<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, 2000
[ ] 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 14, 2000 was 13,366,278.
<PAGE> 2
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements ............................................................... 3
Interim Condensed Consolidated Balance Sheets ...................................... 4
Interim Condensed Consolidated Statements of Operations ............................ 5 & 6
Interim Condensed Consolidated Statements of Cash Flows ............................ 7
Notes to Interim Condensed Consolidated Financial Statements ....................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ......................... 23
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities .............................................................. 24
ITEM 4. Submission of Matters to a Vote of Security Holders ................................ 25
ITEM 6. Exhibits and Reports on Form 8-K ................................................... 26
SIGNATURE ....................................................................................... 27
</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):
Interim Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and December 31, 1999.
Interim Condensed Consolidated Statements of Operations for
the three months ended June 30, 2000 (unaudited) and June 30,
1999 (unaudited and restated).
Interim Condensed Consolidated Statements of Operations for
the six months ended June 30, 2000 (unaudited) and June 30,
1999 (unaudited and restated).
Interim Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 (unaudited) and June 30,
1999 (unaudited and restated).
Notes to Interim Condensed Consolidated Financial Statements.
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<PAGE> 4
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 2,056,708 $ 1,991,427
Accounts receivable -- trade, net .......................................... 16,317,441 18,091,455
Inventories ................................................................ 19,777,797 19,647,250
Prepaid expenses and other current assets .................................. 1,309,928 1,262,611
Income tax receivable ...................................................... 840,700 953,055
Deferred taxes ............................................................. 1,246,439 1,246,439
-------------- --------------
Total current assets .................................................... 41,549,013 43,192,237
Property and equipment, net .................................................... 3,405,066 3,683,446
Intangible assets, net ......................................................... 55,401,050 55,259,193
Other assets ................................................................... 258,422 262,596
-------------- --------------
Total assets ............................................................ $ 100,613,551 $ 102,397,472
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade .................................................. $ 3,556,461 $ 5,861,935
Accrued salaries and commissions ........................................... 170,612 203,415
Accrued royalties .......................................................... 125,196 172,073
Accrued interest ........................................................... 515,557 450,560
Other accrued expenses ..................................................... 872,291 820,227
Current portion of long-term debt .......................................... 52,637,296 5,757,196
-------------- --------------
Total current liabilities ............................................... 57,877,413 13,265,406
Long-term debt, net of current portion ......................................... 72,029 44,998,709
Other liabilities .............................................................. 141,957 157,282
Deferred taxes ................................................................. 907,079 907,079
-------------- --------------
Total liabilities ....................................................... 58,998,478 59,328,476
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 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 2000 and 1999 ............... 13,366 13,366
Additional paid-in capital ................................................. 51,826,125 51,826,125
Shareholders' notes receivable ............................................. (1,372,996) (452,581)
Accumulated deficit ........................................................ (8,851,422) (8,317,914)
-------------- --------------
Total shareholders' equity .............................................. 41,615,073 43,068,996
-------------- --------------
Total liabilities and shareholders' equity .............................. $ 100,613,551 $ 102,397,472
============== ==============
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
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<PAGE> 5
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30
2000 1999
------------ ------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
Net sales .................................................. $ 16,364,545 $ 18,878,176
Cost of goods sold ......................................... 11,260,420 11,727,528
------------ ------------
Gross profit ....................................... 5,104,125 7,150,648
Selling, general and administrative expenses ............... 4,715,335 4,849,858
------------ ------------
Operating income ................................... 388,790 2,300,790
------------ ------------
Other income (expense):
Interest expense ........................................ (1,329,649) (1,043,863)
Other income ............................................ 28,498 42,747
------------ ------------
(1,301,151) (1,001,116)
------------ ------------
(Loss) income before income taxes ....................... (912,361) 1,299,674
Income tax benefit/(provision) ............................. 295,759 (557,284)
------------ ------------
Net (loss) income .................................. $ (616,602) $ 742,390
============ ============
Net (loss) income per share - basic and diluted ............ $ (0.05) $ 0.06
============ ============
Weighted average common shares outstanding -- basic ........ 13,366,278 13,366,278
============ ============
Weighted average common shares outstanding -- diluted ...... 13,368,257 13,374,749
============ ============
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
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<PAGE> 6
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------------ ------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
Net sales .................................................. $ 33,463,746 $ 38,319,517
Cost of goods sold ......................................... 22,321,019 23,783,423
------------ ------------
Gross profit ........................................ 11,142,727 14,536,094
Selling, general and administrative expenses ............... 9,392,083 9,692,412
------------ ------------
Operating income .................................... 1,750,644 4,843,682
------------ ------------
Other income (expense):
Interest expense ....................................... (2,500,580) (1,956,073)
Other income ........................................... 74,399 54,220
------------ ------------
(2,426,181) (1,901,853)
------------ ------------
(Loss) income before income taxes ................... (675,537) 2,941,829
Income tax benefit/(provision) ............................. 142,029 (1,260,146)
------------ ------------
Net (loss) income ................................... (533,508) 1,681,683
============ ============
Net (loss) income per share -- basic and diluted ........... $ (0.04) $ 0.13
============ ============
Weighted average common shares outstanding -- basic ........ 13,366,278 13,366,278
============ ============
Weighted average common shares outstanding -- diluted ...... 13,370,982 13,370,769
============ ============
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
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<PAGE> 7
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .............................................................. $ (533,508) $ 1,681,683
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation ........................................................ 384,011 371,308
Amortization ........................................................ 1,458,143 1,361,648
Non-cash increase in notes receivable-shareholders .................. (20,415) (13,403)
(Increase) decrease in operating assets, net:
Accounts receivable -- trade ................................... 1,774,014 (267,525)
Inventories .................................................... (130,547) (3,816,215)
Prepaid expenses and other assets .............................. 91,944 (135,190)
Income tax receivable .......................................... 112,355
Increase (decrease) in operating liabilities:
Accounts payable -- trade ...................................... (2,305,474) (1,720,437)
Income taxes payable ........................................... (1,178,793)
Accrued expenses and other liabilities ......................... 42,972 (886,425)
------------ ------------
Net cash provided by (used in) operating activities ................. 873,495 (4,603,349)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................... (105,631) (212,098)
Change in non-operating assets, net ............................................ (18,652)
------------ ------------
Net cash used in investing activities ............................... (105,631) (230,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issue costs ............................................................... (68,741)
Principal payments on long-term debt ........................................... (702,583) (202,098)
------------ ------------
Net cash used in financing activities ................................... (702,583) (270,839)
------------ ------------
Net increase (decrease) in cash and cash equivalents .................... 65,281 (5,104,938)
Cash and cash equivalents, beginning of period ................................. 1,991,427 6,232,215
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 2,056,708 $ 1,127,277
============ ============
</TABLE>
See Notes 4, 5 and 6 for additional supplemental disclosures of
cash flow information.
