------------
Income before income taxes and extraordinary items ........................ 3,192,786 913,296
Income tax expense ............................................................ (1,367,753) (890,073)
------------- -------------
Income before extraordinary items ......................................... 1,825,033 23,223
Extraordinary gain on early extinguishment of put feature ..................... -- 1,100,000
Extraordinary loss on early extinguishments of debt, net of income
tax benefit of $53,330 .................................................... -- (83,414)
------------- -------------
Net income .................................................................... $ 1,825,033 $ 1,039,809
============= =============
Net income per share before extraordinary items - basic and diluted ............ $ .14 $ .00
============= =============
Net income per share - basic and diluted ....................................... $ .14 $ .09
============= =============
Weighted average common shares outstanding - basic ............................ 13,366,278 10,988,318
============= =============
Weighted average common shares outstanding - diluted .......................... 13,370,769 11,441,123
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HORIZON MEDICAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 1,825,033 $ 1,039,809
------------- -------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Extraordinary gain on early extinguishment of put feature .......... -- (1,100,000)
Depreciation ....................................................... 371,308 176,960
Amortization ....................................................... 1,361,648 760,889
Amortization of discount ........................................... -- 1,985,559
Non-cash officer compensation ...................................... -- 91,250
Non-cash consulting expense ........................................ -- 657,256
(Increase) decrease in operating assets:
Accounts receivable ........................................... (267,525) (1,925,562)
Inventories ................................................... (4,067,172) (476,865)
Prepaid expenses and other assets ............................. (135,190) (1,803)
Increase (decrease) in operating liabilities:
Accounts payable - trade ...................................... (1,720,437) (286,446)
Income taxes payable .......................................... (1,071,186) 300,152
Accrued expenses and other liabilities ........................ (886,425) (941,022)
------------- -------------
Net cash (used in) provided by operating activities ................ (4,589,946) 280,177
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................................... (212,098) (1,081,508)
Cash paid for acquisitions .................................................... -- (9,412,561)
Change in non-operating assets ................................................ (18,652) (107,932)
------------- -------------
Net cash used in investing activities .............................. (230,750) (10,602,001)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issue costs .............................................................. (68,741) (283,582)
Principal payments on long-term debt .......................................... (202,098) (29,619,307)
Proceeds from initial public offering, net of offering costs .................. -- 40,160,245
Proceeds from the exercise of stock warrants .................................. -- 83
Notes receivable - shareholders ............................................... (13,403) --
------------- -------------
Net cash (used in) provided by financing activities .................... (284,242) 10,257,439
------------- -------------
Net decrease in cash and cash equivalents .............................. (5,104,938) (64,385)
Cash and cash equivalents, beginning of period ................................ 6,232,215 2,893,924
------------- -------------
Cash and cash equivalents, end of period ...................................... $ 1,127,277 $ 2,829,539
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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<PAGE> 8
HORIZON MEDICAL PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated balance sheet of Horizon Medical Products,
Inc. (the "Company") at December 31, 1998 has been derived from the
Company's audited consolidated financial statements at such date.
Certain information and footnote disclosures normally included in
complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission
("SEC") and instructions to Form 10-Q. The condensed consolidated
financial statements at June 30, 1999, and for the three months and
six months ended June 30, 1999 and 1998 are unaudited; however, these
statements reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation. All such
adjustments are of a normal recurring nature unless noted otherwise.
The results of operations for the interim periods are not necessarily
indicative of the results of the full year. These financial statements
should be read in conjunction with the Company's Form 10-K for the
year ended December 31, 1998, including, without limitation, the
summary of accounting policies and notes and consolidated financial
statements included therein.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("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 No. 130 in 1998, and for the three months and six months
ended June 30, 1999 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 effective as hedges. SFAS No. 133, as
amended by SFAS No. 137, Deferral of the Effective Date of FAS 133, is
effective for fiscal years beginning after June 15, 2000 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.
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<PAGE> 9
2. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials ...................................................... $ 7,062,457 $ 5,336,210
Work in process .................................................... 2,616,797 1,984,133
Finished goods ..................................................... 14,551,738 12,797,898
------------- -------------
24,230,992 20,118,241
Less inventory reserves ............................................ (805,397) (759,818)
------------- -------------
$ 23,425,595 $ 19,358,423
============= =============
</TABLE>
3. INITIAL PUBLIC OFFERING
On April 20, 1998, the Company completed an initial public offering
(the "Offering") of 3,473,000 shares of common stock at $14.50 per
share. The Offering included 2,600,000 shares of common stock issued
by the Company and 873,000 shares sold by a group of selling
shareholders. Subsequently the underwriters of the Offering exercised
their option to purchase 520,950 shares of common stock at $14.50 per
share to cover over-allotments. Total proceeds to the Company after
underwriters' discounts and commissions and other offering costs were
$40,160,245 through June 30, 1998. Subsequent to June 30, 1998, the
Company recognized additional offering costs of $249,533, which
reduced the Company's total net proceeds from the Offering to
$39,910,712.
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1999 For the Six Months Ended June 30, 1999
---------------------------------------- -------------------------------------------
Income Shares Per-share Income Shares Per-share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ....................... $885,740 13,366,278 $0.07 $1,825,033 13,366,278 $0.14
Effect of Dilutive Securities ... -- 8,471 ===== -- 4,491 =====
-------- ---------- ---------- ----------
Diluted EPS ..................... $885,740 13,374,749 $0.07 $1,825,033 13,370,769 $0.14
======== ========== ===== ========== ========== =====
For the Three Months Ended June 30, 1998 For the Six Months Ended June 30, 1998
---------------------------------------- -------------------------------------------
Income Shares Per-share Income Shares Per-share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- ---------- ----------- -----------
Basic EPS ....................... $867,659 12,534,467 $0.07 $1,039,809 10,988,318 $ .09
Effect of Dilutive Securities ... -- 128,662 ===== -- 452,805 =====
-------- ---------- ---------- ----------
Diluted EPS ..................... $867,659 12,663,129 $0.07 $1,039,809 11,441,123 $ .09
======== ========== ===== ========== ========== =====
</TABLE>
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
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<PAGE> 10
common share market price during the period. The average common share
market price used in the above calculation was $ 6.49 for the three
months ended June 30, 1999 and $6.22 for the six months ended June 30,
1999.
