##### Table of Contents



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

FORM 10-Q

|                                             |  |                                                                                          
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------
|(BOX WITH AN X)                              |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|                                            
|                                            
|                                            
|                                            
|                                            
|For the quarterly period ended June 30, 2001
|                                            
|                                            
|                                            
|                                            
|                                            
|(EMPTY BALLOT BOX)                           |  | 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
incorporation or organization) |  | (I.R.S. Employer
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, 2001 was 13,366,278.



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TABLE OF CONTENTS



|                                                             |                                                                                                |                                                         |  |  |  |  |  | 
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                               
|                                                             | ITEM 1. FINANCIAL STATEMENTS.                                                                 
|                                                             |                                                                                                | INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS          
|                                                             |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                                                             |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                                                             |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                                                             | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                           
|PART II. OTHER INFORMATION                                  
|                                                             | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                                                             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                  
|                                                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                     
|SIGNATURE                                                   
|Common Stock Purchase Warrant                               
|Employment Agreement                                        



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended June 30, 2001

INDEX

|        |                       |           |  |                                                                                       |  |                                                              |    |  |   |  |  | 
|------- | --------------------- | --------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | -- |  | - |  |  | 
|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                            |  |                                                              | 27 | 
|       
|       
|       
|       
|       
|PART II | OTHER INFORMATION    
|       
|       
|       
|       
|       
|        |                       | ITEM 1.   |  | Legal Proceedings                                                                     |  |                                                              | 28 | 
|       
|       
|       
|       
|        |                       | ITEM 4.   |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                              | 28 | 
|       
|       
|       
|       
|        |                       | ITEM 6.   |  | Exhibits and Reports on Form 8-K                                                      |  |                                                              | 30 | 
|       
|       
|       
|       
|        |                       | SIGNATURE |  |                                                                                       |  | 31                                                           |   

-2-



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##### Table of Contents






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, 2001
(unaudited) and December 31, 2000.                              
|
| |  | Interim Condensed Consolidated Statements of Operations for the
three months ended June 30, 2001 and June 30, 2000 (unaudited).
|
| |  | Interim Condensed Consolidated Statements of Operations for the six
months ended June 30, 2001 and June 30, 2000 (unaudited).  
|
| |  | Interim Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and June 30, 2000 (unaudited).  
|
| |  | Notes to Interim Condensed Consolidated Financial Statements.                                                                  

-3-



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |              |             |            |            | 
|----------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ----------- | ----------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                                |                                           |                                                                                                                                                           |                      |                                            |             | June 30,    |            | December 31,
|                                                |                                           |                                                                                                                                                           |                      |                                            |             | 2001        |            | 2000        
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      |                                            |             | (Unaudited) |            |              |             |           
|                                                |                                           |                                                                                                                                                           |                      | ASSETS                                     |             |             |            |              |             |            |            | 
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                 |                                                                                                                                                           | $                    | 2,272,604                                  |             |             | $          | 537,954      |            
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade, net          |                                                                                                                                                           |                      | 12,370,734                                 |             |             |            | 14,452,768   |            
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories                               |                                                                                                                                                           |                      | 17,239,836                                 |             |             |            | 20,721,483   |            
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses and other current assets |                                                                                                                                                           |                      | 2,135,610                                  |             |             |            | 1,306,043    |            
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax receivable                     |                                                                                                                                                           |                      |                                            |             |             |            | 1,903,802    |            
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           | Total current assets |                                            |             | 34,018,784  |            |              |             | 38,922,050 |           
|                                               
|                                               
|                                               
|                                               
|Property and equipment, net                     |                                           |                                                                                                                                                           | 2,968,464            |                                            |             |             | 5,680,473  |             
|                                               
|                                               
|                                               
|                                               
|Intangible assets, net                          |                                           |                                                                                                                                                           | 39,372,747           |                                            |             |             | 41,902,486 |             
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                           |                                                                                                                                                           | 216,208              |                                            |             |             | 222,408    |             
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           | Total assets         |                                            | $           | 76,576,203  |            |              | $           | 86,727,417 |           
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      | LIABILITIES AND SHAREHOLDERS EQUITY       |             |             |            |              |             |            |            | 
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Cash overdraft                                                                                                                                            |                      |                                            |             |             |            | $            | 609,176     |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accounts payable  trade                                                                                                                                  |                      | $                                          | 7,412,332   |             |            |              | 8,897,350   |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued salaries and commissions                                                                                                                          |                      |                                            | 465,306     |             |            |              | 178,408     |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued royalties                                                                                                                                         |                      |                                            | 53,838      |             |            |              | 89,577      |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued interest                                                                                                                                          |                      |                                            | 347,773     |             |            |              | 814,150     |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued rebate payable                                                                                                                                    |                      |                                            | 624,944     |             |            |              | 688,931     |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Other accrued expenses                                                                                                                                    |                      |                                            | 1,180,157   |             |            |              | 955,229     |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Income taxes payable                                                                                                                                      |                      |                                            | 35,107      |             |            |              |             |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Current portion of long-term debt                                                                                                                         |                      |                                            | 45,210,232  |             |            |              | 11,430,228  |           
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      | Total current liabilities                  |             |             | 55,329,689 |              |             |            | 23,663,049 | 
|                                               
|                                               
|                                               
|                                               
|Long-term debt, net of current portion          |                                           |                                                                                                                                                           | 67,587               |                                            |             |             | 40,597,750 |             
|                                               
|                                               
|                                               
|                                               
|Other liabilities                               |                                           |                                                                                                                                                           | 127,159              |                                            |             |             | 134,558    |             
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      | Total liabilities                          |             |             | 55,524,435 |              |             |            | 64,395,357 | 
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|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 as of June 30, 2001 and
December 31, 2000 |                      |                                            | 13,366      |             |            |              | 13,366      |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Additional paid-in capital                                                                                                                                |                      |                                            | 52,086,125  |             |            |              | 51,826,125  |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Shareholders notes receivable                                                                                                                            |                      |                                            | (1,194,171  | )           |            |              | (1,428,939  | )         
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accumulated deficit                                                                                                                                       |                      |                                            | (29,853,552 | )           |            |              | (28,078,492 | )         
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      | Total shareholders equity                 |             |             | 21,051,768 |              |             |            | 22,332,060 | 
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             
|                                                |                                           |                                                                                                                                                           |                      | Total liabilities and shareholders equity |             | $           | 76,576,203 |              |             | $          | 86,727,417 | 
|                                                |                                           |                                                                                                                                                           |                      |                                            |             |             |            |             