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
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<PAGE> 8
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING
POLICIES - The interim condensed consolidated balance sheet of Horizon
Medical Products, Inc. and Subsidiaries (the "Company") at December 31,
1999 has been derived from the Company's audited consolidated financial
statements at such date. Certain information and footnote disclosures
normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and instructions to Form
10-Q. The interim condensed consolidated financial statements at June
30, 2000, and for the three and six months ended June 30, 2000 and 1999
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, 1999,
including, without limitation, the summary of accounting policies and
notes and consolidated financial statements included therein.
REVENUE RECOGNITION - Revenue from product sales is recognized upon
shipment to customers, as the Company generally has no significant post
delivery obligations, the product price is fixed and determinable,
collection of the resulting receivable is probable, and product returns
are reasonably estimable. Provisions for discounts, rebates to
customers, returns and other adjustments are provided for in the period
the related sales are recorded.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, the FASB issued SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133. SFAS No.
133, as amended by SFAS No. 138, requires all derivatives to be
measured at fair value and recognized as either assets or liabilities
on the balance sheet. Changes in such fair value are required to be
recognized immediately in net income to the extent the derivatives are
not effective as hedges. In September 1999, the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an amendment
to delay the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company does not expect the adoption of SFAS
No. 133 as amended by SFAS Nos. 137 and 138 to have a material impact
on the interim condensed consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." This pronouncement summarizes certain of the SEC staff's
views on applying generally accepted accounting principles to revenue
recognition. The Company has reviewed the requirements of SAB 101, as
amended in March 2000 and June 2000, and believes its existing
accounting policies are consistent with the guidance provided in the
SAB.
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<PAGE> 9
2. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials ................ $ 4,655,246 $ 5,551,390
Work in process .............. 3,143,015 3,943,563
Finished goods ............... 13,441,566 11,260,057
------------ ------------
21,239,827 20,755,010
Less inventory reserves ...... (1,462,030) (1,107,760)
------------ ------------
$ 19,777,797 $ 19,647,250
============ ============
</TABLE>
3. 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 For the Six Months Ended
June 30, 2000 June 30, 2000
----------------------------------- -----------------------------------
Loss Shares Per-share Loss Shares Per-share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ....................... $ (616,602) 13,366,278 $(0.05) $ (533,508) 13,366,278 $(0.04)
====== ======
Effect of Dilutive Securities ... -- 1,979 -- 4,704
---------- ---------- ---------- ----------
Diluted EPS ..................... $ (616,602) 13,368,257 $(0.05) $ (533,508) 13,370,982 $(0.04)
========== ========== ====== ========== ========== ======
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, 1999 (Restated) June 30, 1999 (Restated)
----------------------------------- -----------------------------------
Income Shares Per-share Income Shares Per-share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ....................... $ 742,390 13,366,278 $ 0.06 $1,681,683 13,366,278 $ 0.13
====== ======
Effect of Dilutive Securities ... -- 8,471 -- 4,491
---------- ---------- ---------- ----------
Diluted EPS ..................... $ 742,390 13,374,749 $ 0.06 $1,681,683 13,370,769 $ 0.13
========== ========== ====== ========== ========== ======
</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 common share market
price during the period. The average common share market price used in
the above calculation was $2.10 and $2.47 for the three and six months
ended June 30, 2000 and $6.49 and $6.22 for the three and 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 342,782 and 334,576 options
outstanding for the three and six months ended June 30, 2000, with
exercise prices ranging from $2.69 to $15.50, and 212,974 and 223,851
options outstanding for the three and six months ended June 30, 1999,
with exercise prices ranging from $6.25 to $15.50. All of these options
expire between 2008 and 2010 and were not included in the
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<PAGE> 10
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, 2000 and 1999.
4. LONG-TERM DEBT
The Company maintains a $50 million amended and restated credit
facility (the "New Credit Facility") with Banc of America, which is to
be used for working capital purposes (the "Working Capital Loans") and
to fund 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 terminated on May 26,
2000, and the New Credit Facility expires on July 1, 2004. In addition,
the Company had outstanding standby letters of credit of $4,800,000 at
June 30, 2000 and at December 31, 1999. These letters of credit, which
have terms through January 2002, collateralize the Company's
obligations to third parties in connection with acquisitions. Effective
June 6, 2000, the New Credit Facility was amended to provide for a
short-term bridge loan (the "Bridge Loan") to the Company in the
principal amount of $900,000. The proceeds of the Bridge Loan were used
to fund a short-term bridge loan by the Company to Marshall B. Hunt
("Hunt"), the Company's Chairman, CEO and largest shareholder (the
"Shareholder Bridge Loan") (see Note 5). Hunt's obligations under the
Shareholder Bridge Loan are collateralized by the pledge of 2,813,943
shares of the Company's common stock owned beneficially by Hunt (the
"Hunt Shares"). The Company's obligations under the Bridge Loan are
collateralized by the pledge of the Hunt Shares to Banc of America and
by the collateral previously pledged by the Company to Banc of America
under the New Credit Facility.
