<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 September 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 November 14, 2000 was 13,366,278.
<PAGE> 2
HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
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............................................................... 19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 25
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities............................................................... 26
ITEM 3. Defaults Upon Senior Securities..................................................... 26
ITEM 6. Exhibits and Reports on Form 8-K.................................................... 27
SIGNATURE........................................................................................ 28
</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 September 30,
2000 (unaudited) and December 31, 1999.
Interim Condensed Consolidated Statements of Operations for
the three months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited and restated).
Interim Condensed Consolidated Statements of Operations for
the nine months ended September 30, 2000 (unaudited) and
September 30, 1999 (unaudited and restated).
Interim Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 (unaudited) and
September 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>
September 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 652,745 $ 1,991,427
Accounts receivable - trade, net ................................................ 16,991,481 18,091,455
Inventories ..................................................................... 20,264,740 19,647,250
Prepaid expenses and other current assets ....................................... 1,992,647 1,262,611
Income tax receivable ........................................................... 1,184,910 953,055
Deferred taxes .................................................................. 1,246,439 1,246,439
-------------- --------------
Total current assets ......................................................... 42,332,962 43,192,237
Property and equipment, net ......................................................... 3,363,429 3,683,446
Intangible assets, net .............................................................. 54,660,212 55,259,193
Other assets ........................................................................ 235,558 262,596
-------------- --------------
Total assets ................................................................. $ 100,592,161 $ 102,397,472
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft .................................................................. $ 711,508 $ --
Accounts payable - trade ........................................................ 6,248,342 5,861,935
Accrued salaries and commissions ................................................ 175,753 203,415
Accrued royalties ............................................................... 95,344 172,073
Accrued interest ................................................................ 519,533 450,560
Other accrued expenses .......................................................... 1,138,031 820,227
Current portion of long-term debt ............................................... 49,092,979 5,757,196
-------------- --------------
Total current liabilities .................................................... 57,981,490 13,265,406
Long-term debt, net of current portion .............................................. 666,390 44,998,709
Other liabilities ................................................................... 138,258 157,282
Deferred taxes ...................................................................... 907,079 907,079
-------------- --------------
Total liabilities ............................................................ 59,693,217 59,328,476
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 4 AND 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 .................................................. (1,388,380) (452,581)
Accumulated deficit ............................................................. (9,552,167) (8,317,914)
-------------- --------------
Total shareholders' equity ................................................... 40,898,944 43,068,996
-------------- --------------
Total liabilities and shareholders' equity ................................... $ 100,592,161 $ 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
September 30
2000 1999
-------------- --------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
Net sales ........................................................................... $ 16,115,269 $ 18,841,653
Cost of goods sold .................................................................. 10,576,298 11,937,372
-------------- --------------
Gross profit ......................................................... 5,538,971 6,904,281
Selling, general and administrative expenses ........................................ 5,023,023 5,400,567
-------------- --------------
Operating income ..................................................... 515,948 1,503,714
-------------- --------------
Other income (expense):
Interest expense ................................................................ (1,464,019) (1,057,490)
Other (expense) income .......................................................... (55,880) 16,354
-------------- --------------
(1,519,899) (1,041,136)
-------------- --------------
(Loss) income before income taxes .............................................. (1,003,951) 462,578
Income tax benefit / (provision) .................................................... 303,211 (218,249)
-------------- --------------
Net (loss) income .................................................... $ (700,740) $ 244,329
============== ==============
Net (loss) income per share - basic and diluted ..................................... $ (0.05) $ 0.02
============== ==============
Weighted average common shares outstanding - basic .................................. 13,366,278 13,366,278
============== ==============
Weighted average common shares outstanding - diluted ................................ 13,366,278 13,369,006
============== ==============
</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>
Nine Months Ended
September 30,
2000 1999
-------------- --------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
Net sales ........................................................................... $ 49,579,009 $ 57,161,170
Cost of goods sold .................................................................. 32,897,319 35,720,795
-------------- --------------
Gross profit ................................................................. 16,681,690 21,440,375
Selling, general and administrative expenses ........................................ 14,415,108 15,092,979
-------------- --------------
Operating income ............................................................. 2,266,582 6,347,396
-------------- --------------
Other income (expense):
Interest expense ................................................................ (3,964,600) (3,013,562)
Other income .................................................................... 18,525 70,573
-------------- --------------
(3,946,075) (2,942,989)
-------------- --------------
(Loss) income before income taxes ............................................ (1,679,493) 3,404,407