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

-4-



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                               |                  |                          |            |                    |            |             |            |            |           |  
|-------------------------------------------------------------- | ---------------- | ------------------------ | ---------- | ------------------ | ---------- | ----------- | ---------- | ---------- | --------- | -
|                                                               |                  |                          |            | Three Months Ended
|                                                               |                  |                          |            | June 30,          
|                                                               |                  |                          |            |                   
|                                                               |                  |                          |            | 2001               |            | 2000       
|                                                               |                  |                          |            |                    |            |            
|                                                               |                  |                          |            | (Unaudited)        |            | (Unaudited)
|                                                              
|Net sales                                                      |                  | $                        | 15,070,099 |                    |            | $           | 16,364,545 |           
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of goods sold                                             |                  |                          | 9,767,642  |                    |            |             | 11,260,420 |           
|                                                               |                  |                          |            |                    |            |             |            |           
|                                                               |                  | Gross profit             |            |                    | 5,302,457  |             |            |            | 5,104,125 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Selling, general and administrative expenses                   |                  |                          | 5,473,935  |                    |            |             | 4,715,335  |           
|                                                               |                  |                          |            |                    |            |             |            |           
|                                                               |                  | Operating (loss) income  |            |                    | (171,478   | )           |            |            | 388,790   |  
|                                                               |                  |                          |            |                    |            |             |            |           
|Other income (expense):                                        |                  |                          |            |                    |            |             |            |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Interest expense |                          |            | (1,189,455         | )          |             |            | (1,329,649 | )        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Other income     |                          |            | 20,396             |            |             |            | 28,498     |          
|                                                               |                  |                          |            |                    |            |             |            |           
|                                                               |                  |                          | (1,169,059 | )                  |            |             | (1,301,151 | )         
|                                                               |                  |                          |            |                    |            |             |            |           
|                                                               |                  | Loss before income taxes |            |                    | (1,340,537 | )           |            |            | (912,361  | )
|                                                              
|                                                              
|                                                              
|                                                              
|Income tax benefit                                             |                  |                          |            |                    |            |             | 295,759    |           
|                                                               |                  |                          |            |                    |            |             |            |           
|                                                               |                  | Net loss                 |            | $                  | (1,340,537 | )           |            | $          | (616,602  | )
|                                                               |                  |                          |            |                    |            |             |            |           
|Net loss per share  basic and diluted                         |                  | $                        | (0.10      | )                  |            | $           | (0.05      | )         
|                                                               |                  |                          |            |                    |            |             |            |           
|Weighted average common shares outstanding  basic and diluted |                  |                          | 13,366,278 |                    |            |             | 13,366,278 |           
|                                                               |                  |                          |            |                    |            |             |            |           

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

-5-



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                               |                  |                          |            |                  |            |             |            |            |            |  
|-------------------------------------------------------------- | ---------------- | ------------------------ | ---------- | ---------------- | ---------- | ----------- | ---------- | ---------- | ---------- | -
|                                                               |                  |                          |            | Six Months Ended
|                                                               |                  |                          |            | June 30,        
|                                                               |                  |                          |            |                 
|                                                               |                  |                          |            | 2001             |            | 2000       
|                                                               |                  |                          |            |                  |            |            
|                                                               |                  |                          |            | (Unaudited)      |            | (Unaudited)
|                                                              
|Net sales                                                      |                  | $                        | 31,489,882 |                  |            | $           | 33,463,746 |           
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of goods sold                                             |                  |                          | 20,258,734 |                  |            |             | 22,321,019 |           
|                                                               |                  |                          |            |                  |            |             |            |           
|                                                               |                  | Gross profit             |            |                  | 11,231,148 |             |            |            | 11,142,727 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Selling, general and administrative expenses                   |                  |                          | 10,607,194 |                  |            |             | 9,392,083  |           
|                                                               |                  |                          |            |                  |            |             |            |           
|                                                               |                  | Operating income         |            |                  | 623,954    |             |            |            | 1,750,644  |  
|                                                               |                  |                          |            |                  |            |             |            |           
|Other income (expense):                                        |                  |                          |            |                  |            |             |            |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Interest expense |                          |            | (2,448,849       | )          |             |            | (2,500,580 | )         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Other income     |                          |            | 49,835           |            |             |            | 74,399     |           
|                                                               |                  |                          |            |                  |            |             |            |           
|                                                               |                  |                          | (2,399,014 | )                |            |             | (2,426,181 | )         
|                                                               |                  |                          |            |                  |            |             |            |           
|                                                               |                  | Loss before income taxes |            |                  | (1,775,060 | )           |            |            | (675,537   | )
|                                                              
|                                                              
|                                                              
|                                                              
|Income tax benefit                                             |                  |                          |            |                  |            |             | 142,029    |           
|                                                               |                  |                          |            |                  |            |             |            |           
|                                                               |                  | Net loss                 |            |                  | (1,775,060 | )           |            |            | (533,508   | )
|                                                               |                  |                          |            |                  |            |             |            |           
|Net
loss per share  basic and diluted                         |                  | $                        | (0.13      | )                |            | $           | (0.04      | )         
|                                                               |                  |                          |            |                  |            |             |            |           
|Weighted
average common shares outstanding  basic and diluted |                  |                          | 13,366,278 |                  |            |             | 13,366,278 |           
|                                                               |                  |                          |            |                  |            |             |            |           

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

-6-



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                |                                                               |                                        |             |                  |            |             |           |            |            |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------- | ----------- | ---------------- | ---------- | ----------- | --------- | ---------- | ---------- | -
|                                                                                |                                                               |                                        |             | Six Months Ended
|                                                                                |                                                               |                                        |             | June 30,        
|                                                                                |                                                               |                                        |             |                 
|                                                                                |                                                               |                                        |             | 2001             |            | 2000       
|                                                                                |                                                               |                                        |             |                  |            |            
|                                                                                |                                                               |                                        |             | (Unaudited)      |            | (Unaudited)
|                                                                               
|Cash flows from operating activities:                                           |                                                               |                                        |             |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net loss                                                                        |                                                               | $                                      | (1,775,060  | )                |            | $           | (533,508  | )         
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|Adjustments to reconcile net loss to net cash provided by
operating activities: |                                                               |                                        |             |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Depreciation expense                                          |                                        |             | 509,088          |            |             |           | 384,011    |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Amortization expense                                          |                                        |             | 1,299,247        |            |             |           | 1,458,143  |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Amortization of discount                                      |                                        |             | 41,370           |            |             |           |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Non-cash increase in notes receivable-shareholders            |                                        |             | (65,232          | )          |             |           | (20,415    | )         
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | (Increase) decrease in operating assets and liabilities, net: |                                        |             |                  |            |             |           |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accounts receivable-trade              |             |                  | 2,082,034  |             |           |            | 1,774,014  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Inventories                            |             |                  | 201,499    |             |           |            | (130,547   | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Prepaid expenses and other assets      |             |                  | (227,803   | )           |           |            | 91,944     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Income tax receivable/payable          |             |                  | 1,938,909  |             |           |            | 112,355    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accounts payable  trade               |             |                  | (1,485,018 | )           |           |            | (2,305,474 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accrued expenses and other liabilities |             |                  | (245,343   | )           |           |            | 42,972     |  
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|                                                                                | Net cash provided by operating activities                     |                                        |             | 2,273,691        |            |             |           | 873,495    |           
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|Cash flows from investing activities:                                           |                                                               |                                        |             |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash proceeds from sale of IFM                                                  |                                                               |                                        | 2,250,500   |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Short-term bridge loan to shareholder                                           |                                                               |                                        |             |                  |            |             | (900,000  | )         
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Payment of short-term bridge loan by shareholder                                |                                                               |                                        | 300,000     |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Capital expenditures                                                            |                                                               |                                        | (153,255    | )                |            |             | (105,631  | )         
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|                                                                                | Net cash provided by (used in) investing activities           |                                        |             | 2,397,245        |            |             |           | (1,005,631 | )         
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|Cash flows from financing activities:                                           |                                                               |                                        |             |                  |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Debt issue costs                                                                |                                                               |                                        | (151,714    | )                |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash overdraft                                                                  |                                                               |                                        | (609,176    | )                |            |             |           |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Proceeds from issuance of long-term debt                                        |                                                               |                                        | 36,818,333  |                  |            |             | 900,000   |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Principal payments on long-term debt                                            |                                                               |                                        | (38,993,729 | )                |            |             | (702,583  | )         
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|                                                                                | Net cash (used in) provided by financing activities           |                                        |             | (2,936,286       | )          |             |           | 197,417    |           
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|                                                                                | Net increase in cash and cash equivalents                     |                                        |             | 1,734,650        |            |             |           | 65,281     |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash and cash equivalents, beginning of period                                  |                                                               |                                        | 537,954     |                  |            |             | 1,991,427 |           
|                                                                                |                                                               |                                        |             |                  |            |             |           |           
|Cash and cash equivalents, end of period                                        |                                                               | $                                      | 2,272,604   |                  |            | $           | 2,056,708 |           
|                                                                                |                                                               |                                        |             |                  |            |             |           |           