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 212,974 options outstanding for the
three months ended June 30, 1999 and 223,851 options outstanding for
the six months ended June 30, 1999 that expire in 2008 with exercise
prices ranging from $ 6.25 to $ 15.50, that 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 for the
three and six months ended June 30, 1999.
The EPS impact of the extraordinary items for the six months ended
June 30, 1998 was $.09.
5. ACQUISITIONS
On May 19, 1998, the Company completed the purchase of certain assets
used in the manufacture and sale of the port product line of Ideas for
Medicine, Inc. (the "IFM Port Line"), a wholly-owned subsidiary of
CryoLife, Inc. for approximately $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
condensed consolidated financial statements for the three and six
months ended June 30, 1998, but are immaterial.
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"). As consideration for the assets acquired,
Horizon (i) paid Norfolk an aggregate of approximately $7.4 million in
cash, and (ii) paid approximately $1.9 million in cash into an escrow
account. The escrow will be released upon the successful transition by
Norfolk of the manufacturing of the Human Product Line to Manchester,
Georgia. The Company accounted for the acquisition using the purchase
method of accounting and, accordingly, the purchase price has been
allocated to the 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 condensed consolidated financial
statements for the three and six months ended June 30, 1998.
The following unaudited pro forma summary for the six months ended
June 30, 1998 combines the results of the Company with the acquisition
of the Port Business of Norfolk as if the acquisition had occurred at
the beginning of 1998. Certain adjustments, including amortization of
intangible assets and income tax effects, have been made to reflect
the
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<PAGE> 11
impact of the purchase transaction. 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 acquisition been made
at the beginning of 1998, or of results which may occur in the future.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
----------------
<S> <C>
Sales.................................................... $ 14,833,000
Net income .............................................. $ 1,095,000
Net income per share - basic and diluted................. $ 0.10
</TABLE>
Pro forma earnings per share was calculated by dividing pro forma net
income by the weighted average shares outstanding of 10,988,318 and
11,441,123 for basic and diluted earnings per share, respectively.
6. EXTRAORDINARY ITEMS
Effective January 29, 1998, NationsCredit, the Company's lender, agreed
to the extinguishment of the put feature related to the warrants issued
by the Company to NationsCredit in July 1997. As a result of this
extinguishment in the first quarter of 1998, the Company recorded an
extraordinary gain of $1.1 million and the net recorded value of the
warrant of $9.9 million was reclassified to additional paid-in capital.
In connection with the Offering, the Company was required to repay
certain of its existing debt with a portion of the Offering proceeds.
The Company recorded an $83,414 net loss on these early extinguishments
of debt in the second quarter of 1998.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the consolidated financial position, results of
operations, or cash flows of the Company.
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
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
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<PAGE> 12
filed a motion to dismiss on April 7, 1999 on which the Court has not
yet ruled. 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 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 currently negotiating with its lender and others for
either an increase in its credit facility or a replacement facility.
Should the Company not be successful in modifying its current credit
facility, it may violate the covenants of the credit facility in third
quarter 1999. Should this violation occur or a modification of the
covenants is not obtained from the lender, there could be a material,
adverse effect on the Company's financial condition and results of
operations.
On September 30, 1998, the Company acquired certain assets used in the
manufacture and sale of medical devices by Ideas for Medicine, Inc.
("IFM"), a wholly-owned subsidiary of CryoLife, Inc. (the
"Acquisition"). The Acquisition was consummated pursuant to an Asset
Purchase Agreement, dated as of September 30, 1998, by and between the
Company and IFM. In connection with the Acquisition, the Company and
IFM entered into a manufacturing agreement (the "Manufacturing
Agreement"), dated as of September 30, 1998, pursuant to which, for a
four year term, IFM agreed to manufacture exclusively for the Company
and the Company agreed to purchase from IFM a specified minimum amount
of products (the "Products"). The Manufacturing Agreement requires that
the Company make annual purchases of Products of at least $6,000,000.
On June 22, 1999, IFM notified the Company that it was in breach of the
Manufacturing Agreement. IFM notified the Company that it was in
violation of the payment provision contained in the Manufacturing
Agreement, which calls for the Company to pay amounts due to IFM within
45 days of the date of each invoice. The total of accounts payable due
to IFM under the Manufacturing Agreement at June 30, 1999 was
approximately $2.2 million. Additionally, IFM notified the Company that
it was in violation of the Manufacturing Agreement due to the
nonpayment of interest related to such past due accounts payable. In
addition, IFM notified the Company that it was in breach for failing to
provide a production schedule at the end of the first six months of the
term of the Manufacturing Agreement and on a monthly basis thereafter.
Finally, IFM notified the Company that it was in breach for the failure
to provide packaging and labeling.
The Company has 60 days from the notification of default to cure. If
the Company does not take corrective action within 60 days, IFM may
terminate the Manufacturing Agreement and may be entitled to receive an
amount equal to (i) the direct costs incurred by IFM for all purchase
orders committed for raw materials and components, (ii) the direct and
indirect
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<PAGE> 13
costs incurred by IFM for six months after such termination for labor
utilized in the manufacture of the Products, and (iii) the fixed
facility costs incurred by IFM in connection with the manufacture of
the Products for the remainder of the term of the Manufacturing
Agreement.