Income tax benefit / (provision) .................................................... 445,240 (1,478,395)
-------------- --------------
Net (loss) income ............................................................ (1,234,253) 1,926,012
============== ==============
Net (loss) income per share - basic and diluted ..................................... $ (0.09) $ 0.14
============== ==============
Weighted average common shares outstanding - basic .................................. 13,366,278 13,366,278
============== ==============
Weighted average common shares outstanding - diluted ................................ 13,366,278 13,369,606
============== ==============
</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>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
-------------- --------------
(Unaudited) (Unaudited &
Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................................................................... $ (1,234,253) $ 1,926,012
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation ............................................................. 584,571 569,120
Amortization ............................................................. 2,198,981 2,160,962
Loss on disposal of property and equipment ............................... 83,850
Non-cash increase in notes receivable-shareholders ....................... (35,799) (20,215)
(Increase) decrease in operating assets:
Accounts receivable-trade ........................................... 1,099,974 (1,153,996)
Inventories ........................................................ (617,490) (2,418,914)
Prepaid expenses and other assets ................................... (628,167) 739,355
Income tax receivable ............................................... (231,855) (419,053)
Increase (decrease) in operating liabilities:
Accounts payable - trade ............................................ 386,407 (4,172,877)
Income taxes payable ................................................ (1,343,473)
Accrued expenses and other liabilities .............................. 284,279 (608,512)
-------------- --------------
Net cash provided by (used in) operating activities ...................... 1,890,498 (4,741,591)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................................ (348,404) (331,628)
Change in non-operating assets, net ................................................. (56,893)
-------------- --------------
Net cash used in investing activities .................................... (348,404) (388,521)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft ...................................................................... 711,508
Debt issue costs .................................................................... (69,353)
Principal payments on long-term debt ................................................ (3,592,284) (331,894)
-------------- --------------
Net cash used in financing activities ........................................ (2,880,776) (401,247)
-------------- --------------
Net decrease in cash and cash equivalents ........................................... (1,338,682) (5,531,359)
Cash and cash equivalents, beginning of period ...................................... 1,991,427 6,232,215
-------------- --------------
Cash and cash equivalents, end of period ............................................ $ 652,745 $ 700,856
============== ==============
</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
September 30, 2000, and for the three and nine months ended September
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. Currently, the Company does not hold derivative
instruments or engage in hedging activities other than the interest
rate cap discussed in Note 4, which expired on October 2, 2000.
In December 1999, the SEC 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
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<PAGE> 9
consistent with the guidance provided in the SAB.
2. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials................ $ 3,954,495 $ 5,551,390
Work in process.............. 3,283,439 3,943,563
Finished goods............... 14,303,472 11,260,057
------------ ------------
21,541,406 20,755,010
Less inventory reserves...... (1,276,666) (1,107,760)
------------ ------------
$ 20,264,740 $ 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 Nine Months Ended
September 30, 2000 September 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 ....................... $ (700,740) 13,366,278 $ (0.05) $(1,234,253) 13,366,278 $ (0.09)
========= =========
Effect of Dilutive Securities.... -- -- -- --
---------- ---------- ----------- ----------
Diluted EPS...................... $ (700,740) 13,366,278 $ (0.05) $(1,234,253) 13,366,278 $ (0.09)
========== ========== ========= =========== ========== =========
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, 1999 (Restated) September 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 ....................... $ 244,329 13,366,278 $ 0.02 $ 1,926,012 13,366,278 $ 0.14
========= =========
Effect of Dilutive Securities.... -- 2,728 -- 3,328
---------- ---------- ----------- ----------
Diluted EPS...................... $ 244,329 13,369,006 $ 0.02 $ 1,926,012 13,369,606 $ 0.14
========== ========== ========= =========== ========== =========
</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 $4.34 and $5.58 for the three and nine months
ended September 30, 1999, respectively.
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 297,481 and 263,350 options
outstanding for the three and nine months ended September 30, 1999,
respectively, with exercise prices ranging from $5.75 to $15.50. All of
these options expire between 2008 and 2009 and were not included in the
computation of diluted EPS because the
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<PAGE> 10
exercise price of the options was greater than the average market price
of the common shares for the three and nine months ended September 30,
1999.
4. LONG-TERM DEBT
The Company has retained a management consulting firm to assist the
Company in restructuring its current senior indebtedness and to seek
alternative sources of either senior and/or subordinated debt or an
equity investment. Should the Company be unsuccessful in obtaining new
senior and/or subordinated debt or an equity investment, the Company
will continue to be in default under its New Credit Facility and, as a
result, 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.
The Company maintains a $50 million amended and restated credit
facility (the "New Credit Facility") with Bank of America, which is
used for working capital purposes (the "Working Capital Loans") and to
fund acquisitions (the "Acquisition Loans"). The New Credit Facility
provides for a sublimit, as of September 30, 2000, of $5,756,961 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 September 30, 2000 and 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 to the Company's
largest shareholder (the "Shareholder Bridge Loan") (see Note 5).
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, was due
on August 30, 2000. As of September 30, 2000 and December 31, 1999,
$3,057,593 and $5,533,225, respectively, were outstanding under the
Working Capital Loans and $39,443,039 was outstanding under the
Acquisition Loans. Additionally, as described above, there were
outstanding letters of credit of $4,800,000 under the New Credit
Facility as of September 30, 2000 and December 31, 1999.