Amounts outstanding under the Acquisition Loans are payable in 16
quarterly installments beginning October 1, 2000 in amounts
representing 6.25% of the principal amounts outstanding on the payment
due dates. Amounts outstanding under the Working Capital Loans are due
on July 1, 2004. The Bridge Loan, including accrued interest, is due on
August 30, 2000. As of June 30, 2000 and December 31, 1999, $5,554,142
and $5,533,225, respectively, were outstanding under the Working
Capital Loans and $39,443,039 was outstanding under the Acquisition
Loans.
Subject to certain limitations, amounts outstanding under the Revolving
Credit Loans may be prepaid at the Company's option. Further, amounts
outstanding under the Revolving Credit Loans are mandatorily prepayable
annually in an amount equal to 50% of the Excess Cash Flow for such
year, as defined in the agreement, beginning with fiscal year December
31, 2000, as well as upon the occurrence of certain other events as
defined in the agreement.
Effective March 29, 2000, the New Credit Facility, including the Bridge
Loan, bears interest, at the option of the Company, at the Index Rate,
as defined in the agreement, plus an applicable margin ranging from
3.50% to 4.50% or adjusted LIBOR plus an applicable margin ranging from
3.50% to 4.50%. The applicable margin applied is based on the Company's
leverage ratio, as defined in the agreement. At June 30, 2000, the
Company's interest rate was based on the Index Rate with a resulting
rate of 11.096%. At December 31, 1999, the Company's interest rate was
based on the Index Rate with a resulting rate of 9.5152%.
The Company has entered into an interest rate cap agreement with Bank
of America. The Company utilizes the interest rate cap agreement to
limit the impact of increases in interest rates
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<PAGE> 11
on its floating rate debt. The interest rate cap agreement entitles the
Company to receive from Bank of America 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 June 30, 2000 and
December 31, 1999, the Company had an interest rate cap with a notional
amount of $9,937,500 and $11,062,500, respectively. 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 Bank of America under the agreement during 1999 and 2000.
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 minimum net worth and EBITDA thresholds as well
as specific ratios such as total debt service coverage, leverage,
interest coverage and debt to capitalization. The covenants also place
limitations on capital expenditures, other borrowings, operating lease
arrangements, and affiliate transactions. The Company is in compliance
with or has received appropriate waivers of these covenants at June 30,
2000 and December 31, 1999.
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 as
well as 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. The Company's obligation under the Bridge Loan is
collateralized by the pledge of 2,813,943 shares of the Company's
common stock beneficially owned by Marshall B. Hunt, the Company's
Chairman, CEO and largest shareholder, and by the collateral previously
pledged by the Company to Banc of America under the New Credit
Facility.
As of June 30, 2000, the Company has violated certain financial
covenants of the New Credit Facility, as amended, but the Company has
obtained a waiver of these covenant violations from Banc of America
through July 31, 2000. This waiver amends certain of the financial
covenants and provides that (i) the Company's financial covenant
compliance shall be measured monthly rather than quarterly; (ii) the
Company shall cooperate and pay all expenses associated with the Bank
of America Recovery Group's conduct of collateral and operational
audits; and (iii) the Company shall either (a) enter into a letter of
intent setting forth the terms for an equity investment which is
satisfactory to Banc of America on or before August 22, 2000 or (b)
engage an investment banker acceptable to Banc of America to explore
strategic alternatives with respect to the sale of a portion or all of
the Company's assets or stock. Pursuant to EITF 86-30, the Company has
classified the debt under its New Credit Facility to current.
The Company is continuing negotiations with various lenders to
refinance its existing senior indebtedness and to provide new
subordinate debt or equity investment. Quarterly payments of principal
under the New Credit Facility commence on October 1, 2000 and continue
thereafter on each January 1, April 1, July 1 and October 1 for sixteen
quarters. Should the Company not be successful in refinancing its
existing senior indebtedness or securing new subordinate debt or equity
investment, the Company may again violate certain financial covenants
of the New Credit Facility as of August 31, 2000 or may be unable to
pay the August 30, 2000 Bridge Loan payment or the October 1, 2000
principal installment payment and subsequent principal installment
payments. Should this covenant violation occur and not be waived by the
Banc of America or should the Company be unable to make the August 30,
2000 Bridge Loan payment or the October 1, 2000 principal payment,
there could be a material adverse effect on the Company's business,
consolidated financial condition, results of operations, liquidity and
its ability to pay its debts as they become due.
5. RELATED PARTY TRANSACTIONS
As discussed in Note 4, on June 6, 2000, the Company obtained a
short-term bridge note from Banc of America in the amount of $900,000,
which was used to fund a short-term bridge loan to Marshall B. Hunt,
the Company's Chairman, CEO and largest shareholder (the "Shareholder
Bridge Loan"). The Shareholder Bridge Loan requires interest at either
the Index Rate, as defined in the agreement, plus 4.5% or the adjusted
LIBOR rate plus 4.5%, as elected by the shareholder. The Shareholder
Bridge Loan and related interest are due on August 30, 2000. The
Shareholder Bridge Loan is recorded as contra-equity in the condensed
consolidated balance sheet at June 30, 2000.
Also, the Company has unsecured loans to the former majority
shareholders in the form of notes receivable in the amount of $337,837,
plus accrued interest receivable of $128,256 and $114,744 at June 30,
2000 and December 31, 1999, respectively. 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 $13,512 during the six months ended June 30, 2000 related to
the notes. The notes and related accrued interest are recorded as
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<PAGE> 12
contra-equity in the condensed consolidated balance sheets.