The Company has indicated to IFM that it will not be able to meet the
minimum purchase requirements outlined in the Manufacturing Agreement,
and the Company and IFM are currently in negotiations to revise the
Manufacturing Agreement. The parties are currently operating under a
verbal modification to the Manufacturing Agreement. Should the Company
be unable to revise the Manufacturing Agreement to include acceptable
terms, fail to continue to operate under the verbal modification to the
Manufacturing Agreement or if the default is not cured, then any
liabilities incurred as a result of the default could have a material
adverse effect on the Company's financial position and disrupt the
Company's ability to obtain and sell the Products.
Also in connection with the acquisition of IFM, the Company assumed
certain license agreements (the "IFM Licensors") for the right to
manufacture and sell cholangiogram catheters, surgical retractors,
embolectomy catheters, aortic occlusion catheters, suture needles 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. Such payments shall continue until the expiration of
a fixed 20-year term or the expiration date of each corresponding
licensed patent covering each product under the agreements.
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 covering each product under the agreements.
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.
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<PAGE> 14
The Company is currently negotiating with its lender and others for
either an increase in its credit facility or a replacement facility.
Should the Company not be successful in modifying its current credit
facility, it may violate the covenants of the credit facility in third
quarter 1999. Should this violation occur or a modification of the
covenants is not obtained from the lender, there could be a material
adverse effect on the Company's financial condition and results of
operations.
In connection with the Company's October 15, 1998 purchase of Stepic
Corporation ("Stepic"), 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 purchase
payments made under the purchase agreement will be accounted for as
additional costs of acquired assets and amortized over the remaining
life of the assets. During the six months ended June 30, 1999, the
Company recorded a liability of $1.6 million, representing the
Company's contingent payment for the first anniversary year ending
October 1999.
8. SEGMENT INFORMATION AND MAJOR CUSTOMERS
Since the acquisitions of Columbia Vital Systems, Inc. (CVS) and Stepic
in 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 CVS and Stepic acquisitions, the
Company operated as one segment, manufacturing. Thus, segment
information as of and for the three and six months ended June 30, 1998
will not be included in the tables below.
The Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and administrative costs, as well
as research and development, interest income/expense, and provision
for income taxes, are reported on an entity wide basis only.
The table below presents information about the reported sales (which
include intersegment revenues), gross profit (which include
intersegment gross profit) and identifiable assets of the Company's
segments as of and for the three and six months ended June 30, 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended As of
June 30, 1999 June 30, 1999 June 30, 1999
-------------------------- ---------------------------- ------------
Identifiable
Sales Gross Profit Sales Gross Profit Assets
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Manufacturing .............. $ 8,181,081 $4,938,389 $16,547,633 $ 9,832,881 $ 66,818,607
Distribution ............... 11,309,797 2,351,390 23,186,234 5,040,864 37,237,888
----------- ---------- ----------- ------------ ------------
$19,490,878 $7,289,779 $39,733,867 $ 14,873,745 $104,056,495
=========== ========== =========== ============ ============
</TABLE>
-14-
<PAGE> 15
A reconciliation of total segment sales to total consolidated sales
and of total segment gross profit to total consolidated gross profit
of the Company for the three and six months ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
<S> <C> <C>
Total segment sales ................................................ $ 19,490,878 $ 39,733,867
Elimination of intersegment sales .................................. (612,702) (1,414,350)
------------ ------------
Consolidated sales ................................................. $ 18,878,176 $ 38,319,517
============ ============
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
Total segment gross profit ......................................... $ 7,289,779 $ 14,873,745
Elimination of intersegment gross profit ........................... 111,826 (86,694)
------------ ------------
Consolidated gross profit .......................................... $ 7,401,605 $ 14,787,051
============ ============
</TABLE>
A reconciliation of total segment assets to total consolidated assets
of the Company as of June 30, 1999 is as follows:
<TABLE>
<S> <C>
Total segment assets .......................................................... $ 104,056,495
Elimination of intersegment receivables ....................................... (383,542)
Assets not allocated to segments .............................................. 699,316
-------------
Consolidated assets ........................................................... $ 104,372,269
=============
</TABLE>
The Company's operations are located in the United States. Thus,
substantially all of the Company's assets are located domestically.
Sales information by geographic area for the three and six months
ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ................... $17,900,368 $ 6,175,442 $36,055,464 $11,737,625
Foreign ......................... 977,808 683,248 2,264,053 1,829,934
----------- ----------- ----------- -----------
$18,878,176 $ 6,858,690 $38,319,517 $13,567,559
=========== =========== =========== ===========
</TABLE>
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net Sales. Net sales increased 175% to $18.9 million for the second
quarter of 1999 from $6.9 million for the second quarter of 1998. This increase
is attributable to sales resulting from the 1998 acquisitions of IFM, CVS and
Stepic, which represented approximately $13.6 million of total sales for the
quarter. The allocation of 1999 net sales on a segment basis resulted in net
sales of $8.2 million from the manufacturing segment and $11.3 million from the
distribution segment, before intersegment eliminations. There were no
distribution segment sales for the second quarter of 1998.
Gross Profit. Gross profit increased 69.8% to $7.4 million for the
second quarter of 1999 from $4.4 million for the second quarter of 1998. Gross
margin decreased to 39.2% in the second quarter of 1999 from 63.6% in the
second quarter of 1998. The decrease in gross margin is the result of the
distribution segment gross margin of 20.8%, a significantly lower margin than
the manufacturing segment margin of 60.4% for the three months ended June 30,
1999. The allocation of gross profit between segments is gross profit of $4.9
million from the manufacturing segment and $2.4 million from the distribution
segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased $2.4 million or 98.9% to approximately
$4.8 million for the second quarter of 1999 compared with $2.4 million for the
second quarter of 1998. This increase is substantially attributable to expenses
incurred in operating the businesses acquired in 1998. SG&A expenses decreased
as a percentage of net sales to 25.7% for the second quarter of 1999 from 35.6%
for the second quarter of 1998. This decrease is due to the large revenue
growth in the second quarter of 1999, a result of the 1998 acquisitions.