As permitted under the New Credit Facility documents and under the
Bridge Loan documents, Bank of America has instituted a sweep
arrangement whereby funds collected in the Company's depository
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 Bank of America that such lockbox arrangements
have been instituted, and the Company's as well as its subsidiaries'
right to withdraw, transfer or pay funds from the accounts has been
terminated. The Company periodically will apply to receive additional
loans under the Working Capital 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 Bank of America will continue to loan
the Company additional funds under the New Credit Facility as the
outstanding Working Capital Loans are paid down periodically under the
sweep arrangement and the Company applies for additional loans. The
failure of the Company to obtain additional loans from Bank of America
as the Company applies for such loans 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.
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<PAGE> 11
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 as of June 6, 2000, 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
September 30, 2000, the Company's interest rate was based on the Index
Rate with a resulting rate of 11.035%. At December 31, 1999, the
Company's interest rate under its New Credit Facility was based on the
Index Rate with a resulting rate of 9.5152%. The default interest rate
under the New Credit Facility and the Bridge Loan is equal to the
otherwise applicable interest rate plus 2%.
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 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 September 30, 2000 and December 31, 1999,
the Company had an interest rate cap with a notional amount of
$9,375,000 and $11,062,500, respectively. Under this agreement, the
interest rate on the notional amount is capped at 8.8%. The agreement
expired on October 2, 2000. The Company has received no payments from
Bank of America under the agreement during 2000 and 1999.
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 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 Bank of America under the New Credit
Facility.
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. As of September 30, 2000, the
Company has violated certain of these
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<PAGE> 12
financial covenants and, as a result, is in default under its New
Credit Facility.
In addition, the Company is also in default under its New Credit
Facility as a result of not making its principal payment of
approximately $2.5 million due October 1, 2000, as well as non-payment
of the Bridge Loan that was due on August 30, 2000. The Company has
classified the debt under its New Credit Facility to current as of
September 30, 2000 as a result of such defaults.
As a result of the Company's default under the Bridge Loan and the New
Credit Facility as of September 30, 2000 and continuing through the
filing date of this Form 10-Q, Bank of America notified the Company of
its intention to exercise its rights and remedies under the New Credit
Facility, the Bridge Loan, and the Shareholder Bridge Loan (as endorsed
to Bank of America). Bank of America has indicated that it intends to
directly pursue collection of the Shareholder Bridge Loan and has
demanded payment of principal and interest payable at the default rate
under the Shareholder Bridge Loan from the Company. Bank of America has
also notified the Company that, as a result of the Company's various
defaults, it will exercise, without further notice, any and all
remedies available to it under the New Credit Facility, the Bridge Loan
and the Shareholder Bridge Loan. The remedies available to Bank of
America include, without limitation, the right to foreclose upon the
collateral securing the New Credit Facility, the Bridge Loan or the
Shareholder Bridge Loan, the right to declare immediately due and
payable all amounts due under the New Credit Facility, the right to
collect attorneys' fees under the New Credit Facility and the Bridge
Loan, and the right to file suit against any and all parties liable on
the New Credit Facility, the Bridge Loan or the Shareholder Bridge
Loan. Should Bank of America exercise its remedies under the New Credit
Facility, the Bridge Loan, or the Shareholder Bridge Loan such exercise
will have a material adverse effect upon the Company's business,
results of operations, consolidated financial condition, liquidity and
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 the Bridge
Loan from Bank of America in the amount of $900,000, which was used to
fund the Shareholder Bridge Loan to the Company's largest shareholder.
The Shareholder Bridge Loan requires interest at either the Index Rate,
as defined in the Shareholder Bridge Loan, plus 4.5% or the adjusted
LIBOR rate plus 4.5%, as elected by the shareholder. The Shareholder
Bridge Loan and related interest were due on August 30, 2000 but not
paid. As a result, the Company was unable to pay the amount due to its
lender under the Bridge Loan, thereby causing the Company to default
under the Bridge Loan and its New Credit Facility at September 30, 2000
(see Note 4). The Shareholder Bridge Loan and related accrued interest
of $15,529 are recorded as contra-equity in the interim condensed
consolidated balance sheet at September 30, 2000.
The Company has unsecured loans to Messrs. Hunt and Peterson, the
Chairman of the Board and Chief Executive Officer of the Company and
the President of the Company, respectively, and to a former Vice
Chairman of the Board of the Company in the form of notes receivable in
the amount of $337,837, plus accrued interest receivable of $135,014
and $114,744 at September 30, 2000 and December 31, 1999, respectively.
The notes require annual payments of interest at 8% beginning on
September 28, 1997. Three of the notes were due September 20, 2000, and
the remaining three notes were due October 12, 2000. All of these notes
are in default as a result of non-payment. The Company recognized
interest income of $20,270 during the nine months ended September 30,
2000 related to the notes. The notes and related accrued interest are
recorded as 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.
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<PAGE> 13
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.
The Company and Bank of America amended the New Credit Facility on June
6, 2000 to provide the Bridge Loan to the Company in the principal
amount of $900,000. The proceeds of the Bridge Loan were used to fund
the Shareholder Bridge Loan to the Company's Chairman, CEO and largest
shareholder (See Notes 4 and 5). The Shareholder Bridge Loan and
related interest were due on August 30, 2000 but not paid. As a result,
the Company was unable to pay the amount due to its lender under the
Bridge Loan, thereby causing the Company to default under the Bridge
Loan and the New Credit Facility at September 30, 2000.