See Note 12 of the Company's consolidated financial statements included
in the Company's Form 10-K for the year ended December 31, 1999 for
descriptions of the Company's other related party transactions.
6. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the consolidated financial position, results of
operations, or cash flows of the Company.
The Company is subject to numerous federal, state and local
environmental laws and regulations. Management believes that the
Company is in material compliance with such laws and regulations and
that potential environmental liabilities, if any, are not material to
the interim condensed consolidated financial statements.
In September 1999, the Company identified a breach in the primary
sterile barrier of a dialysis catheter kit. Further inspection revealed
the breach was inherent in the packaging design, and the Company
initiated a voluntary product recall. The Food and Drug Administration
has approved the packaging rework procedures for the recalled kits, and
product manufacturing resumed with a modified packaging design.
Management believes the majority of the affected product has been
returned. Expense associated with the recall was approximately $24,000
for the six months ended June 30, 2000.
The Company and Banc of America further amended the New Credit Facility
on June 6, 2000 to provide a short-term bridge loan (the "Bridge Loan")
to the Company in the principal amount of $900,000. The proceeds of the
Bridge Loan were used to fund a short-term bridge loan to Marshall B.
Hunt, the Company's Chairman, CEO and largest shareholder. (See Notes 4
and 5). The Bridge Loan and related interest are due on August 30,
2000. In the event that the Company is unable to pay the amount due
under the Bridge Loan, it will be in default under the New Credit
Facility. In such event, the business, results of operation and
consolidated financial condition of the Company will be materially
adversely affected.
As of June 30, 2000, the Company has violated certain financial
covenants of the New Credit Facility, as amended, but the Company has
obtained a waiver of these covenant violations from Banc of America
through July 31, 2000. This waiver amends certain of the financial
covenants and provides that (i) the Company's financial covenant
compliance shall be measured monthly rather than quarterly; (ii) the
Company shall cooperate and pay all expenses associated with the Bank
of America Recovery Group's conduct of collateral and operational
audits; and (iii) the Company shall either (a) enter into a letter of
intent setting forth the terms for an equity investment which is
satisfactory to Banc of America on or before August 22, 2000 or (b)
engage an investment banker acceptable to Banc of America to explore
strategic alternatives with respect to the sale of a portion or all of
the Company's assets or stock. Pursuant to EITF 86-30, the Company has
classified the debt under its New Credit Facility to current.
The Company is continuing negotiations with various lenders to
refinance its existing senior indebtedness and to provide new
subordinate debt or equity investment. Quarterly payments of principal
under the New Credit Facility commence on October 1, 2000 and continue
thereafter on each January 1, April 1, July 1 and October 1 for sixteen
quarters. (See Note 4). Should the Company not be successful in
refinancing its existing senior indebtedness or securing new
subordinate debt or equity investment, the Company may again violate
certain financial covenants of the New Credit Facility as of August 31,
2000 or may be unable to pay the August 30, 2000 Bridge Loan payment or
the October 1, 2000 principal installment payment or subsequent
principal payments. Should this covenant violation occur and not be
waived by the Banc of America or should the Company be unable to make
the August 30, 2000 Bridge Loan payment or the October 1, 2000
principal payment, there could be a material adverse effect on the
Company's business, consolidated financial condition, results of
operations, liquidity and its ability to pay its debts as they become
due.
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
the seller of IFM (the "Seller") entered into a manufacturing agreement
(the "Manufacturing Agreement"), dated as of September 30, 1998,
pursuant to which, for a four year term, the Seller agreed to
manufacture exclusively for the Company and the Company agreed to
purchase from the Seller a specified minimum amount of products (the
"Products"). The Manufacturing 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
Manufacturing Agreement is cancelable at the option of the Seller if
the Company fails to meet the quotas required under the Manufacturing
Agreement.
On June 22, 1999, IFM notified the Company that the Company was in
breach of the Manufacturing Agreement. IFM notified the Company that
the Company 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 accounts
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<PAGE> 13
payable due to IFM under the Manufacturing Agreement at June 30, 2000
was approximately $55,000. Additionally, IFM notified the Company that
the Company 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 the Company 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 the Company
was in breach for the failure to provide packaging and labeling.
The Company is in default under the Manufacturing Agreement. As a
result, 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 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 continued to indicate to IFM that the Company will not
be able to meet the minimum purchase requirements outlined in the
Manufacturing Agreement. The Company is currently in negotiations with
IFM to purchase the existing inventory, fixed assets, and leasehold
improvements of IFM. The Company would assume responsibility for the
plant and manufacturing of the IFM product line. The parties are
currently operating under an oral modification to the Manufacturing
Agreement. Should the Company be unable to revise the Manufacturing
Agreement to include acceptable terms or fail to continue to operate
under the oral modification to the Manufacturing Agreement, then any
liabilities incurred as a result of the default could have a material
adverse effect on the Company's consolidated financial position and
disrupt the Company's ability to obtain and sell the related 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.
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<PAGE> 14
On March 18, 1997, the Company entered into an agreement with a
vascular access port manufacturer (the "Manufacturer") to allow for the
eventual transfer of the manufacturing process of certain port models
to the Company. The agreement requires the Company to purchase a
minimum of 3,500 ports each year through 2002. To the extent that
purchases exceed 4,000 in one contract year, such excess purchases may
be applied to the following year's minimum commitment. The Company has
satisfied all criteria in the agreement to take over the manufacture of
the ports with the payment of a royalty to the Manufacturer. Any
royalty payments would be paid quarterly and will be calculated as
40% of the difference between the Company's cost to manufacture the
port and the Company's sales price, as defined in the agreement, for
each port sold by the Company. The percentage used to calculate the
royalty payments will decrease to 25% after the first year of
manufacture by the Company. If the Company takes over manufacturing,
the Company is required to buy the Manufacturer's inventory of related
parts and finished ports at the Manufacturer's cost, including the
Manufacturer's standard overhead charges.