Interest Expense. Net interest expense increased to approximately $1.0
million in the second quarter of 1999 compared to approximately $300 thousand
in the second quarter of 1998. The increase in 1999 is due to higher debt
outstanding during the second quarter of 1999 compared to the second quarter of
1998. This increase in debt is primarily a result of the 1998 acquisitions. The
majority of the debt outstanding in the first quarter 1998 was repaid with the
proceeds generated from the Company's initial public offering in April 1998.
Income Tax Expense. Income tax expense decreased to approximately $665
thousand for the second quarter of 1999 from approximately $681 thousand for
the second quarter of 1998. The slight decrease in 1999 was the result of lower
taxable income in the second quarter of 1999 compared to the second quarter of
1998.
-16-
<PAGE> 17
Extraordinary Item. During April 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 Company's
Initial Public Offering ("IPO").
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Sales. Net sales increased 182% to $38.3 million for the six
months ended June 30, 1999, from $13.6 million for the same period in 1998.
This increase is attributable to the additional revenue resulting from the 1998
acquisitions of IFM, CVS and Stepic, which represented approximately $27.7
million of the increase. The allocation of 1999 net sales on a segment basis
resulted in net sales of $16.5 million from the manufacturing segment and $23.2
million from the distribution segment, before intersegment eliminations. There
were no distribution segment sales for the six months ended June 30, 1998.
Gross Profit. Gross profit increased 73.3% to $14.8 million for the
six months ended June 30, 1999 from $8.5 million for the same period in 1998.
Gross margin decreased to 38.6% in 1999 from 62.9% in 1998. The decrease in
gross margin is the result of the distribution segment gross margin of 21.7%, a
significantly lower margin than the manufacturing segment margin of 59.9% for
the six months ended June 30, 1999. The allocation of gross profit between
segments is $9.9 million for the manufacturing segment and $5.0 million for the
distribution segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased $4.3 million to $9.7 million for the
six months ended June 30, 1999 compared to $5.4 million for the same period in
1998. The majority of the increase is due to the additional expenses incurred
in operating the businesses acquired in 1998. SG&A expenses decreased as a
percentage of net sales to 25.3% for the six months ended June 30, 1999 from
39.8% for the same period in 1998. The decrease is due to the substantial
revenue growth from period to period.
Interest Expense. Net interest expense decreased approximately $285
thousand to $2.0 million for the six months ended June 30, 1999 compared to
$2.2 million for the six months ended June 30, 1998. The higher interest
expense in 1998 was attributable to the amortization of the debt discount and
accelerated amortization of debt issuance costs related to the NationsCredit
debt and warrants. Exclusive of the aforementioned, interest expense increased
approximately $1.2 million in 1999 from 1998 due to higher debt outstanding for
the six months ended 1999.
Income Tax Expense. Income taxes increased approximately $478 thousand
to $1.4 million for the six months ended June 30, 1999 from approximately $890
thousand for the same period in 1998. This increase is attributable to the
Company generating higher taxable income in 1999 as compared to 1998.
-17-
<PAGE> 18
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, 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, 9 and
13 of the Company's Form 10-K for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($4,589,946) for the
six months ended June 30, 1999 compared with $280,177 for the six months ended
June 30, 1998. The increase in cash used in operations during 1999 was
attributable to higher accounts receivable and inventory balances in 1999, as
well as the reduction of income taxes payable, accounts payable, certain
liabilities related to acquisition and salary expenses.
Net cash used in investing activities was $230,750 in 1999 compared to
$10,602,001 in 1998. Substantially all of the investing activities in 1999 were
for capital expenditures for the Company's facilities. The investing activities
in 1998 consisted of cash paid for the acquisition of Norfolk and capital
expenditures for the Company's facilities.
Net cash provided by (used in) financing activities was ($284,242) in 1999
compared to $10,257,439 in 1998. Financing activities in 1999 consisted
primarily of principal payments on outstanding debt. The primary source of cash
in financing activities in 1998 was the Company's initial public offering of
its common stock which generated over $40 million of proceeds to the Company.
Approximately $28 million of these proceeds was used to repay debt.
As discussed more fully in Note 6 of the Company's consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
1998, the Company entered into a $50 million amended and restated credit
facility with NationsCredit to be used for working capital purposes and to fund
future acquisitions. The Company is currently negotiating with its lenders and
others for either an increase in its credit facility or a replacement 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. Should the Company not be successful in modifying its current
credit facility, it may violate the covenants of the credit facility at the end
of third quarter 1999. Should this violation occur, there could be a material
adverse effect on the Company's financial condition and results of operations.
The Company is currently under negotiations to resolve the violations of its
Manufacturing Agreement with IFM dated September 30, 1998. The Company was
notified on June 22, 1999 by IFM that it was in breach of the Manufacturing
Agreement for certain violations as discussed in further detail in Note 7 of
the Company's condensed consolidated financial statements contained elsewhere
in this Form 10-Q. The Company has 60 days from the notification of the default
to cure. Should the Company be unable to revise the Manufacturing Agreement or
if the default is not cured, then any liabilities incurred as a result of the
default could have a material adverse effect on the Company's financial
condition and results of operations.
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 is commonly known as the Year 2000 ("Y2K") issue. Based on the
Company's review of its business and operating systems, the Company does not
expect to incur material cost with respect to assessing and
-18-
<PAGE> 19
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's definition of Y2K compliance means that all aspects of the
business processes have been evaluated for potential Y2K problems that effect
manufacturing, tracking, distribution, performance, functionality and
effectiveness of its products. These include: products manufactured, internal
financial and manufacturing information systems, internal equipment used in the
manufacturing process of its products, suppliers of products, and suppliers of
raw materials and services to the Company.