As of September 30, 2000, the Company has violated certain financial
covenants of the New Credit Facility, as amended, and as a result, is
in default of the New Credit Facility. In addition, the Company is also
in default of its New Credit Facility as a result of not making its
principal payment of approximately $2.5 million due October 1, 2000.
The Company has classified the debt under its New Credit Facility to
current at September 30, 2000 as a result of the defaults.
As a result of the Company's default under the Bridge Loan and the New
Credit Facility as of September 30, 2000 and continuing through the
filing date of this Form 10-Q, Bank of America notified the Company of
its intention to exercise its rights and remedies under the New Credit
Facility, the Bridge Loan, and the Shareholder Bridge Loan (as endorsed
to Bank of America). Bank of America has indicated that it intends to
directly pursue collection of the Shareholder Bridge Loan and has
demanded payment of principal and interest payable at the default rate
under the Shareholder Bridge Loan from the Company. Bank of America has
also notified the Company that, as a result of the Company's various
defaults, it will exercise, without further notice, any and all
remedies available to it under the New Credit Facility, the Bridge Loan
and the Shareholder Bridge Loan. The remedies available to Bank of
America include, without limitation, the right to foreclose upon the
collateral securing the New Credit Facility, the Bridge Loan or the
Shareholder Bridge Loan, the right to declare immediately due and
payable all amounts due under the New Credit Facility, the right to
collect attorneys' fees under the New Credit Facility and the Bridge
Loan, and the right to file suit against any and all parties liable on
the New Credit Facility, the Bridge Loan or the Shareholder Bridge
Loan. Should Bank of America exercise its remedies under the New Credit
Facility, the Bridge Loan, or the Shareholder Bridge Loan such exercise
will have a material adverse effect upon the Company's business,
results of operations, consolidated financial condition, liquidity and
ability to pay its debts as they become due.
The Company has retained a management consulting firm to assist the
Company in restructuring its current senior indebtedness and to seek
alternative sources of either senior and/or subordinated debt or an
equity investment. Should the Company be unsuccessful in obtaining new
senior and/or subordinated debt or an equity investment, the Company
will continue to be in default with its New Credit Facility and as a
result, 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 from Ideas for Medicine,
Inc. ("IFM") certain medical device product lines and certain equipment
used in the manufacture of the medical devices. The acquisition was
consummated pursuant to an Asset Purchase Agreement dated September 30,
1998, between the Company and IFM. In connection with the acquisition,
the Company and IFM entered into a Manufacturing Agreement (the
"Manufacturing Agreement"), pursuant to which, for a four-year term,
IFM agreed to manufacture exclusively for the Company and the Company
agreed to purchase from IFM a specified minimum amount of products from
the medical device product lines acquired by the Company. The
Manufacturing Agreement provided that annual sales of the products from
IFM to the Company would be equal to at least $6 million during each
twelve-month period under the Manufacturing Agreement.
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<PAGE> 14
On June 22, 1999, IFM notified the Company that it was in breach of the
Manufacturing Agreement in several respects, including non-payment of
invoices from IFM to the Company within 45 days after invoice date, the
Company's failure to provide a production schedule at the end of the
first six months of the term of the Manufacturing Agreement and on a
monthly basis thereafter, the Company's failure to provide packaging
and labeling, and non-payment of interest related to past due invoices.
On October 9, 2000, the Company acquired certain additional assets from
IFM, including inventory, leasehold improvements, and other fixed
assets and assumed IFM's lease for its manufacturing facility located
in St. Petersburg, Florida, pursuant to an Asset Purchase Agreement
dated October 9, 2000 ("Asset Purchase Agreement"). In connection with
the Asset Purchase Agreement, the Manufacturing Agreement was
terminated, and the Company has no further obligation after October 9,
2000 to purchase products from IFM. With such termination, the
above-described defaults were resolved. For a more detailed description
of the October 2000 acquisition by the Company, see the Company's Form
8-K filed on October 24, 2000.
In consideration for the October 2000 acquisition, the Company agreed
to pay IFM approximately $5.9 million, which reflects the fully
absorbed cost of the acquired inventory together with the book value of
the fixed assets acquired. Such purchase price is payable pursuant to a
promissory note (the "Note") in 22 equal monthly installments of
principal and interest of $140,000 and a $1 million payment upon the
earlier of April 3, 2001 or the closing of an equity financing, as
described in the Asset Purchase Agreement. This payment schedule
assumes that all payments due under the Note are made on a timely
basis. The Note consists of a portion, equal to approximately $3.8
million, which bears interest at 9% per year, and a non-interest
bearing portion of approximately $2.1 million. If the $1 million
payment under the Note is made when due, and no other defaults exist
under the Note, then $1 million of the non-interest bearing portion of
the Note will be forgiven. In addition, at such time as the principal
balance has been paid down to $1.1 million and assuming that there have
been no defaults under the Note, the remainder of the Note will be
forgiven, and the Note will be canceled.