On June 27, 1997, the Company entered into a distribution agreement
with an overseas distributor (the "Distributor") granting the
Distributor exclusive distribution rights for the Company's
hemodialysis catheter products in certain foreign territories. Under
the agreement, the Distributor has agreed to purchase, and the Company
has agreed to sell, a minimum number of units each year through June
2000. The term of the agreement has been renewed through June 2002, and
there are minimum commitments for each year during the renewal term. As
of June 30, 2000, the Distributor was not in compliance with the
minimum commitments and the Company had not shipped on a timely basis
all products ordered. However, management does not believe there is any
exposure as a result of such non-compliance by the Company.
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.
The Company has entered into various distribution agreements under
which the Company has guaranteed certain gross margin percentages to
the distributors. As a result of these guarantees, the Company has
accrued approximately $312,000 and $287,000 as of June 30, 2000 and
December 31, 1999, respectively, related to amounts to be rebated to
the various distributors.
In connection with the Company's September 1, 1998 purchase of Columbia
Vital Systems, Inc ("CVS"), the Company agreed to pay CVS up to an
additional $4.0 million upon the successful achievement of certain
criteria. Any additional payments made will be accounted for as
additional costs of acquired assets and amortized over the remaining
life of the assets. As of
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<PAGE> 15
June 30, 2000, none of these criteria has been met.
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. During 1999, the Company recorded
additional purchase price of approximately $2.1 million, representing
the Company's additional earned contingent payment for the first
anniversary year ended October 31, 1999. During the six months ended
June 30, 2000, the Company recorded additional purchase price and a
liability of $1.6 million, representing the Company's estimated
contingent payment for the second anniversary year ending October 31,
2000. Should Stepic's earnings exceed the target amount of $3.9 million
for the second anniversary year, the liability will be increased by
that amount. The contingent payment is due December 15, 2000 and will
be paid from general company funds or funds obtained from the Company's
lenders through an increase in or replacement of its current credit
facility, a result of continuing negotiations with the lenders. Should
the Company not obtain an increase in or replacement of its current
credit facility, the Company may not have sufficient funds to meet its
obligations and, therefore, will be required to negotiate new payment
terms with the shareholders of Stepic. Should these negotiations not be
successful and should the Company be required to pay the additional
purchase payment when due, there could be a material adverse effect on
the Company's business, consolidated financial condition and results of
operations.
The Company is party to numerous agreements which contain provisions
regarding change in control, as defined by the agreements, or the
acquisition of the Company by a third party. These provisions could
result in additional payments being required by the Company should
these events occur.
7. SEGMENT INFORMATION
As of June 30, 2000, the Company operates two reportable segments,
manufacturing and distribution. The manufacturing segment includes
products manufactured by the Company as well as products manufactured
by third parties on behalf of the Company through manufacturing and
supply agreements.
The Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and administrative costs, as well
as research and development, interest income/expense, and provision for
income taxes, are reported on an entity wide basis only.
The table below presents information about the reported sales (which
include intersegment 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, 2000 and
1999.
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<PAGE> 16
<TABLE>
<CAPTION>
Identifiable
Three Months Ended Six Months Ended As of
June 30, 2000 June 30, 2000 June 30, 2000
---------------------------- ---------------------------- -------------
Sales Gross Profit Sales Gross Profit Assets
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Manufacturing ...... $ 6,807,686 $ 2,961,164 $ 14,088,642 $ 6,785,188 $ 60,413,861
Distribution ....... 10,472,775 2,123,896 21,275,240 4,361,205 39,620,710
------------ ------------ ------------ ------------ ------------
$ 17,280,461 $ 5,085,060 $ 35,363,882 $ 11,146,393 $100,034,571
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended As of
June 30, 1999 (Restated) June 30, 1999 (Restated) June 30, 1999 (Restated)
---------------------------- ---------------------------- ------------------------
Identifiable
Sales Gross Profit Sales Gross Profit Assets
------------ ------------ ------------ ------------ ------------------------
<S> <C> <C> <C> <C> <C>
Manufacturing ...... $ 8,181,081 $ 4,687,432 $ 16,547,633 $ 9,581,924 $ 66,567,650
Distribution ....... 11,309,797 2,351,390 23,186,234 5,040,864 37,237,888
------------ ------------ ------------ ------------ ------------
$ 19,490,878 $ 7,038,822 $ 39,733,867 $ 14,622,788 $103,805,538
============ ============ ============ ============ ============
</TABLE>
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, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 (Restated) 2000 1999 (Restated)
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Total segment sales .................... $ 17,280,461 $ 19,490,878 $ 35,363,882 $ 39,733,867
Elimination of intersegment sales ...... (915,916) (612,702) (1,900,136) (1,414,350)
------------ ------------ ------------ ------------
Consolidated sales ..................... $ 16,364,545 $ 18,878,176 $ 33,463,746 $ 38,319,517
============ ============ ============ ============
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 (Restated) 2000 1999 (Restated)
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Total segment gross profit .................. $ 5,085,060 $ 7,038,822 $ 11,146,393 $ 14,622,788
Elimination of intersegment gross profit .... 19,065 111,826 (3,666) (86,694)
------------ ------------ ------------ ------------
Consolidated gross profit ................... $ 5,104,125 $ 7,150,648 $ 11,142,727 $ 14,536,094
============ ============ ============ ============
</TABLE>
A reconciliation of total segment assets to total consolidated assets of
the Company as of June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of As of
June 30, 2000 June 30, 1999 (Restated)
-------------- ------------------------
<S> <C> <C>
Total segment assets ........................ $ 100,034,571 $ 103,805,538
Elimination of intersegment receivables ..... (667,459) (383,542)
Assets not allocated to segments ............ 1,246,439 699,316
-------------- --------------
Consolidated assets ......................... $ 100,613,551 $ 104,121,312
============== ==============
</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, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ...... $ 15,508,873 $ 17,900,368 $ 31,803,412 $ 36,055,464
Foreign ............ 855,672 977,808 1,660,334 2,264,053
------------ ------------ ------------ ------------
$ 16,364,545 $ 18,878,176 $ 33,463,746 $ 38,319,517
============ ============ ============ ============
</TABLE>
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<PAGE> 17
8. RESTATEMENT OF PREVIOUSLY REPORTED QUARTERLY INFORMATION
The Company amended its quarterly report on Form 10-Q for the quarter
ended June 30, 1999 as filed with the Securities and Exchange
Commission on August 16, 1999, to reflect an adjustment made to
previously reported inventory and cost of goods sold. The restatement
was necessary due to inventory valuation errors discovered in the
fourth quarter of 1999 relating to previous periods.