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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




|1. |  | Basis of Presentation and Summary of Significant Accounting Policies
|-- |  | --------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The interim condensed consolidated balance sheet of Horizon Medical
Products, Inc. and Subsidiaries (the Company) at December 31, 2000 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, 2001, and for the three and
six months ended June 30, 2001 and 2000 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, 2000, including, without limitation, the summary of
accounting policies and notes and consolidated financial statements
included therein.
|
| | Reclassifications Certain reclassifications have been made to the
consolidated financial statements of the previous periods in order to make
them comparable to the current periods presentation. These
reclassifications had no impact on previously reported shareholders
equity, net loss or cash flows from operating activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 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 hold
derivative instruments or engage in hedging activities.                                                                                                                                                                                                                                    
|
| | In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
supercedes Accounting Principles Board Opinion (APB) No.
16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and for all business combinations accounted
for by the purchase method for which the date of acquisition is after June
30, 2001,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and requires unallocated negative goodwill to be written off
immediately as an extraordinary gain (instead of being deferred and
amortized). The Company does not expect the adoption of SFAS No. 141 to
have a material impact on the interim condensed consolidated financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | SFAS No. 142 supercedes APB No. 17, Intangible Assets,and its provisions
are effective for fiscal years beginning after December 15, 2001. SFAS
No.142 requires that: 1) goodwill and indefinite lived intangible assets
will no longer be amortized; 2) goodwill will be tested for impairment at
least annually at the reporting unit level (reporting unit levels to be
determined upon adoption); 3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually; and 4) the
amortization period of intangible assets with finite lives will no longer
be limited to forty years. As of June 30, 2001, the Company has goodwill
and other intangible assets of $39.4 million and has recognized
amortization expense of approximately $1.3 million during the six months
ended June 30, 2001. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS No. 142. However,
the Company believes that a material impairment could be required based on
the fair value of its acquired businesses at the date of implementation.



|2. |  | Inventories
|-- |  | -----------



| |                                        
| | ---------------------------------------
| | A summary of inventories is as follows:

|                        |  |          |            |              |  |   |            |  
|----------------------- |  | -------- | ---------- | ------------ |  | - | ---------- | -
|                        |  | June 30, |            | December 31,
|                        |  | 2001     |            | 2000        
|                        |  |          |            |             
|Raw materials           |  | $        | 4,069,670  |              |  | $ | 4,013,959  |  
|                       
|                       
|                       
|                       
|Work in process         |  |          | 1,665,872  |              |  |   | 3,706,925  |  
|                       
|                       
|                       
|                       
|Finished goods          |  |          | 15,541,421 |              |  |   | 17,805,996 |  
|                        |  |          |            |              |  |   |            |  
|                        |  |          | 21,276,963 |              |  |   | 25,526,880 |  
|                       
|                       
|                       
|                       
|Less inventory reserves |  |          | (4,037,127 | )            |  |   | (4,805,397 | )
|                        |  |          |            |              |  |   |            |  
|                        |  | $        | 17,239,836 |              |  | $ | 20,721,483 |  
|                        |  |          |            |              |  |   |            |  



|3. |  | Earnings Per Share
|-- |  | ------------------



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | A summary of the calculation of basic and diluted earnings per share
(EPS) is as follows:

|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|----------- |  | -------------------------- | ---------- | ------------------------ |  | --------- | ---------- | --------- |  | ----------- | ----- | --------- |  | - | ---------- | - |  |  | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended |            | For the Six Months Ended
|            |  | June 30, 2001              |            | June 30, 2001           
|            |  |                            |            |                         
|            |  | Loss                       |            | Shares                   |  | Per-share |            | Loss      |  | Shares      |       | Per-share
|            |  | Numerator                  |            | Denominator              |  | Amount    |            | Numerator |  | Denominator |       | Amount   
|            |  |                            |            |                          |  |           |            |           |  |             |       |          
|Basic EPS   |  | $                          | (1,340,537 | )                        |  |           | 13,366,278 |           |  | $           | (0.10 | )         |  | $ | (1,775,060 | ) |  |  | 13,366,278 |  |  | $ | (0.13 | )
|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (1,340,537 | )                        |  |           | 13,366,278 |           |  | $           | (0.10 | )         |  | $ | (1,775,060 | ) |  |  | 13,366,278 |  |  | $ | (0.13 | )
|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  

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##### Table of Contents



|            |  |                            |          |                          |  |           |            |           |  |             |       |           |  |   |          |   |  |  |            |  |  |   |       |  
|----------- |  | -------------------------- | -------- | ------------------------ |  | --------- | ---------- | --------- |  | ----------- | ----- | --------- |  | - | -------- | - |  |  | ---------- |  |  | - | ----- | -
|            |  | 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   
|            |  |                            |          |                          |  |           |            |           |  |             |       |          
|Basic EPS   |  | $                          | (616,602 | )                        |  |           | 13,366,278 |           |  | $           | (0.05 | )         |  | $ | (533,508 | ) |  |  | 13,366,278 |  |  | $ | (0.04 | )
|            |  |                            |          |                          |  |           |            |           |  |             |       |           |  |   |          |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (616,602 | )                        |  |           | 13,366,278 |           |  | $           | (0.05 | )         |  | $ | (533,508 | ) |  |  | 13,366,278 |  |  | $ | (0.04 | )
|            |  |                            |          |                          |  |           |            |           |  |             |       |           |  |   |          |   |  |  |            |  |  |   |       |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Options to purchase 620,550 shares of common stock and warrants to purchase
735,157 shares of common stock were outstanding as of June 30, 2001 but are
not included in the computation of the June 30, 2001 diluted EPS because
the effect would be anti-dilutive. The options have exercise prices
ranging from $.44 to $15.50 and expire between 2008 and 2011. Warrants to
purchase 300,000 shares of common stock have an exercise price of $14.50
and expire as described in Note 9 to the Companys consolidated financial
statements included in the Companys Form 10-K for the year ended December
31, 2000. Warrants to purchase 435,157 shares of common stock have an
exercise price of $.05 per share and expire June 19, 2004.
|
| | Options to purchase 334,576 shares of
common stock and warrants to purchase 400,000 shares of common stock were outstanding as of June 30, 2000 but are
not included in the computation of the June 30, 2000 diluted EPS because
the effect would be anti-dilutive. The options have exercise prices
ranging from $2.69 to $15.50 and expire between 2008 and 2010. The
warrants have an exercise price of $14.50 and expire as described in Note 9
to the Companys consolidated financial statements included in the
Companys Form 10-K for the year ended December 31, 2000.                                                                                                                                                             