Also in connection with the September 30, 1998 IFM acquisition, 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
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<PAGE> 15
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 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
forty percent 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 September 30, 2000, the Distributor was not in compliance with the
minimum purchase 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 Distribution 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. As of September 30, 2000, the Company was not in compliance
with the minimum commitments under the Distribution Agreement but has
not been notified by the manufacturer of its intent to terminate the
Distribution Agreement as a result of such non-compliance by the
Company.
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<PAGE> 16
The Company has entered into various distribution agreements under
which the Company has guaranteed certain gross margin percentages to
its distributors. As a result of these guarantees, the Company has
accrued approximately $378,000 and $287,000 as of September 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 million upon the successful achievement of certain
criteria during the twelve months ended August 31, 1999 and during the
twelve months ended August 31, 2000. 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 September 30, 2000, none
of these criteria have been met for either twelve-month period.
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 over a three year period.
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 nine months ended September 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 or fall
short of the target amount of $3.9 million for the second anniversary
year, the liability will be adjusted 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. 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 September 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.
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<PAGE> 17
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 nine months ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended As of
September 30, 2000 September 30, 2000 September 30, 2000
---------------------------- ---------------------------- -------------------
Identifiable
Sales Gross Profit Sales Gross Profit Assets
----------- ------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Manufacturing ............... $ 7,127,052 $ 3,583,882 $21,215,688 $10,369,061 $ 59,959,702
Distribution ................ 10,006,226 1,978,822 31,281,466 6,340,027 $ 40,211,111
----------- ----------- ----------- ----------- -----------
$17,133,278 $ 5,562,704 $52,497,154 $16,709,088 $100,170,813
=========== =========== =========== =========== ============
<CAPTION>
Three Months Ended Nine Months Ended As of
September 30, 1999 (Restated) September 30, 1999 (Restated) September 30, 1999 (Restated)
----------------------------- ----------------------------- -----------------------------
Identifiable
Sales Gross Profit Sales Gross Profit Assets
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Manufacturing ............... $ 8,522,132 $ 4,515,879 $25,072,765 $14,097,803 $ 65,806,713
Distribution ................ 11,168,995 2,424,994 34,355,229 7,465,858 36,341,307
----------- ----------- ----------- ----------- ------------
$19,691,127 $ 6,940,873 $59,427,994 $21,563,661 $102,148,020
=========== =========== =========== =========== ============
</TABLE>
A reconciliation of total segment sales to total consolidated sales and
total segment gross profit to total consolidated gross profit of the
Company for the three and nine months ended September 30, 2000 and 1999
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total segment sales ................ $ 17,133,278 $ 19,691,127 $ 52,497,154 $ 59,427,994
Elimination of intersegment sales... (1,018,009) (849,474) (2,918,145) (2,266,824)
------------ ------------ ------------ ------------
Consolidated sales ................. $ 16,115,269 $ 18,841,653 $ 49,579,009 $ 57,161,170
============ ============ ============ ============
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 (Restated) 2000 1999 (Restated)
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Total segment gross profit ...... $ 5,562,704 $ 6,940,873 $ 16,709,088 $ 21,563,661
Elimination of intersegment
gross profit.................. (23,733) (36,592) (27,398) (123,286)
------------- ------------ ------------ ------------
Consolidated gross profit ....... $ 5,538,971 $ 6,904,281 $ 16,681,690 $ 21,440,375
============ ============ ============ ============
</TABLE>
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<PAGE> 18
A reconciliation of total segment assets to total consolidated assets
of the Company as of September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
As of As of
September 30, 2000 September 30, 1999
------------------- ------------------
(Restated)
------------------
<S> <C> <C>
Total segment assets ............................. $100,170,813 $102,148,020
Elimination of intersegment receivables .......... (825,091) (686,587)
Assets not allocated to segments ................. 1,246,439 699,316
------------ ------------
Consolidated assets .............................. $100,592,161 $102,160,749
============ ============
</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 nine months
ended September 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
United States ................... $ 15,171,999 $ 17,950,605 $ 46,975,405 $ 54,006,069
Foreign ......................... 943,270 891,048 2,603,604 3,155,101
------------ ------------ ------------ ------------
$ 16,115,269 $ 18,841,653 $ 49,579,009 $ 57,161,170
============ ============ ============ ============
</TABLE>
8. RESTATEMENT OF PREVIOUSLY REPORTED QUARTERLY INFORMATION
The Company amended its quarterly report on Form 10-Q for the quarter
ended September 30, 1999 as filed with the SEC on November 12, 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> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net Sales. Net sales decreased 14.5 % to $16.1 million for the third
quarter of 2000 from $18.9 million for the third 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 third
quarter of 2000, partially offset by a stocking order of approximately $400,000
resulting from an increase in sales territory of one of the Company's largest
distributors. Additionally, sales declined as a result of a decline in sales
volume of the Company's distribution segment due to decreased market demand and
increased competition. The allocation of net sales on a segment basis for the
three months ended September 30, 2000 resulted in net sales of $7.1 million from
the manufacturing segment and $10 million from the distribution segment, before
intersegment eliminations. The allocation of net sales on a segment basis for
the three months ended September 30, 1999 resulted in net sales of $8.5 million
from the manufacturing segment and $11.2 million from the distribution segment,
before intersegment eliminations.