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net Sales. Net sales decreased 13% to $16.4 million for the second
quarter of 2000 from $18.9 million for the second quarter of 1999. This decrease
is primarily attributable to a decline in sales volume resulting from scheduled
management reductions of inventory held by its distributors during the second
quarter of 2000 as well as timing of shipment differences resulting in higher
than anticipated backlog of orders at the end of the second quarter of 2000.
Back orders improved during the quarter resulting in an increase in service
levels from 85% at the end of the first quarter to greater than 90% at the end
of the second quarter. Management believes that back orders will continue to
decrease and service levels will continue to increase during the third quarter.
The allocation of net sales on a segment basis for the three months ended June
30, 2000 resulted in net sales of $6.8 million from the manufacturing segment
and $10.5 million from the distribution segment, before intersegment
eliminations. The allocation of net sales on a segment basis for the three
months ended June 30, 1999 resulted in net sales of $8.2 million from the
manufacturing segment and $11.3 million from the distribution segment, before
intersegment eliminations.
Gross Profit. Gross profit decreased 29% to $5.1 million for the second
quarter of 2000 from $7.2 million for the second quarter of 1999. Gross margin
decreased to 31.2% in the second quarter of 2000 from 37.9% in the second
quarter of 1999. The decrease in gross margin is the result of higher
manufacturing costs incurred in late 1999, which affected the cost of goods sold
in the second quarter of 2000. Additionally, distribution sales as a percentage
of total sales was higher in the second quarter of 2000, which generates a lower
margin than manufacturing sales. The allocation of gross profit between segments
for the three months ended June 30, 2000 resulted in gross profit of $3.0
million from the manufacturing segment and $2.1 million from the distribution
segment, before intersegment eliminations. The allocation of gross profit
between segments for the three months ended June 30, 1999 resulted in gross
profit of $4.7 million from the manufacturing segment and $2.4 million from the
distribution segment, before intersegment eliminations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) decreased approximately $135,000 or 2.8% to
approximately $4.7 million for the second quarter of 2000 compared with $4.8
million for the second quarter of 1999. This decrease is due to lower salaries
and commissions and shipping and marketing expenses in the second quarter of
2000 compared to the second quarter of 1999. SG&A expenses increased as a
percentage of net sales to 28.8% for the second quarter of 2000 from 25.7% for
the second quarter of 1999. This increase is substantially due to decreased
sales in the second quarter of 2000 from the second quarter of 1999.
Interest Expense. Net interest expense increased to approximately $1.3
million in the second quarter of 2000 compared to approximately $1.0 million in
the second quarter of 1999. The increase in 2000 is due to higher debt
outstanding during the second quarter of 2000 compared to the second quarter of
1999 as well as higher interest rates under the Company's New Credit Facility
in the second quarter of 2000.
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<PAGE> 19
Income Tax Expense. Income tax expense decreased and resulted in an
income tax benefit of approximately $296,000 for the second quarter of 2000
compared to income tax expense of approximately $557,000 for the second quarter
of 1999. The income tax benefit in the second quarter 2000 was the result of a
pretax loss in the second quarter of 2000 compared to pretax income in the
second quarter of 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net Sales. Net sales decreased 12.7% to $33.5 million for the six
months ended June 30, 2000 from $38.3 million for the six months ended June 30,
1999. This decrease is primarily attributable to a decline in sales volume
resulting from scheduled management reductions of inventory held by its
distributors during 2000 as well as timing of shipment differences resulting in
higher than anticipated backlog of orders at June 30, 2000. The allocation of
net sales on a segment basis for the six months ended June 30, 2000 resulted in
net sales of $14.1 million from the manufacturing segment and $21.3 million from
the distribution segment, before intersegment eliminations. The allocation of
net sales on a segment basis for the six months ended June 30, 1999 resulted in
net sales of $16.5 million from the manufacturing segment and $23.2 million from
the distribution segment, before intersegment eliminations.
Gross Profit. Gross profit decreased 23.3% to $11.1 million for the six
months ended June 30, 2000 from $14.5 million for the six months ended June 30,
1999. Gross margin decreased to 33.3% in 2000 from 37.9% in 1999. The decrease
in gross margin is the result of higher manufacturing costs incurred in late
1999, which affected the cost of goods sold during the six months ended June 30,
2000. Additionally, distribution sales as a percentage of total sales was higher
in 2000, which generates a lower margin than manufacturing sales. The allocation
of gross profit between segments for the six months ended June 30, 2000 resulted
in gross profit of $6.8 million from the manufacturing segment and $4.4 million
from the distribution segment, before intersegment eliminations. The allocation
of gross profit between segments for the six months ended June 30, 1999 resulted
in gross profit of $9.6 million from the manufacturing segment and $5.0 million
from the distribution segment, before intersegment eliminations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) decreased approximately $300,000 or 3.1% to
approximately $9.4 million for the six months ended June 30, 2000 compared with
$9.7 million for the six months ended June 30, 1999. This decrease is due to
lower salaries and commissions and shipping and marketing expenses in 2000
compared to 1999. SG&A expenses increased as a percentage of net sales to 28.1%
for the six months ended June 30, 2000 from 25.3% for the six months ended June
30, 1999. This increase is substantially due to decreased sales in 2000 from
1999.