|4. |  | Long-Term Debt
|-- |  | --------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 30, 2001, the Company entered into a Forbearance Agreement,
as amended, with Bank of America, N.A. (Bank of America) wherein Bank of
America will forbear from exercising its rights and remedies allowed under
a $50 million amended and restated credit facility (the Credit Facility)
due to certain defaults until March 31, 2002 or upon earlier termination as
defined in the Forbearance Agreement (the Termination Date). The period
from March 30, 2001 through the Termination Date is defined as the
Forbearance Period. The Forbearance Agreement provides for the monthly
payment, during the Forbearance Period, of interest based on the Bank of
America prime rate plus 2.5% per annum and principal payments of $135,000
beginning on May 15, 2001 and a payment of Excess Cash Flow, as
defined in the Credit Facility, on
the ninetieth day following the last day of each fiscal year. There was no
Excess Cash Flow payment required for fiscal year 2000. In addition, the
Forbearance Agreement requires an additional principal payment in the
amount of the greater of $150,000 or the gross proceeds payable to the
Company in connection with the Companys sale of the Ideas for
Medicine product line ("IFM") (see Note 7).
|
| | The Forbearance Agreement further requires payments of $300,000 each on a
short-term bridge loan (the Bridge Loan) on May 31, 2001, August 31,
2001, and November 30, 2001 and adjusts certain of the financial ratio
covenants. The installment due on May 31, 2001 under the Bridge Loan was
paid. In addition, the installment due on August 31, 2001 under the Bridge
Loan was paid in July 2001. The Forbearance Agreement also provides for a
forbearance and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | restructuring fee of $10,000 plus related expenses and interest at the rate
then in effect plus 6% upon a Termination Event, as defined in the
Forbearance Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | As of June 30, 2001 and December 31, 2000, $3,908,347 and $2,561,661,
respectively, was outstanding under the Working Capital Loans and
$36,922,539 and $39,443,039, respectively, was outstanding under the
Acquisition Loans, each as defined in the Credit Facility. No funds were
available for borrowing under the Credit Facility as of June 30, 2001,
except as may be available under the sweep arrangement (see below). In
addition, the Company had outstanding standby letters of credit of
$2,400,000 and $2,544,000 as of June 30, 2001 and December 31, 2000,
respectively. These letters of credit, which have terms through January
2002, collateralize the Companys obligations to third parties in
connection with an acquisition (see Note 15 to the Companys consolidated
financial statements included in the Companys Form 10-K for the year ended
December 31, 2000).
|
| | In connection with the Forbearance Agreement, the Company issued a warrant
to Bank of America to acquire 435,157 shares of the Company's Common
Stock for $.05
per share. The warrant is exercisable by Bank of America during a
three-year period without regard to the status of the Credit Facility or
the Bridge Loan. The Company recorded the estimated fair value of the
warrant as of April 2001 of $260,000, determined using the Black-Scholes
Model (using weighted average assumptions as follows: dividend yield of 0%,
expected life of five years, expected volatility of 107.6% and a risk free
interest rate of 4.44%) as a deferred cost and is amortizing the deferred
cost over the Forbearance Period.                                                                                                                                                                    
|
| | The Forbearance Agreement also requires the Company to hire on or before
June 30, 2001 a new chief operating officer, restricts the repayment of
principal debt to junior lien holders, as defined, and either i) sell the
assets of IFM or ii) obtain an
agreement from the seller of the IFM product line to defer all payments
under the related promissory note (see below) through the Termination Date
(see Note 7 regarding the sale of the IFM product line). The Company
hired a Chief Operating Officer in April 2001 who was terminated in
June 2001, and the Company is actively pursuing a replacement for the
position. The Company sold the assets of the IFM product line as of
March 30, 2001 (see Note 7).                                                                                                                                                                   
|
| | The Forbearance Agreement amends the Credit Facility such that the Working
Capital Loans shall not exceed the least of i) the Working Capital Sublimit
of $10 million, as reduced due to the sale of IFM (see Note 7) as defined;
ii) an amount equal to the Borrowing Base, as defined in the Credit
Facility; and iii) the
Revolving Credit Commitment, as defined in the Credit Facility, then in effect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | As of June 30, 2001 and December 31, 2000, the Company has classified the
Credit Facility as due in 2002 in accordance with the terms of the
Forbearance Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Companys lockbox accounts are swept periodically into a Bank of America
account and applied against the outstanding loan under the 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                                                                                                                                                                                                                       

-11-



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Capital Loans under the Credit Facility to the extent such loan has been
paid down under the lockbox arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Effective March 30, 2001, through the Termination Date of the Forbearance
Agreement, the Credit Facility bears interest at the Bank of America prime
rate plus 2.5% per annum. As of June 30, 2001, the Companys interest rate
on the Credit Facility is approximately 9.5%. At December 31, 2000, the
Credit Facility bore interest, at the option of the Company, at the Index
Rate or Adjusted LIBOR, as defined in the Credit Facility, plus an applicable
margin ranging from 3.5% to 4.5%. The applicable margin applied is based
on the Companys leverage ratio, as defined in the Credit Facility. As of
December 31, 2000, the Companys interest rate on the Credit Facility was
based on the Index Rate with a resulting rate of approximately 11%. The
Bridge Loan bears interest, at the option of the Company, at the Index Rate
or Adjusted LIBOR, as defined in the Bridge Loan documents, plus 4.5%. As
of June 30, 2001 and December 31, 2000, the Companys interest rate on the
Bridge Loan is based on the Index Rate with a resulting rate of
approximately 9.5% and 11.32%, respectively.
|
| | The Credit Facility calls for an unused commitment fee payable quarterly,
in arrears, at a rate of .375% per annum, as well as a letter of credit fee
payable quarterly, in arrears, at a rate of 2% per annum. Both fees are
based on a defined calculation in the agreement. In addition, the Credit
Facility requires an administrative fee in the amount of $30,000 to be paid
annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The Companys obligations under the 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
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 the Companys CEO, and by the collateral
previously pledged by the Company to Bank of America under the Credit
Facility.                                                                                                                                                                                                            
|
| | The Companys 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 December 31, 2000, the Company had violated certain of
these financial covenants and, as a result, was in default under its Credit
Facility. In addition, the Company was also in default under its Credit
Facility as a result of not making principal payments of approximately $2.5
million due October 1, 2000 and January 1, 2001, as well as non-payment of
the Bridge Loan that was due on August 30, 2000. All of such defaults were
foreborne until the Termination Date as provided for in the Forbearance
Agreement. Revised restrictive covenants for the Forbearance Period have
been set in the Forbearance Agreement, and the Company was in compliance
with those covenants as of June 30, 2001.