Gross Profit. Gross profit decreased 19.8 % to $5.5 million for the
third quarter of 2000 from $6.9 million for the third quarter of 1999. Gross
margin decreased to 34.4 % in the third quarter of 2000 from 36.6% in the third
quarter of 1999. The decrease in gross margin is the result of higher
manufacturing costs incurred in late 1999 and in 2000, which affected the cost
of goods sold in the third quarter of 2000. Additionally, distribution sales
as a percentage of total sales were higher in the third quarter of 2000, which
generates a lower margin than manufacturing sales. The allocation of gross
profit between segments for the three months ended September 30, 2000 resulted
in gross profit of $3.6 million from the manufacturing segment and $2 million
from the distribution segment, before intersegment eliminations. The allocation
of gross profit between segments for the three months ended September 30, 1999
resulted in gross profit of $4.5 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 $378,000 or 7% to
approximately $5 million for the third quarter of 2000 compared with $5.4
million for the third quarter of 1999. This decrease is due to lower salaries,
commissions, and shipping and marketing expenses in the third quarter of 2000
compared to the third quarter of 1999. SG&A expenses increased as a percentage
of net sales to 31.2% for the third quarter of 2000 from 28.7% for the third
quarter of 1999. This increase is substantially due to decreased sales in the
third quarter of 2000 from the third quarter of 1999.
Interest Expense. Net interest expense increased to approximately $1.5
million in the third quarter of 2000 compared to approximately $1.1 million in
the third quarter of 1999. The increase in 2000 is due to higher debt
outstanding during the third quarter of 2000 compared to the third quarter of
1999 as well as higher interest rates under the Company's New Credit Facility in
the third quarter of 2000.
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<PAGE> 20
Income Tax Expense. Income tax expense decreased and resulted in an
income tax benefit of approximately $303,000 for the third quarter of 2000
compared to income tax expense of approximately $218,000 for the third quarter
of 1999. The income tax benefit in the third quarter 2000 was the result of a
pretax loss in the third quarter of 2000 compared to pretax income in the third
quarter of 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net Sales. Net sales decreased 13.3% to $49.6 million for the nine
months ended September 30, 2000 from $57.2 million for the nine months ended
September 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. Additionally, the decrease is due to a decline in
sales volume of the Company's distribution segment as a result of decreased
market demand and increased competition. The allocation of net sales on a
segment basis for the nine months ended September 30, 2000 resulted in net sales
of $21.2 million from the manufacturing segment and $31.3 million from the
distribution segment, before intersegment eliminations. The allocation of net
sales on a segment basis for the nine months ended September 30, 1999 resulted
in net sales of $25.1 million from the manufacturing segment and $34.4 million
from the distribution segment, before intersegment eliminations.
Gross Profit. Gross profit decreased 22.2% to $16.7 million for the
nine months ended September 30, 2000 from $21.4 million for the nine months
ended September 30, 1999. Gross margin decreased to 33.7% in 2000 from 37.5% in
1999. The decrease in gross margin is the result of higher manufacturing costs
incurred in late 1999 and in 2000, which affected the cost of goods sold during
the nine months ended September 30, 2000. Additionally, distribution sales as a
percentage of total sales were higher in 2000, which generates a lower margin
than manufacturing sales. The allocation of gross profit between segments for
the nine months ended September 30, 2000 resulted in gross profit of $10.4
million from the manufacturing segment and $6.3 million from the distribution
segment, before intersegment eliminations. The allocation of gross profit
between segments for the nine months ended September 30, 1999 resulted in gross
profit of $14.1 million from the manufacturing segment and $7.5 million from the
distribution segment, before intersegment eliminations.
Selling, General and Administrative Expenses. SG&A decreased
approximately $678,000 or 4.5% to approximately $14.4 million for the nine
months ended September 30, 2000 compared with $15.1 million for the nine months
ended September 30, 1999. This decrease is due to lower salaries, commissions,
and shipping and marketing expenses in 2000 compared to 1999. SG&A expenses
increased as a percentage of net sales to 29.1% for the nine months ended
September 30, 2000 from 26.4% for the nine months ended September 30, 1999. This
increase is substantially due to decreased sales in 2000 from 1999.
Interest Expense. Net interest expense increased to approximately $4
million for the nine months ended September 30, 2000 compared to approximately
$3 million for the nine months ended September 30, 1999. The increase in 2000 is
due to higher debt balances outstanding during 2000
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<PAGE> 21
compared to 1999 as well as higher interest rates under the Company's New Credit
Facility in 2000.
Income Tax Expense. Income tax expense decreased and resulted in an
income tax benefit of approximately $445,000 for the nine months ended September
30, 2000 compared to income tax expense of approximately $1.5 million for the
nine months ended September 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 $1,890,498 for the nine
months ended September 30, 2000 compared with ($4,741,591) for the nine months
ended September 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 as well as a reduction in
inventory purchases in 2000 compared to 1999. During the nine month period ended
September 30, 2000, the Company restructured the terms of outstanding accounts
receivable of approximately $2.5 million due from two of the Company's largest
distributors. As a result of the restructuring, the outstanding balances will be
collected over a period of approximately twelve months, beginning August 2000.