Interest Expense. Net interest expense increased to approximately $2.5
million for the six months ended June 30, 2000 compared to approximately $2.0
million for the six months ended June 30, 1999. The increase in 2000 is due to
higher debt outstanding during 2000 compared to 1999 as well as higher interest
rates under the Company's New Credit Facility in 2000.
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<PAGE> 20
Income Tax Expense. Income tax expense decreased and resulted in an
income tax benefit of $142,000 for the six months ended June 30, 2000 compared
to income tax expense of approximately $1.3 million for the six months ended
June 30, 1999. The income tax benefit in 2000 was the result of a pretax loss
in 2000 compared to pretax income in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $873,495 for the six
months ended June 30, 2000 compared with ($4,603,349) for the six months ended
June 30, 1999. The decrease in cash used in operations during 2000 compared to
1999 was primarily attributable to the reduction in accounts receivable and
lower income taxes paid during 2000. The Company restructured outstanding
accounts receivable due from two of the Company's largest distributors in an
aggregate amount of approximately $2.5 million. As a result of the
restructuring, the outstanding balances will be collected over a period of
approximately 12 months, beginning August 2000.
Net cash used in investing activities was $105,631 in 2000 compared to $230,750
in 1999. Substantially all of the investing activities in both 2000 and 1999
were for capital expenditures for the Company's facilities.
Net cash used in financing activities was $702,583 in 2000 compared to $270,839
in 1999. Financing activities in both 2000 and 1999 consisted primarily of
principal payments on outstanding debt. The increase in principal payments on
outstanding debt in 2000 was attributable to payments on the notes payable to
the shareholders of Stepic of approximately $488,000.
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,
1999, the Company maintains a $50 million amended and restated credit facility
(the "New Credit Facility") with Banc of America Commercial Finance Corporation
("Banc of America") to be used for working capital purposes and to fund future
acquisitions. 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 $45 million and no funds were available
for borrowing under the New Credit Facility at June 30, 2000. In addition, the
Company had outstanding standby letters of credit at June 30, 2000 of
approximately $4.8 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 and Banc of America amended
the New Credit Facility on March 31, 1999 and March 29, 2000, to adjust certain
of the financial ratio covenants and increase the interest rate.
The Company and Banc of America further amended the New Credit Facility on June
6, 2000 to provide a short-term bridge loan (the "Bridge Loan") to the Company
in the principal amount of $900,000. The proceeds of the Bridge Loan were used
to fund a short-term bridge loan to Marshall B. Hunt, the Company's Chairman,
CEO and largest shareholder. (See Notes 4 and 5 to the Company's interim
condensed consolidated financial statements included in this Form 10-Q). The
Bridge Loan and related interest are due on August 30, 2000. In the event that
the Company is unable to pay the amount due under the Bridge Loan, it will be in
default under the New Credit Facility. In such event, the business, results of
operation and consolidated financial condition of the Company will be materially
adversely affected.
As permitted under the New Credit Facility documents and under the Bridge Loan
documents, Banc of America has instituted a sweep arrangement whereby funds
collected in the Company's depositary accounts are swept periodically into the
Company's lockbox account with Bank of America and applied against the
outstanding loan under the New Credit Facility. The financial institutions which
hold such accounts have been notified by Banc of America that such lockbox
arrangements have been instituted, and the Company's and its subsidiaries' right
to withdraw, transfer or pay funds from the accounts has been terminated. The
Company may apply to receive additional loans under the New Credit Facility to
the extent such loan has been paid down under the lockbox arrangement. There can
be no assurance that Banc of America will agree to loan the Company additional
funds under the New Credit Facility. The failure of the Company to secure
additional loans from Banc of America will have a material adverse effect on the
Company's business, results of operations, consolidated financial condition,
liquidity and ability to pay its debts as they become due.
As of June 30, 2000, the Company has violated certain financial covenants of the
New Credit Facility, as amended, but the Company has obtained a waiver of these
covenant violations from Banc of America through July 31, 2000. This waiver
amends certain of the financial covenants and provides that (i) the Company's
financial covenant compliance shall be measured monthly rather than quarterly;
(ii) the Company shall cooperate and pay all expenses associated with the Banc
of America Recovery Group's conduct of collateral and operational audits; and
(iii) the Company shall either (a) enter into a letter of intent setting forth
the terms for an equity investment which is satisfactory to Banc of America on
or before August 22, 2000 or (b) engage an investment banker acceptable to Banc
of America to explore strategic alternatives with respect to the sale of a
portion or all of the Company's assets or stock. Pursuant to EITF 86-30, the
Company has classified the debt under its New Credit Facility to current.
The Company is continuing negotiations with various lenders to refinance its
existing senior indebtedness and to provide new subordinate debt or equity
investment. Quarterly payments of principal under the New Credit Facility
commence on October 1, 2000 and continue thereafter on each January 1, April 1,
July 1 and October 1 for sixteen quarters. (See Note 4 to the Company's interim
condensed consolidated financial statements included in this Form 10-Q.) Should
the Company not be successful in refinancing its existing senior indebtedness or
securing new subordinate debt or equity investment, the Company may again
violate certain financial covenants of the New Credit Facility as of August 31,
2000 or may be unable to pay the August 30, 2000 Bridge Loan payment or
October 1, 2000 principal installment payment and subsequent principal
installment payments. Should this covenant violation occur and not be waived by
the Banc of America or should the Company be unable to make the August 30, 2000
Bridge Loan payment or the October 1, 2000 or subsequent principal payments,
there could be a material adverse effect on the Company's business, consolidated
financial condition, results of operations liquidity and ability to pay its
debts as they become due.