The Company does not manufacture any products that use any type of software or
microprocessors. None of the Company's manufactured products, once
manufactured, are affected by the Y2K date problem.
The Company has identified and is in the process of correcting Y2K problems
within its internal information systems. This includes a change in server
operating systems, new financial system software and new Manchester Facility
manufacturing system software and all related hardware. These changes are
currently scheduled to be completed, operational, and compliant by November 30,
1999.
The implementation of the new computer systems described above were planned and
are considered part of the Company's normal business. The Company does not
track its internal costs incurred related to Y2K; these costs however, to date,
consist primarily of the related payroll costs of its information systems group
and certain other employees and are not material.
The Company's primary computer system utilized in its New York distribution
business is currently in the final modification phase. This final modification
phase, originally scheduled for completion by June 30, 1999, should be completed
by November 30, 1999. The Company has also surveyed its embedded telephone and
voice mail systems at its Atlanta and Manchester offices and determined that
they are substantially Y2K compliant.
The Company's Medical Device Reporting software will be upgraded to comply with
FDA Year 2000 requirements by August 30, 1999. The upgrade will also comply
with International Regulatory Affairs Year 2000 requirements.
The Company has identified plant equipment that contains software and
microprocessors. Through the process of testing and supplier certification, the
Company has found no material Y2K issues with equipment used in the
manufacturing process of its products.
The Company is currently in the process of evaluating all suppliers for Y2K
readiness. As of June 30, 1999 the results are as follows: 48.8% responded,
29.3% of those responding are Y2K compliant, 19.5% are addressing Y2K issues
and 51.2% have yet to respond. If critical suppliers
-19-
<PAGE> 20
are found to be not compliant or have no contingency plans in place, the
Company will make positive efforts to obtain backup suppliers to ensure an
uninterrupted flow of product. The Company, however, will not have a
contingency plan for a supplier's failure to deliver electricity, gas or water
services.
According to recent reports, the healthcare industry lags other industries in
Y2K preparedness. The reports indicate that the progress of health claims
billing systems of third party payers is progressing slowly. To the extent the
Company's customers experience problems with their payment collections or with
their product ordering procedures, the Company's ability to collect payments or
receive product orders from its customers could be adversely affected and could
have a material adverse effect on the Company's business, liquidity, financial
condition and results of operations.
As noted above, the Company plans to have all internal systems Y2K compliant by
year-end 1999. The Company believes that other than for its electricity, gas
and water services, it is addressing the year 2000 issue and expects that
through its actions, year 2000 problems are not reasonably likely to have a
material adverse effect on its operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 1 of the condensed consolidated financial statements included elsewhere in
this Form 10-Q describes the recently issued accounting standards.
FORWARD-LOOKING STATEMENTS
Certain statements and information included herein may constitute
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Act of 1934 as amended by the Federal Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors which may cause the actual results of the
Company to be materially different from any future results expressed, implied
or contemplated by such forward-looking statements. Such factors include, among
other things, the timing of future acquisitions; the ability to integrate
acquired businesses; the ability to obtain financing on acceptable terms to
finance the Company's growth strategy; the ability to develop and implement
operational and financial systems to manage rapidly growing operations; general
domestic and international economic and business conditions; changes in federal
and state regulations applying to the Company and its operations; competition
in the Company's market; the Company's dependence on key personnel; and other
factors referenced in the Company's Registration Statement on Form S-1 and the
Company's Form 10-K for the year ended December 31, 1998. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
-20-
<PAGE> 21
ITEM 3. 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, and June 30, 1999, the Company had approximately $42
million outstanding under its Credit Facility, which expires in July 2004.
Amounts outstanding under the Credit Facility of approximately $13.3 million at
December 31, 1998, and $12.2 million at June 30, 1999, were subject to the Cap
Agreement, which expires in October 2002. 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 included in the Company's Form 10-K for the
year ended December 31, 1998.
-21-
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. 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 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 filed a motion to dismiss on April 7, 1999 on which the Court has
not yet ruled. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on May 12, 1999.
(b) Not applicable.
(c) The following proposals were adopted by the shareholders of the
Company:
-22-
<PAGE> 23
(i) The election of two Directors.
The vote on the above was:
<TABLE>
<CAPTION>
For Withhold Authority
---------- ------------------
<S> <C> <C>
Lynn R. Detlor 11,553,004 17,160
Charles E. Adair 11,553,004 17,160
</TABLE>
(ii) A proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent
auditors for 1999.
The vote of the above proposal was:
For 11,445,014
Against 118,550
Abstained 6,600
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-----------
<S> <C>
10.1 Employment Agreement, dated as of May 12, 1999 by and between
the Company and Walter J. Fritschner
10.2 Amendment, dated as of June 29, 1999, to the Employment
Agreement, dated as of April 3, 1998, by and between the
Company and Marshall B. Hunt
10.3 Amendment, dated as of June 29, 1999, to the Employment
Agreement, dated as of April 3, 1998, by and between the
Company and William E. Peterson, Jr.
27.1 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1999.
-23-
<PAGE> 24
HORIZON MEDICAL PRODUCTS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON MEDICAL PRODUCTS, INC.
(Registrant)
August 13, 1999 /s/ Walter J. Fritschner
- --------------- --------------------------------------
Senior Vice-President and
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
-24-
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
May 12 , 1999, by and between Walter J. Fritschner, an individual resident of
the State of Texas ("Employee"), and Horizon Medical Products, Inc., a Georgia
corporation (the "Employer").
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee and Employee desires to
be employed by Employer, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:
SECTION 1 EMPLOYMENT.
Subject to the terms hereof, the Employer hereby employs Employee, and
Employee hereby accepts such employment. Employee will serve as Senior Vice
President and Chief Financial Officer of Employer. Employee agrees to devote
his full business time and best efforts to the performance of the duties that
the Board of Directors of Employer (the "Board of Directors") or the Chief
Executive Officer of Employer may assign Employee from time to time, which
duties will be consistent with Employee's position and title.