Additionally, during the nine month period ended September 30, 2000, the Company
granted payment terms of 180 days to one of its Distributors in connection with
the initial stocking sales of that Distributor for a new territory. The amount
of the related accounts receivable is approximately $400,000, and the terms of
the sale require payments of $80,000 each month until the balance is paid in
full. The payments are scheduled to begin sixty days after the date of the sale.
Net cash used in investing activities was $348,404 in 2000 compared to $388,521
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 $2,880,776 for the nine months ended
September 30, 2000 compared to $401,247 for the same period 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 for the
nine months ended September 30, 2000 was attributable to depository funds of
approximately $2.5 million applied against the outstanding loan under the
Company's New Credit Facility pursuant to the Company's new sweep arrangement
with its lender (See Below). The increase was also 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 Bank of America, N.A. ("Bank of America") to be
used for working capital purposes and to fund 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 $42.5 million, and no funds were available for borrowing under the
New Credit Facility at September 30, 2000, except as may be available under the
sweep arrangement (See below). In addition, the Company had outstanding standby
letters of credit at September 30, 2000 of approximately $4.8 million, which
collateralize the Company's obligations to third parties in connection with a
1998 acquisition. The Company's New Credit Facility contains certain financial
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 Bank of America amended the New Credit Facility on March 31, 1999,
March 29, 2000, and August 14, 2000 to adjust certain of the financial ratio
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<PAGE> 22
covenants and increase the interest rate. The Company is in violation of
certain of these financial covenants as of September 30, 2000.
The Company and Bank of America further amended the New Credit Facility on June
6, 2000 to provide the Bridge Loan to the Company in the principal amount of
$900,000. The proceeds of the Bridge Loan were used to fund the Shareholder
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, the
Shareholder Bridge Loan, and related interest were due on August 30, 2000. As of
September 30, 2000, the Shareholder Bridge Loan was not paid to the Company, and
the Company has not paid the Bridge Loan and related interest. Due to the
Company being unable to pay the amount due under the Bridge Loan, it is in
default under the Bridge Loan and the New Credit Facility. Therefore, the
business, results of operation and consolidated financial condition of the
Company could be materially adversely affected.
As permitted under the New Credit Facility Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Company's depository accounts are swept periodically into the Company's lockbox
account with Bank of America and applied against the outstanding loan balance
under the New Credit Facility. The financial institutions which hold such
accounts have been notified by Bank of America that such lockbox arrangements
have been instituted, and the Company's as well as its subsidiaries' right to
withdraw, transfer or pay funds from the accounts has been terminated. The
Company periodically will apply to receive additional loans under the Working
Capital Loan in the New Credit Facility to the extent such loan has been paid
down under the lockbox arrangement. There can be no assurance that Bank of
America will continue to loan the Company additional funds under the New Credit
Facility as the outstanding loan is paid down periodically under the sweep
arrangement and the Company applies for additional loans. The failure of the
Company to obtain additional loans from Bank of America as the Company applies
for such loans 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 described above, as of September 30, 2000, the Company is in default of the
New Credit Facility as a result of non-compliance under certain financial
covenants. In addition, the Company is also in default of its New Credit
Facility as a result of not making its principal payment of approximately $2.5
million due October 1, 2000. The Company has classified the debt under its New
Credit Facility to current at September 30, 2000 as a result of such defaults.
As a result of the Company's default under the Bridge Loan and the New Credit
Facility as of September 30, 2000 and continuing through the filing date of this
Form 10-Q, Bank of America notified the Company of its intention to exercise its
rights and remedies under the New Credit Facility, the Bridge Loan, and the
Shareholder Bridge Loan (as endorsed to Bank of America). Bank of America has
indicated that it intends to directly pursue collection of the Shareholder
Bridge Loan and has demanded payment of principal and interest payable at the
default rate under the Shareholder Bridge Loan from the Company. Bank of America
has also notified the Company that, as a result of the Company's various
defaults, it will exercise, without further notice, any and all remedies
available to it under the New Credit Facility, the Bridge Loan and the
Shareholder Bridge Loan. The remedies available to Bank of America include,
without limitation, the right to foreclose upon the collateral securing the New
Credit Facility, the Bridge Loan or the Shareholder Bridge Loan, the right to
declare immediately due and payable all amounts due under the New Credit
Facility, the right to collect attorneys' fees under the New Credit Facility and
the Bridge Loan, and the right to file suit against any and all parties liable
on the New Credit Facility, the Bridge Loan or the Shareholder Bridge Loan.
Should Bank of America exercise its remedies under the New Credit Facility, the
Bridge Loan, or the Shareholder Bridge Loan such exercise will have a material
adverse effect upon the Company's business, results of operations, consolidated
financial condition, liquidity and ability to pay its debts as they become due.