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<PAGE> 21
The Company is continuing 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 6 of the
Company's interim condensed consolidated financial statements contained
elsewhere in this Form 10-Q.
The Company and IFM are currently operating under an oral modification to the
Manufacturing Agreement. Should the Company be unable to revise the
Manufacturing Agreement to include acceptable terms or fail to continue to
operate under the oral modification to the Manufacturing Agreement, then any
liabilities incurred as a result of the default could have a material adverse
effect on the Company's business, consolidated financial condition and results
of operations.
YEAR 2000 READINESS DISCLOSURE
The Company previously recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action. The Company's efforts included replacing and testing
four basic aspects of its business operations: internal information technology
("IT") systems, including sales order processing, contract management, financial
systems and service management; internal non-IT systems, including office
equipment and test equipment products; building infrastructure, including
heating and cooling systems, security systems, water, gas and electric; and
material third-party relationships. Management believes the Company has
completed all of the activities within its control to ensure that the Company's
systems are Year 2000 compliant, and the Company has experienced no
interruptions to normal operations due to the start of the Year 2000.
The Company's Year 2000 readiness costs were not material and were incurred and
recorded as normal operating costs. The Company funded these costs through funds
generated from operations and such costs were generally not incremental to
existing IT budgets; internal resources were re-deployed and timetables for
implementation of replacement systems were accelerated. The Company does not
currently expect to apply any further funds to address Year 2000 issues.
As of June 30, 2000, the Company has not experienced any material disruptions of
its internal computer systems or software applications, and has not experienced
any problems with the computer systems or software applications of its third
party vendors, suppliers or service providers. The Company will continue to
monitor these third parties to determine the impact, if any, on the business of
the Company and the actions the Company must take, if any, in the event of
non-compliance by any of these third parties. Based upon the Company's
assessment of compliance by third parties, there appears to be no material risk
posed by any such noncompliance. Moreover, the Company generally believes that
the vendors that supply products to the Company for resale are responsible for
the products' Year 2000 functionality.
Although the Company's Year 2000 rollover did not present any material business
disruption, there may be some remaining Year 2000-related risks, including risks
due to the fact that the Year 2000 is a leap year. These risks include
potential product supply issues and other non-operational issues.
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<PAGE> 22
Management believes that appropriate action has been taken to address these
remaining Year 2000 issues. Management, however, cannot be certain that
Year 2000 issues will not have a material adverse impact on the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 1 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recently issued accounting standards.
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, deterioration in general economic
conditions and the Company's ability to pay its indebtedness or to comply on a
monthly basis with the financial covenants in the New Credit Facility.
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 in the Company's Form 10-K for the year ended December 31, 1999.
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<PAGE> 23
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 Bank of America 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 June 30, 2000 and December 31, 1999, the Company had approximately $46
million and $45 million, respectively, outstanding under its New Credit
Facility, which expires in July 2004. Amounts outstanding under the New Credit
Facility of approximately $9.9 million and $11.1 million at June 30, 2000 and
December 31, 1999, respectively, 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 2 and 6 to the Company's
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 1999.
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<PAGE> 24
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(a) On June 6, 2000 the Company entered into the Fourth Amendment to
Amended and Restated Credit Agreement by and among the Company, the
Lenders referred to therein and Banc of America Commercial Finance
Corporation, as Agent. The Amended and Restated Credit Agreement, and
the amendments and waivers thereto, currently prohibit the payment of
dividends on the Company's capital stock and also restrict the
Company's capital expenditures.
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's Annual Meeting of Shareholders was held on May 8, 2000.
(b) Not applicable.
(c) The following proposals were adopted by the shareholders of the
Company:
(i) The election of two Directors.
The vote on the above proposal was:
<TABLE>
<CAPTION>
For Withhold Authority
---------- ------------------
<S> <C> <C>
Robert Cohen 10,962,673 119,550
Robert J. Simmons 10,962,673 119,550
</TABLE>
(ii) A proposal to ratify the appointment of PriceWaterhouseCoopers
LLP as the Company's independent auditors for 2000.
The vote on the above proposal was:
<TABLE>
<CAPTION>
For Against Abstained
---------- ------- ---------
<S> <C> <C>
10,988,073 92,950 1,200
</TABLE>
(iii) A proposal to increase the number of shares of the Company's
common stock authorized and reserved for issuance under the
Company's 1998 Stock Incentive Plan from 500,000 shares to
800,000 shares.
The vote on the above proposal was:
<TABLE>
<CAPTION>
For Against Abstained
---------- ------- ---------
<S> <C> <C>
10,811,858 255,615 14,750
</TABLE>
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<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
10.1 Loan Agreement, dated as of June 6, 2000, by and among
the Company, Marshall B. Hunt and Hunt Family
Investments, L.L.L.P.
10.2 Revolving Credit Note, dated as of July 1, 2000, by the
Company in favor of Bank of America, N.A.
10.3 Bridge Loan Note, dated as of July 1, 2000, by the
Company in favor of Bank of America, N.A.
10.4 Pledge and Assignment of Note and Collateral, dated as
of June 6, 2000, by and between the Company and Banc of
America Commercial Finance Corporation, as Agent for the
Lenders referred to therein.
10.5 Promissory Note, dated as of June 6, 2000, by Marshall
B. Hunt and Hunt Family Investments, L.L.L.P. in favor
of the Company.
10.6 Pledge Agreement, dated as of June 6, 2000, between
Marshall B. Hunt and the Company.
10.7 Pledge Agreement, dated as of June 6, 2000, between Hunt
Family Investments, L.L.L.P. and the Company.
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, 2000.
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<PAGE> 27
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 14, 2000 /s/ Robert M. Dodge
--------------- --------------------------------------
Senior Vice-President and
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
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