-12-



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2000, the Company had a promissory note (the Note)
outstanding in the approximate amount of $5.3 million in connection with
the October 9, 2000 purchase of IFM (see Note 6 to the Companys
consolidated financial statements included in the Companys Form 10-K for
the year ended December 31, 2000). On March 30, 2001, the Company sold the
assets of IFM (see Note 7). In connection with the sale, the Buyer assumed
the Note.



|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 CEO. The Shareholder Bridge
Loan requires interest at either the Index Rate or adjusted LIBOR, as
defined in the Shareholder Bridge Loan, plus 4.5%, as elected by the CEO.
As of June 30, 2001 and December 31, 2000, the interest rate is based on
the Index Rate with a resulting rate of approximately 9.5% and 11.32%,
respectively. 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 Bank of America under the Bridge Loan, thereby causing
the Company to default under the Bridge Loan and its Credit Facility (see
Note 4). The Shareholder Bridge Loan and related accrued interest of
$101,049 and $49,330 are recorded as contra-equity in the consolidated
balance sheet as of June 30, 2001 and December 31, 2000, respectively.
Under the terms of the Forbearance Agreement, as of June 30, 2001, the
Company has received $300,000 from the CEO as payment on the Shareholder
Bridge Loan and has paid that amount to reduce the amount outstanding under
the Bridge Loan. In addition, subsequent to June 30, 2001, the CEO paid
approximately $384,000 directly to Bank of America, which will be applied
against the Bridge Loan (and which the Company will apply to the
Shareholder Bridge Loan) by the Company, satisfying the second payment due
by the Company on August 31, 2001.
|
| | The Company has unsecured loans to the CEO, the President of the Company,
and a former Vice Chairman of the Board of the Company in the form of notes
receivable in the amount of $337,837, plus accrued interest receivable of
$155,285 and $141,772 as of June 30, 2001 and December 31, 2000,
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 notes and related accrued
interest are recorded as contra-equity in the 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, 2000 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.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 is party to license agreements with an individual (the
Licensor) for the right to manufacture and sell dual lumen fistula
needles, dual lumen over-the-needle catheters, dual lumen chronic and acute
catheters, and other products covered by the Licensors patents or derived
from the Licensors confidential information. Payments under the agreement
vary,
depending upon the purchaser, and range from 9% to 15% of the Companys net
sales of such licensed products. Such payments shall continue until the
expiration date of each corresponding licensed patent right covering each
product under the agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | On June 27, 1997, the Company entered into a distribution agreement with an
overseas distributor (the Distributor) granting the Distributor exclusive
distribution rights for one of 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 no minimum commitments during the
renewal term. As of June 30, 2001, neither company was in compliance with
the distribution agreement. However, management does not believe there is
any exposure as a result of these violations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | In June 2001, the Company terminated its Distribution Agreement (the
Distribution Agreement) with Possis Medical, Inc. (Possis) in connection
with settling ongoing litigation with Possis. See Part II, Item 1
contained elsewhere in this Form 10-Q. As of March 31, 2001 and December
31, 2000, the Company has accrued for expected product returns related to
Possis and has written off related inventory in the consolidated balance
sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 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 and 2000, the Company
recorded additional purchase price payable to the previous Stepic
shareholders of approximately $2.1 million and $1.2 million, respectively,
representing the Companys additional earned contingent payments for fiscal
years 1999 and 2000 as required by the purchase agreement (the Purchase
Agreement). In addition, the Company recorded approximately $437,000
related to the 2001 contingent payment during the year ended December 31,
2000. This amount was included in accrued expenses as of June 30, 2001 and
December 31, 2000. The 2000 contingent payment was due December 15, 2000
and $2.4 million, which was previously accrued, was paid from proceeds from
the Credit Facility. On December 15, 2000, the Company amended the Purchase
Agreement so that the remaining portion of the 2000 contingent payment of
approximately $1.2 million could be paid, together with interest at 11%,
through April 2001. The Company failed to make all required payments to the
Stepic shareholders under the December 15, 2000 amendment and on

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | February 14, 2001, two of the three previous Stepic shareholders (the
Plaintiffs) filed suit against the Company for non-payment. On March 30,
2001, the Company entered into a Settlement Agreement with the Plaintiffs
wherein the Plaintiffs agreed to voluntarily dismiss their pending lawsuit
against the Company, and the Company agreed to pay the 2000 contingent
payment at a rate of $9,400 per month beginning on April 15, 2001, until
final payment of the remaining outstanding balance on February 10, 2002.
In addition, under the terms of the Settlement Agreement, the Company will
pay interest to the Plaintiffs on the unpaid balance of the 2000 contingent
payment at the rate of 11% per annum, including a lump sum interest payment
of approximately $27,000 that had accrued since the Companys last payment
to the Plaintiffs. Should Stepics earnings exceed the target amount of
$3.9 million for the third anniversary year, the liability will be
increased up to a cap of approximately $1.6 million. However, as of June
30, 2001, it does not appear that Stepic will exceed its target amount for
the third anniversary year and therefore, no contingent payment would be
due by the Company. Should a contingent payment be earned for the third
anniversary year, the payment will be due December 15, 2001 and will be
paid from general company funds or funds obtained from the Companys
lenders through an increase in its current credit facility. Should the
Company not obtain an increase in 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 Stepic shareholders.
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 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 $625,000 and $689,000 as of June 30, 2001 and December 31,
2000, respectively, related to amounts to be rebated to the various
distributors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | The Company is party to numerous agreements which contain certain
provisions regarding change in control, as defined by the agreements, or
the acquisition of the Company by a third party. These provisions could
result in additional payments being required by the Company should these
events occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|7. |  | Sale of IFM
|-- |  | -----------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 30, 2001 (the Closing Date), the Company completed the
sale of certain IFM assets for the assumption of the Note related to IFM
(see Note 4), cash of $2,250,500 upon closing, and cash of $150,000 due six
months from the Closing Date (the Second Installment). Assets sold
included inventory of $3.3 million, property and equipment of $2.4 million,
and intangible assets of $1.6 million. The asset purchase agreement
provides for a purchase price adjustment related to certain inventory
values within five business days after the Closing Date. Based on the
values of the inventory following the Closing Date, the Company recorded an
additional purchase price receivable of approximately $70,000 outstanding
as of June 30, 2001 which will be paid as part of the Second Installment.
In addition to the purchase of certain assets, the buyer assumed the
Companys sublease of the IFM facility and the related employees.

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| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2000, the Company recognized an
impairment loss, in accordance with APB No.17, on the long-lived assets of
IFM. The Company recognized a non-cash pre-tax charge of $12.1 million
during the year ended December 31, 2000 to write the assets down to their
estimated fair value based on managements estimate of the expected
proceeds to be received upon a sale of IFM.



|8. |  | Segment Information
|-- |  | -------------------



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates two reportable segments, manufacturing and
distribution. The manufacturing segment includes products manufactured by
the Company as well as products manufactured by third parties on behalf of
the Company through manufacturing and supply agreements.
|
| | The Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and administrative costs, as well as
research and development, interest income/expense, and provision for income
taxes, are reported on an entity wide basis only. 
|
| | The table below presents information about the reported sales (which
include intersegment sales) and gross profit (which include intersegment
gross profit) of the Companys segments as of and for the three and six
months ended June 30, 2001 and 2000.                   