The Company has retained a management consulting firm to assist the Company in
restructuring its current senior indebtedness and to seek alternative sources of
either senior and/or subordinated debt or an equity investment. Should the
Company be unsuccessful in obtaining new senior and/or subordinated debt or an
equity investment, the Company will continue to be in default of its New Credit
Facility and as a result, 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.
YEAR 2000 READINESS DISCLOSURE
The Company previously recognized the material nature of the business issues
surrounding computer
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<PAGE> 23
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. The Company does not currently expect to apply any further
funds to address Year 2000 issues.
As of September 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 are 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. 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
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<PAGE> 24
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 Company's ability to effectively market and
sell products manufactured by others, 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, pricing pressure
related to healthcare reform and managed care and other healthcare provider
organizations, the possible failure to comply with applicable federal, state or
foreign laws or regulations, limitations on third-party reimbursement, the
highly competitive and fragmented nature of the medical devices industry,
deterioration in general economic conditions and the Company's ability to pay
its indebtedness. Management believes that these forward-looking statements are
reasonable; however, you should not place undue reliance on such statements.
These statements are based on current expectations and speak only as of the date
of such statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risk and
uncertainties listed above and other factors that you may wish to consider is
contained in the Company's Form 10-K for the year ended December 31, 1999.
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<PAGE> 25
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 the Cap Agreement to reduce risk by essentially creating
offsetting market exposures. The Cap Agreement is not held for trading purposes.
At September 30, 2000 and December 31, 1999, the Company had approximately $42.5
million and $45 million, respectively, outstanding under its New Credit
Facility, which expires in July 2004. In addition, under the New Credit
Facility, the Company had outstanding letters of credit at such dates of $4.8
million, which collateralize the Company's obligations to third parties in
connection with a 1998 acquisition. Amounts outstanding under the New Credit
Facility of approximately $9.4 million and $11.1 million at September 30, 2000
and December 31, 1999, respectively, were subject to the Cap Agreement, which
expired on October 2, 2000. 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> 26
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(a) On August 14, 2000, the Company entered into the Fifth Amendment to
Amended and Restated Credit Agreement and Waiver by and among the
Company, Horizon Acquisition Corp., Strato/Infusaid, Inc., Stepic
Corporation, the Lenders referred to therein and Bank of America, N.A.,
successor to Banc of America Commercial Finance Corporation, as Agent.
The Amended and Restated Credit Agreement and Waiver, as amended,
currently prohibits the payment of dividends on the Company's capital
stock and also restricts the Company's capital expenditures.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) As of September 30, 2000, the Company has violated certain of the
financial covenants contained in its New Credit Facility, and as a
result, is in default under its New Credit Facility. In addition, the
Company is also in default under its New Credit Facility as a result of
not making its principal payment of approximately $2.5 million due
October 1, 2000, as well as non-payment of the 900,000 Bridge Loan that
was due August 30, 2000. As of November 14, 2000, the total amount
outstanding under the New Credit Facility is approximately $43 million.
In addition, the Company has outstanding letters of credit of $4.8
million, which collateralize the Company's obligations to third parties
in connection with a 1998 acquisition. The total amount outstanding
under the Bridge Loan is $900,000 plus accrued unpaid interest since
October 1, 2000. As of November 14, 2000, the Company's total arrearage
under the New Credit Facility is approximately $2.5 million plus unpaid
interest accrued since October 1, 2000, and the Company's total
arrearage under the Bridge Loan is $900,000 plus accrued unpaid
interest, since October 1, 2000.
See Notes 4 and 5 to the Company's interim condensed consolidated
financial statements included in this Form 10-Q and the Liquidity and
Capital Resources section in Item 3 of Part I for further discussion
regarding the Company's defaults under the New Credit Facility and the
Bridge Loan.
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<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
10.1 Fifth Amendment to Amended and Restated Credit
Agreement and Waiver, dated as of August 14, 2000, by
and among the Company, Horizon Acquisition Corp.,
Shato/Infosaid, Inc., Stepic Corporation the Lenders
referred to therein and Bank of America, as Agent,
filed as Exhibit 10.1 to the Registrant's Form 8-K
dated August 18, 2000 (SEC File Number 000-24025) and
incorporated herein by reference.
10.2 Asset Purchase Agreement, by and between Ideas for
Medicine, Inc. and Horizon Medical Products, Inc.,
dated October 9, 2000, filed as Exhibit 2.1 to the
Registrant's Form 8-K, dated October 24, 2000 (SEC
File Number 000-24025) and incorporated herein by
reference.
27.1 Financial Data Schedule (for SEC filing purposes
only).
</TABLE>
(b) Reports on Form 8-K
On August 18, 2000 the Company filed a Current Report on Form 8-K
relating to the amendment of the Company's senior credit facility.
On October 24, 2000 the Company filed a Current Report on Form 8-K
relating to the consummation of the acquisition of certain assets used
in the manufacture and sale of medical devices by Ideas for Medicine,
Inc., a wholly-owned subsidiary of CryoLife, Inc.
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<PAGE> 28
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)
November 14, 2000 /s/ Robert M. Dodge
----------------- -----------------------------------------
Senior Vice-President and
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
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