SECTION 2 TERM OF EMPLOYMENT.
The term of Employee's employment hereunder (the "Term") shall be from
May 12, 1999 (the "Effective Date") until termination upon the occurrence of
any of the following events, provided that the Term shall expire on May 12,
2004 if not previously terminated:
(I) The death or total disability of Employee (total
disability meaning the failure to fully perform his
normal required services hereunder for a period of
five (5) consecutive months during the Term hereof,
as determined by the Board of Directors, by reason
of mental or physical disability);
(II) The termination by Employer of Employee's employment
hereunder, upon prior written notice to Employee,
for "good cause". For purposes of this Agreement,
"good cause" for termination of Employee's
employment shall exist (A) if Employee is convicted
of, pleads guilty to, or confesses to any felony or
any act of fraud, misappropriation, or embezzlement,
(B) if Employee has engaged in a dishonest act to
the material damage or prejudice of Employer or an
affiliate of Employer, or in misconduct or unlawful
or improper activities materially damaging to the
business of Employer or an affiliate of Employer, or
(C) if Employee fails to comply with the terms of
this Agreement, and, within thirty (30) days after
written notice from Employer of such failure,
Employee has not corrected such failure or, having
once
<PAGE> 2
received such notice of failure and having so
corrected such failure, Employee at any time
thereafter again so fails, provided, that Employee
will be given the opportunity to explain his
position in the matter at a meeting of the Board of
Directors of Employer prior to any termination under
this clause (C), or (D) if Employee wilfully
neglects or breaches his duties or engages in
intentional misconduct in discharging his duties as
an officer and employee of the Employer, or (E) if
Employee fails to meet the quarterly or annual
management business objectives specifically for
Employee that are mutually agreed to by the Chief
Executive Officer of Employer and Employee and such
failure has an adverse effect on Employer or its
stock price;
(III) The termination of this Agreement by Employee upon
at least ninety (90) days prior written notice;
(IV) The termination of this Agreement by Employer
without cause upon at least thirty (30) days prior
written notice; or
(V) The termination of this Agreement by mutual written
agreement of Employer and Employee.
SECTION 3 COMPENSATION.
3.1 TERM OF EMPLOYMENT. Employer will provide Employee with
the following salary, expense reimbursement, and additional employee benefits
during the term of employment hereunder:
(A) SALARY. Employee will be paid a salary (the
"Salary") of no less than One Hundred Eighty Three
Thousand Two Hundred Sixty Dollars ($183,260.00) per
annum, less deductions and withholdings required by
applicable law. The Salary shall be paid to Employee
in equal monthly installments (or on such more
frequent basis as other executives of Employer are
compensated). The Salary shall be reviewed by the
Board of Directors or the Compensation Committee of
the Board of Directors (the "Compensation
Committee") of Employer on at least an annual basis,
but shall not be below $183,260.00.
(B) BONUS. Employee will be entitled to an annual bonus
for 1999 (the "Bonus") equal to (i) thirty-five
percent (35%) of his Salary, based upon the
achievement during 1999 by the Employer of net
income per share-basic in excess of fifty cents (50
cents) per share, or (ii) twenty percent (20%) of
his Salary, based upon the achievement during 1999
by the Employer of net income per share-basic in
excess of forty-five cents (45 cents) per share but
not greater than fifty cents (50 cents) per share,
or (iii) ten percent (10%) of his Salary, based upon
the achievement during 1999 by Employer of net
income per
-2-
<PAGE> 3
share-basic of forty-three cents (43 cents) per
share or more but not greater than forty-five cents
(45 cents) per share. For each calendar year during
the Term after 1999, Employee will be entitled to
earn an annual bonus, based upon 35%, 20%, or 10% of
the Salary, if Employer achieves for the calendar
year the earnings per share goals for each such
percentage that are established by the Board of
Directors or the Compensation Committee of the Board
of Directors of Employer. Any Bonus earned shall be
paid promptly upon the availability of annual
financial results for the previous calendar year
(which is expected to occur in the second month of
the following calendar year).
(C) CAR ALLOWANCE AND COUNTRY CLUB DUES. Employer shall
provide Employee with a monthly allowance of
$1,000.00 for automobile, country club dues, and
tax/financial planning for Employee.
(D) VACATION. Employee shall receive four (4) weeks
vacation time per calendar year during the term of
this Agreement. Any unused vacation days in any
calendar year may not be carried over to subsequent
years, except that the number of days of vacation
for 1999 will be prorated. Employer agrees that
Employee may take vacation on July 30, 1999 and
August 2-6, 1999 as part of his vacation days for
1999.
(E) EXPENSES. Employer shall reimburse Employee for all
reasonable and necessary expenses incurred by
Employee at the request of and on behalf of
Employer. Reimbursement requests will comply with
the Employer's procedures and policies and must be
approved by the Chief Executive Officer.
(F) BENEFIT PLANS. Employee may participate in such
medical, dental, disability, hospitalization, life
insurance, and other benefit plans (such as pension
and profit sharing plans) as Employer maintains from
time to time for the benefit of other vice-president
executives of Employer, on the terms and subject to
the conditions set forth in such plans, including
without limitation Employer's 401(k) Plan.