|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30, 2001      |            | June 30, 2001   
|              |  |                    |            |                 
|              |  | Sales              |            | Gross Profit     |  | Sales |           | Gross Profit
|              |  |                    |            |                  |  |       |           |             
|Manufacturing |  | $                  | 6,312,346  |                  |  | $     | 3,486,875 |              |  | $ | 13,597,795 |  |  | $ | 7,445,402  | 
|             
|             
|             
|             
|Distribution  |  |                    | 9,231,653  |                  |  |       | 1,767,978 |              |  |   | 18,797,187 |  |  |   | 3,587,436  | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|              |  | $                  | 15,543,999 |                  |  | $     | 5,254,853 |              |  | $ | 32,394,982 |  |  | $ | 11,032,838 | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 

|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30, 2000      |            | June 30, 2000   
|              |  |                    |            |                 
|              |  | Sales              |            | Gross Profit     |  | Sales |           | Gross Profit
|              |  |                    |            |                  |  |       |           |             
|Manufacturing |  | $                  | 6,807,686  |                  |  | $     | 2,961,164 |              |  | $ | 14,088,642 |  |  | $ | 6,785,188  | 
|             
|             
|             
|             
|Distribution  |  |                    | 10,472,775 |                  |  |       | 2,123,896 |              |  |   | 21,275,240 |  |  |   | 4,361,205  | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|              |  | $                  | 17,280,461 |                  |  | $     | 5,085,060 |              |  | $ | 35,363,882 |  |  | $ | 11,146,393 | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 



| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A reconciliation of total segment sales to total consolidated sales and
total segment gross profit to total consolidated gross profit of the
Company for the three and six months ended June 30, 2001 and 2000 is as
follows:

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|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  
|--------------------------------- |  | ------------------ | ---------- | ---------------- |  | -------- | ---------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|                                  |  | Three Months Ended |            | Six Months Ended
|                                  |  |                    |            |                 
|                                  |  | June 30,           |            | June 30,         |  | June 30, |            | June 30,
|                                  |  | 2001               |            | 2000             |  | 2001     |            | 2000    
|                                  |  |                    |            |                  |  |          |            |         
|Total segment sales               |  | $                  | 15,543,999 |                  |  | $        | 17,280,461 |          |  | $ | 32,394,982 |   |  | $ | 35,363,882 |  
|                                 
|                                 
|                                 
|                                 
|Elimination of intersegment sales |  |                    | (473,900   | )                |  |          | (915,916   | )        |  |   | (905,100   | ) |  |   | (1,900,136 | )
|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  
|Consolidated sales                |  | $                  | 15,070,099 |                  |  | $        | 16,364,545 |          |  | $ | 31,489,882 |   |  | $ | 33,463,746 |  
|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  

|                                         |  |                    |           |                  |  |          |           |          |  |   |            |  |  |   |            |  
|---------------------------------------- |  | ------------------ | --------- | ---------------- |  | -------- | --------- | -------- |  | - | ---------- |  |  | - | ---------- | -
|                                         |  | Three Months Ended |           | Six Months Ended
|                                         |  |                    |           |                 
|                                         |  | June 30,           |           | June 30,         |  | June 30, |           | June 30,
|                                         |  | 2001               |           | 2000             |  | 2001     |           | 2000    
|                                         |  |                    |           |                  |  |          |           |         
|Total segment gross profit               |  | $                  | 5,254,853 |                  |  | $        | 5,085,060 |          |  | $ | 11,032,838 |  |  | $ | 11,146,393 |  
|                                        
|                                        
|                                        
|                                        
|Elimination of intersegment gross profit |  |                    | 47,604    |                  |  |          | 19,065    |          |  |   | 198,310    |  |  |   | (3,666     | )
|                                         |  |                    |           |                  |  |          |           |          |  |   |            |  |  |   |            |  
|Consolidated gross profit                |  | $                  | 5,302,457 |                  |  | $        | 5,104,125 |          |  | $ | 11,231,148 |  |  | $ | 11,142,727 |  
|                                         |  |                    |           |                  |  |          |           |          |  |   |            |  |  |   |            |  



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | A reconciliation of total segment assets to total consolidated assets of
the Company as of June 30, 2001 and December 31, 2000 is as follows:

|                                        |                      |   |               |            |                   |   |            |            | 
|--------------------------------------- | -------------------- | - | ------------- | ---------- | ----------------- | - | ---------- | ---------- | 
|                                        |                      |   | June 30, 2001 |            | December 31, 2000
|                                        |                      |   |               |            |                  
|Manufacturing                           |                      | $ | 40,209,210    |            |                   | $ | 46,885,864 |           
|                                       
|                                       
|                                       
|                                       
|Distribution                            |                      |   | 36,427,105    |            |                   |   | 39,879,507 |           
|                                        |                      |   |               |            |                   |   |            |           
|                                        | Total segment assets |   |               | 76,636,315 |                   |   |            | 86,765,371 | 
|                                       
|                                       
|                                       
|                                       
|Elimination of intersegment receivables |                      |   | (60,112       | )          |                   |   | (37,954    | )         
|                                        |                      |   |               |            |                   |   |            |           
|                                        | Consolidated assets  |   | $             | 76,576,203 |                   |   | $          | 86,727,417 | 
|                                        |                      |   |               |            |                   |   |            |           



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Except for a sales office located in Belgium, the Companys operations are
located in the United States. Thus, substantially all of the Companys
assets are located domestically. Sales information by geographic area for
the three and six months ended June 30, 2001 and 2000, is as follows:

|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30,           |            | June 30,        
|              |  |                    |            |                 
|              |  | 2001               |            | 2000             |  | 2001 |            | 2000
|              |  |                    |            |                  |  |      |            |     
|United States |  | $                  | 14,647,503 |                  |  | $    | 15,508,873 |      |  | $ | 30,378,545 |  |  | $ | 31,803,412 | 
|             
|             
|             
|             
|Foreign       |  |                    | 422,596    |                  |  |      | 855,672    |      |  |   | 1,111,337  |  |  |   | 1,660,334  | 
|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 
|              |  | $                  | 15,070,099 |                  |  | $    | 16,364,545 |      |  | $ | 31,489,882 |  |  | $ | 33,463,746 | 
|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 



|9. |  | Liquidity
|-- |  | ---------



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the third quarter of 2000, the Company retained a management
consulting firm (the Consulting Firm) to assist the Company in developing
a plan (the Plan) to improve cash flow and financial controls, increase
operating efficiencies, reduce costs and expenses, and restructure its
current senior indebtedness. The Plan is designed to maintain liquidity
throughout 2001.
|
| | The Company began implementation of the Plan during the fourth quarter of
2000. As of December 31, 2000, the Company had reduced the executive
management group, reduced                                                                                                                                                                                                                 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | certain of its product offerings, discontinued
plans to rework product not meeting specification, wrote off its inventory valuation of its Possis
Perma-Seal graft line (see Note 6),
and modified its inventory purchasing procedures to provide better controls
and to match purchases to forecasted and actual demand. During the six
months ended June 30, 2001, the Company has continued to implement
components of the Plan by reducing costs, improving production planning,
and by launching new versions of existing products: the titanium LifePort®
VTX at the end of March 2001 and the plastic LifePort® VTX during June
2001. In addition, the Company is planning further new product
introductions (Triumph VTX port and the LifeJet CTX hemodialysis catheter
(pending 510k clearance)) later during 2001.
|
| | In an effort to maintain adequate liquidity throughout 2001, the Company has
completed the following as of June 30, 2001:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| | 1. |  | Established a financial forecast for 2001 taking into
consideration the elements of the Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Entered into a Forbearance Agreement with Bank of
America wherein Bank of America will forebear until March 31, 2002
from exercising its rights and remedies allowed under the Credit
Facility. Compliance with the financial covenants in the
Forbearance Agreement is designed around the achievement of the
Companys financial forecast.                                                                                                                                                                                                            
|
| | 3. |  | Sold the assets of IFM effective March 30, 2001 for
cash of $2,400,500 (to be adjusted as described in Note 7) and
the assumption of approximately $5.6 million of the Companys
long-term debt related to IFM.                                                                                                                                                                                                                                                                                                                                         
|
| | 4. |  | Entered into a Settlement Agreement with two of the
former Stepic shareholders calling for revised payment terms of
$9,400 per month through February 10, 2002, thus eliminating the
default conditions that existed and settling the outstanding
legal action commenced during the first quarter of 2001.                                                                                                                                                                                                                                              
|
| | 5. |  | Reached agreement with the Companys CEO to collect
$900,000 in 2001 in connection with the Shareholder Bridge Loan.
The proceeds from these collections will be used to reduce the
Companys indebtedness with Bank of America. During the second
quarter of 2001, the CEO also provided additional liens on
certain of the CEOs assets to further collateralize the
indebtedness. As of the date of this filing the CEO has paid
approximately $674,000 on the Shareholder Bridge Loan and this amount
has been applied to the Company's Bridge Loan.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company exceeded the Plan for the six months ended June 30, 2001 and
thus, was in compliance with the financial covenants contained in the
Forbearance Agreement at June 30, 2001. However, Management believes it is likely that the
Company will not achieve the Plan during the third quarter of 2001 and as a
result, is revising the Plan and beginning negotiations with Bank of
America to amend the Forbearance Agreement in order to adjust the financial
covenants contained in the Forbearance Agreement. If the Company is
unsuccessful in its negotiations with Bank of America to amend the
Forbearance Agreement, there could be a material adverse effect on the
Companys business, consolidated financial position and results of
operations.

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ITEM 2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

Net Sales.Net sales decreased 7.9% to $15.1 million for the second
quarter of 2001 from $16.4 million for the second quarter of 2000. This
decrease is primarily attributable to the sale of the IFM product line as well
as the discontinuance of the Possis Perma-Seal graft product line in the
first quarter of 2001. In addition, there was a decline in volume in distribution
sales in the second quarter of 2001 due to changes at the manufacturer level in
both technology and market place conditions. The allocation of net sales on a
segment basis for the three months ended June 30, 2001 resulted in net sales of
$6.3 million from the manufacturing segment and $9.2 million from the
distribution segment, before intersegment eliminations. 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.

Gross Profit.Gross profit increased 3.9% to $5.3 million for the second
quarter of 2001 from $5.1 million for the second quarter of 2000. Gross margin
increased to 35.2% in the second quarter of 2001 from 31.2% in the second
quarter of 2000. The increase in gross margin is the result of higher gross
margin on the Companys manufactured products resulting from the
Companys ongoing conversion to a complete line of VTX port
offerings which generate a higher average selling price as well as lower rebates granted
to the Companys distributors in the second quarter of 2001
compared to the second quarter
of 2000. In addition, distribution sales, which generate a lower gross
margin, comprised a smaller percentage of total sales in the second
quarter of 2001
compared to the second quarter of 2000. The allocation of gross profit between
segments for the three months ended June 30, 2001 resulted in gross profit of
$3.5 million from the manufacturing segment and $1.8 million from the
distribution segment, before intersegment eliminations. 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.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $759,000 or 16.1% to
approximately $5.5 million for the second quarter of 2001 compared with $4.7
million for the second quarter of 2000. This increase is substantially due to
expenses in the second quarter of 2001 which consist of
product development costs, turnaround consulting fees, PR campaign
fees and severances. SG&A expenses increased as a
percentage of net sales to 36.3% for the second quarter of 2001 from 28.8% for
the second quarter of 2000. This increase is primarily due to increased
expenses as well as decreased sales in the second quarter of 2001
from the second quarter
of 2000.

Interest Expense.Net interest expense decreased to approximately $1.2
million in the second quarter of 2001 compared to approximately $1.3 million in
the second quarter of 2000. The decrease in 2001 is due to lower debt
outstanding during the second quarter of 2001 compared to the second quarter of
2000 as well as lower interest rates under the Companys Credit Facility in
the second quarter of 2001.

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Income Tax Expense.The Company generated an income tax benefit of
approximately $539,000 during the second quarter of 2001 which was reduced fully
by a valuation allowance established on the Companys deferred tax assets
generated by the income tax benefit. The valuation allowance is deemed
necessary due to uncertainties indicated by the Companys taxable loss during
the second quarter of 2001 as well as 2000 and the forecasted taxable loss for the
year ending December 31, 2001. The second quarter 2000 income tax benefit of
approximately $296,000 was a result of the pretax loss during the second
quarter of 2000 of approximately $912,000.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Net Sales.Net sales decreased 5.9% to $31.5 million for the six months
ended June 30, 2001 from $33.5 million in 2000. This decrease is primarily
attributable to the sale of the IFM product line as well as the discontinuance
of the Possis Perma-Seal graft product line in the first quarter of 2001. In
addition, there was a decline in volume in distribution sales during the six
months ended June 30, 2001 due to changes at the manufacturer level in both
technology and market place conditions. The allocation of net sales on a
segment basis for the six months ended June 30, 2001 resulted in net sales of
$13.6 million from the manufacturing segment and $18.8 million from the
distribution segment, before intersegment eliminations. 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.

Gross Profit.Gross profit increased slightly to $11.2 million for the
six months ended June 30, 2001 from $11.1 million for the
same period in 2000.
Gross margin increased to 35.7% in the six months ended June 30, 2001 from
33.3% for the same period in 2000. The increase in gross margin is the result
of higher gross margin on the Companys manufactured products resulting from the Companys ongoing conversion to a complete
line of VTX port offerings which generate a higher average
selling price as well as lower
rebates granted to the Companys distributors in 2001 compared to 2000. In
addition, distribution sales, which generate a lower gross margin,
comprised a smaller percentage of total sales in 2001 compared to 2000. The
allocation of gross profit between segments for the six months ended June 30,
2001 resulted in gross profit of $7.4 million from the manufacturing segment
and $3.6 million from the distribution segment, before intersegment
eliminations. 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.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $1.2 or 12.9% to
approximately $10.6 million for the six months ended June 30, 2001 compared
with $9.4 million for the six months ended June 30, 2000. This increase is
substantially due to expenses in 2001 which consist of
product development costs, turnaround consulting fees, PR campaign
fees and severances. SG&A expenses increased as
a percentage of net sales to 33.7% for the six months ended June 30, 2001 from
28.1% for the same period in 2000. This increase is primarily due to increased
expenses as well as decreased sales in 2001 from 2000.

Interest Expense.Net interest expense decreased to approximately $2.4
million in the six months ended June 30, 2001 compared to approximately $2.5
million in the six months ended June 30, 2000. The decrease is due to lower
debt outstanding during 2001 compared to 2000, as well as lower interest rates under the Companys Credit Facility in 2001.

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Income Tax Expense.The Company recorded an income tax benefit of
approximately $676,000 during the six months ended June 30, 2001 which was
reduced fully by a valuation allowance established on the Companys deferred
tax assets generated by the income tax benefit. The valuation allowance is
deemed necessary due to uncertainties indicated by the Companys taxable loss
during the six months ended June 30, 2001 as well as during 2000 and the
forecasted taxable loss for the year ending December 31, 2001. The six-month
period ended June 30, 2000 income tax benefit of approximately $142,000 was a
result of the pretax loss during 2000 of approximately $676,000.