3.2 EFFECT OF TERMINATION. Except as hereinafter
provided, upon the termination of the employment of Employee hereunder for any
reason, Employee shall be entitled to all compensation and benefits earned or
accrued under Section 3.1 as of the effective date of Termination (the
"Termination Date"), but from and after the Termination Date no additional
compensation or benefits shall be earned by Employee hereunder. Except in the
case of a termination of the employment of Employee pursuant to Section 2(ii)
hereof or a termination by Employee of Employee's employment pursuant to
Section 2(iii) hereof, Employee shall be deemed to have earned any Bonus
payable with respect to the calendar year in which the Termination Date occurs
on a prorated basis (with the Bonus calculated as of the end of the year in
which the Termination Date occurs and with proration through the Termination
Date). If Employee's employment hereunder is terminated by Employer pursuant to
Section 2(iv) hereof,
-3-
<PAGE> 4
then, in addition to any other amount payable hereunder, Employer shall
continue to pay Employee his normal Salary pursuant to Section 3.1(a) for a
period of nine (9) months after the Termination Date in periodic payments (on
the same basis as if Employee continued to serve as an employee hereunder for
such period) and Employee shall continue to be eligible to participate in the
benefit plans and receive the other benefits set forth in Section 3.1(f) above
for such period without any additional expense to Employee.
3.3 RELOCATION EXPENSES. In connection with the
Employee's relocation of his residence from Sugar Land, Texas to Georgia, the
Employer will reimburse the Employee for all reasonable costs incurred by the
Employee in such relocation, such as moving expenses, any real estate sales
commissions that Employee is required to pay upon the sale of his home in Sugar
Land, Texas, and closing costs paid by Employee in purchasing a home in Georgia
(including without limitation a maximum of two mortgage loan points not to
exceed $4,000.00, but excluding, however, any real property ad valorem taxes,
casualty insurance premiums, and pre-paid interest). Estimates of such
relocation costs will be submitted in advance for approval by the Chief
Executive Officer of the Employer. All such reimbursements will be grossed up
to cover any income tax related expense to Employee.
3.4 HOUSING ALLOWANCE. During the period from the
Effective Date through November 12, 1999 or until the Employee's permanent
residence is moved to Georgia, whichever date occurs first (the "Relocation
Period"), the Employer will provide to Employee in Manchester a company-based
furnished apartment with all utilities and related expenses associated with
such apartment. During the Relocation Period, the Employer will reimburse the
Employee for expenses incurred (airplane and automobile rental) by the Employee
and his wife and children in commuting between Georgia and Sugar Land, Texas.
Such trips for the Employee and his wife will not exceed one round trip per
week and for their children will not exceed one round trip per month.
SECTION 4 STOCK OPTIONS.
The Compensation Committee of the Board of Directors of the Employer
will grant to Employee options to purchase 50,000 shares of common stock of
Employer under and subject to Employer's 1998 Stock Incentive Plan (the
"Plan"), and Employer will use its best efforts to finalize such grant prior to
June 1, 1999. The option price will be the closing stock price on the day the
options are granted by the Compensation Committee. The options will vest on the
following schedule under the Plan: 25% on the first anniversary date of the
Effective Date, 25% on the second anniversary date of the Effective Date, 25%
on the third anniversary date of the Effective Date, and 25% on the fourth
anniversary date of the Effective Date; provided, however, that all unvested
options will become fully vested and exercisable immediately prior to a Change
in Control with respect to Employer (as defined in the Plan).
SECTION 5 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
5.1 TRADE SECRETS. During the term of the Employee's
employment by the Employer and after the termination of such employment,
whether such termination is by the Employee or the Employer, the Employee shall
not use or disclose, or permit any unauthorized person access to, any Trade
Secrets belonging to the Employer or any third party whose Trade Secrets are in
the possession of the Employer.
-4-
<PAGE> 5
5.2 CONFIDENTIAL INFORMATION. During the term of the
Employee's employment by the Employer and for a period of two (2) years after
termination of such employment, whether such termination is by the Employee or
by the Employer, the Employee shall not use or disclose, or permit any
unauthorized person access to, any Confidential Information belonging to the
Employer or any third party whose Confidential Information is in the possession
of the Employer.
5.3 DELIVERY OF INFORMATION. Upon request of the Employer
and in any event upon the termination of employment with the Employer, the
Employee shall deliver to the Employer all memoranda, notes, records, tapes,
documentation, disks, manuals, files, or other documents, and all copies
thereof, concerning or containing Confidential Information or Trade Secrets
that are in the Employee's possession, whether made or compiled by the Employee
or furnished to the Employee by the Employer.
5.4 DEFINITION OF TRADE SECRETS. For purposes of this
Agreement, "Trade Secrets" shall refer to the trade secrets of the Employer as
that term is defined in the Official Code of Georgia Annotated, ss.10-1-761, as
amended from time to time. Trade Secrets also include any information described
herein which the Employer obtains from a third party, which Employer or such
third party treats as proprietary or designates as Trade Secrets, whether or
not owned or developed by the Employer.
5.5 DEFINITION OF CONFIDENTIAL INFORMATION. For purposes
of this Agreement, "Confidential Information" shall mean any data or
information, other than Trade Secrets, that is of value to the Employer and is
not generally known to competitors of the Employer and that is treated by the
Employer as confidential (whether or not such material or information is marked
"confidential"). To the extent consistent with the foregoing and to the extent
not Trade Secrets, Confidential Information includes, but is not limited to,
lists of any information about the Employer's executives and employees,
marketing techniques, price lists, pricing policies, business methods,
manufacturing processes and records, regulatory files and information, supplier
and vendor information and contracts, and financial information. Confidential
Information also includes any information described in this paragraph which the
Employer obtains from a third party, which the Employer or the third party
treats as proprietary or designates as Confidential Information, whether or not
owned or developed by the Employer.
SECTION 6 MISCELLANEOUS.
6.1 SEVERABILITY. The covenants in this Agreement shall
be construed as covenants independent of one another and as obligations
distinct from any other contract between Employee and Employer. Any claim that
Employee may have against Employer shall not constitute a defense to
enforcement by Employer of this Agreement.
-5-
<PAGE> 6
6.2 NOTICES.
EMPLOYER: Horizon Medical Products, Inc.
ATTN: CHIEF EXECUTIVE OFFICER
Seven North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 30327
EMPLOYEE: Walter J. Fritschner
21 DuPont Circle
Sugar Land, Texas 77479
or at such other address or number for a party as shall be specified by like
notice. Any notice which is delivered in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party or its agent.
6.3 BINDING EFFECT. This Agreement inures to the benefit
of, and is binding upon, Employer and its successors and assigns, and Employee,
together with Employee's executor, administrator, personal representative,
heirs, and legatees.
6.4 ENTIRE AGREEMENT. This Agreement is intended by the
parties hereto to be the final expression of their agreement with respect to
the subject matter hereof and is the complete and exclusive statement of the
terms thereof, notwithstanding any representations, statements, or agreements
to the contrary heretofore made. This Agreement supersedes and terminates all
prior employment and compensation agreements, arrangements, and understandings
between or among Employer and Employee. This Agreement may be modified only by
a written instrument signed by all of the parties hereto.
6.5 GOVERNING LAW. This Agreement shall be deemed to be
made in, and in all respects shall be interpreted, construed, and governed by
and in accordance with, the laws of the State of Georgia. No provision of this
Agreement shall be construed against or interpreted to the disadvantage of any
party hereto by any court or other governmental or judicial authority or by any
board of arbitrators by reason of such party or its counsel having or being
deemed to have structured or drafted such provision.
6.6 HEADINGS. The section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
6.7 SPECIFIC PERFORMANCE. Each party hereto hereby agrees
that any remedy at law for any breach of the provisions contained in Section 5
of this Agreement shall be inadequate and that the other parties hereto shall
be entitled to specific performance and any other appropriate injunctive relief
in addition to any other remedy such party might have under this Agreement or
at law or in equity.
6.8 COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HORIZON MEDICAL PRODUCTS, INC.
By:
-----------------------------------------
Marshall B. Hunt, Chief Executive Officer
EMPLOYEE:
-----------------------------------------
Walter J. Fritschner
-7-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT made and entered into this June
29, 1999, by and between HORIZON MEDICAL PRODUCTS, INC., a Georgia corporation
("Employer"), and MARSHALL B. HUNT ("Employee");
WHEREAS, Employer and Employee entered into that certain Employment
Agreement dated April 3, 1998 ("Employment Agreement"), and the parties desire
to amend the Employment Agreement in the manner set forth below;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:
SECTION 1
Section 3.1(a) of the Employment Agreement is hereby amended,
effective as of May 12, 1999, by changing the amount of the Salary to the
amount of Two Hundred Seventy Thousand and No/100 Dollars ($270,000.00) in the
first sentence in Section 3.1(a). Commencing on May 12, 1999, for all purposes
under the Employment Agreement, the Salary shall be Two Hundred Seventy
Thousand and No/100 Dollars ($270,000.00).
SECTION 2
Except as expressly amended above, all other provisions in
the Employment Agreement shall continue in full force and effect. This
Amendment is intended by the parties hereto to be the final expression of their
agreement with respect to the subject matter hereof and is the complete and
exclusive statement of the terms thereof, notwithstanding any representations,
statements, or agreements to the contrary heretofore made. This Amendment may
be modified only by a written instrument signed by all of the parties hereto.
This Amendment shall be deemed to be made in, and in all respects shall be
interpreted, construed, and governed by and in accordance with, the laws of the
State of Georgia. No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other
governmental or judicial authority or by any board of arbitrators by reason of
such party or its counsel having been deemed to have structured or drafted such
provision. This Amendment may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Employment Agreement as of the date first above written.
HORIZON MEDICAL PRODUCTS, INC.
By:
-----------------------------------
William E. Peterson, Jr., President
-----------------------------------
MARSHALL B. HUNT
<PAGE> 1
EXHIBIT 10.3
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT made and entered into this June
29, 1999, by and between HORIZON MEDICAL PRODUCTS, INC., a Georgia
corporation ("Employer"), and WILLIAM E. PETERSON, JR. ("Employee");
WHEREAS, Employer and Employee entered into that certain Employment
Agreement dated April 3, 1998 ("Employment Agreement"), and the parties desire
to amend the Employment Agreement in the manner set forth below;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:
SECTION 1
Section 3.1(a) of the Employment Agreement is hereby amended,
effective as of May 12, 1999, by changing the amount of the Salary to the
amount of Two Hundred Twenty-Five Thousand and No/100 Dollars ($225,000.00) in
the first sentence in Section 3.1(a). Commencing on May 12, 1999, for all
purposes under the Employment Agreement, the Salary shall be Two Hundred
Twenty-Five Thousand and No/100 Dollars ($225,000.00).
SECTION 2
Except as expressly amended above, all other provisions in
the Employment Agreement shall continue in full force and effect. This
Amendment is intended by the parties hereto to be the final expression of their
agreement with respect to the subject matter hereof and is the complete and
exclusive statement of the terms thereof, notwithstanding any representations,
statements, or agreements to the contrary heretofore made. This Amendment may
be modified only by a written instrument signed by all of the parties hereto.
This Amendment shall be deemed to be made in, and in all respects shall be
interpreted, construed, and governed by and in accordance with, the laws of the
State of Georgia. No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other
governmental or judicial authority or by any board of arbitrators by reason of
such party or its counsel having been deemed to have structured or drafted such
provision. This Amendment may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Employment Agreement as of the date first above written.
HORIZON MEDICAL PRODUCTS, INC.
By:
---------------------------------
Marshall B. Hunt, Chairman of the
Board and Chief Executive Officer
---------------------------------
WILLIAM E. PETERSON, JR.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HORIZON MEDICAL PRODUCTS, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,127,277
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<RECEIVABLES> 17,783,853
<ALLOWANCES> 590,841
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<CURRENT-ASSETS> 44,240,009
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<DEPRECIATION> 1,253,122
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0
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<INCOME-PRETAX> 3,192,786
<INCOME-TAX> 1,367,753
<INCOME-CONTINUING> 1,825,033
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