Liquidity and Capital Resources

Net cash provided by operating activities was $2.3 million for the six months
ended June 30, 2001 compared with approximately $873,000 for the six months
ended June 30, 2000. The increase in cash provided by operations during 2001
compared to 2000 was primarily attributable to a decrease in income tax
receivable as well was lower reductions in accounts payable and accrued
expenses during 2001 as compared to 2000. In August 2000, the Company
restructured the terms of outstanding accounts receivable of approximately $2.5
million of two of the Companys largest distributors to be collected over a
period of approximately twelve months, beginning August 2000. As of June 30,
2001, the two distributors have complied with the restructuring terms.

Net cash provided by (used in) investing activities was $2.4 million for the
six months ended June 30, 2001 compared to ($1 million) for the six months
ended June 30, 2000. Cash provided by investing activities in 2001 included
cash proceeds from the sale of IFM of approximately $2.3 million and the
payment of $300,000 from the Companys CEO for the Shareholder Bridge Loan. Cash used in
investing activities in 2001 and 2000 included capital expenditures for the
Companys facilities and the Shareholder Bridge Loan to the
Companys CEO during 2000.

Net cash (used in) provided by financing activities
was approximately ($2.9
million) for the six months ended June 30, 2001 compared to approximately
$197,000 for the six months ended June 30, 2000. Financing activities in the
period ending 2001 consisted primarily of principal payments on outstanding
debt attributable to depository funds of approximately $36.2 million applied
against the Working Capital Loan under the Companys Credit Facility pursuant
to the Companys sweep arrangement with Bank of America (see below) and
approximately $2.3 million on its Credit Facility from the proceeds of the sale of IFM (see Note 7 to
the Companys interim condensed consolidated financial statements included
elsewhere in this Form 10-Q). In addition, the Company made principal payments
of $270,000 and $300,000 (the Bridge Loan payment) on its Credit Facility, both
pursuant to the terms of the Forbearance Agreement. These payments were offset
by cash proceeds issued to the Company of approximately $36.8 million from Bank
of America under the same sweep arrangement. Financing activities in 2000 principally consisted of principal payments on the Companys
outstanding debt of its other creditors.

As discussed more fully in Note 6 of the Companys consolidated financial
statements included in the Form 10-K for the year ended December 31, 2000, on
March 30, 2001, the Company entered into a Forbearance Agreement, as amended,
with Bank of America. Under the terms of the Forbearance

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Agreement, Bank of America has agreed that it will not foreclose on, or
institute legal action to collect, the debt outstanding under the Credit
Facility with Bank of America, including the Bridge Loan, until March 31, 2002,
or until the earlier termination of the Forbearance Agreement. Bank of America
may terminate the Forbearance Agreement prior to March 31, 2002, upon the
occurrence of certain events as described below.

The Forbearance Agreement modifies the payment terms of the debt outstanding
under the Credit Facility. The Company has agreed to pay any accrued and
unpaid interest on the debt outstanding under the Credit Facility on the first
day of each month, commencing on April 1, 2001, and to repay $135,000 in
principal each month, beginning on May 15, 2001. The principal payments due on
May 15, 2001, June 15, 2001 and July 15, 2001 were made by the Company as required. The
Company is required to make an additional principal repayment on October 10,
2001, in an amount equal to $150,000 or the gross proceeds to the Company of
the Second Installment Payment pursuant to the sale of the IFM
product line. In
addition, the Company is required to prepay on the 90th day following the last
day of each fiscal year, beginning on March 30, 2001, an amount equal to the
Companys Excess Cash Flow (as defined in the Credit Agreement) for each fiscal
year. The Company has agreed to pay any accrued and unpaid interest on the
Bridge Loan on the first day of each month, commencing on April 1, 2001, and to
repay $300,000 in principal on or before each of May 31, 2001 and August 31,
2001. The unpaid balance of the Bridge Loan will be due on November 30, 2001.
The installment due on May 31, 2001 under the Bridge Loan was paid.
Additionally, subsequent to June 30, 2001, approximately $374,000 was paid on
the Bridge Loan, satisfying the August 31, 2001 installment due. Interest will
continue to accrue on the principal balances of all debt outstanding under the
Credit Facility at the Bank of America prime rate plus 2.5%. Upon expiration
or early termination of the Forbearance Agreement, interest will accrue at the
rate then in effect plus 6%.

The Forbearance Agreement expires on March 31, 2002, but generally may be
terminated earlier by Bank of America if any of the following occur: (i) the
Company files for bankruptcy or an involuntary petition for bankruptcy is filed
against the Company; (ii) the Company fails to timely make any scheduled
principal or interest payment under the Credit Facility, as modified by the
Forbearance Agreement; (iii) the Company breaches any covenant in the
Forbearance Agreement; (iv) the Company violates the modified financial
covenants set out in the Forbearance Agreement relating to minimum net worth,
capital expenditures, and minimum EBITDA, and the specific ratios for debt
service coverage, leverage, interest coverage, and debt to capitalization; (v)
the Company fails to deliver on or prior to April 29, 2001, title to certain
personal assets of Marshall B. Hunt to secure the Bridge Loan; (vi) the Company
fails to deliver on or prior to April 29, 2001, a mortgage of all real property
owned by the Company to secure the revolver loan; (vii) the Company fails to
comply with any demands by Bank of America relating to borrowing base audits;
(viii) the Company fails to hire a Chief Operating Officer by June 30, 2001;
(ix) the Company fails to cooperate with the operational review being conducted
by the management consulting firm; or (x) the Company uses the collateral under
the Credit Facility to repay subordinated debt, except as permitted by Bank of
America.

As of June 30, 2001, the Company has met the
following requirements under the terms of the Forbearance Agreement:
(i) the Company made timely all required interest and principal
payments under the Credit Facility, as modified by the Forbearance
Agreement; (ii) the Company is in compliance with all covenants in
the Forbearance Agreement; (iii) the Company is in compliance with
the modified financial covenants set out in the Forbearance
Agreement; (iv) the Company delivered title to certain personal
assets of Marshall B. Hunt to secure the Bridge Loan; (v) the Company
delivered a mortgage of all real property owned by the Company to
secure the revolver loan; (vi) the Company hired a Chief Operating
Officer in April 2001 who was terminated during June 2001, and the
Company is actively pursuing a replacement for the position; (vii)
the Company has cooperated with the operational review being
conducted by the management consulting firm; and (viii) the Company
has not used the collateral under the Credit Facility to repay
subordinated debt, except as permitted by Bank of America.

Pursuant to the Forbearance Agreement, the Company granted Bank of America
warrants to purchase 435,157 shares of the Company's Common Stock. The warrants have a
strike price of $0.05 per share and are exercisable for three years from the
date of issuance of June 19, 2001. The warrants contain antidilution
protection for issuance of shares at less than fair market value.

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Upon the expiration or early termination of the Forbearance Agreement, if the
Company remains in default under the Credit Facility, the debt outstanding
under the Credit Facility will become due and payable. The failure by the
Company either to extend the Forbearance Period or refinance such debt would
have a material adverse effect on the Companys consolidated financial
position, liquidity and ability to pay its debts as they become due.

During the Forbearance Period, the Credit Facility bears interest at the Bank
of America prime rate plus 2.5%. Prior to March 30, 2001, the Credit Facility
bore interest at a rate to be selected by the Company from certain options
defined in the agreement. At June 30, 2001 and December 31, 2000, the Companys
interest rate was 9.5% and 11.0062%, respectively. The total balance
outstanding under the Credit Facility was approximately $41.4 and $42.9 million
at June 30, 2001 and December 31, 2000, respectively, and no funds were
available for borrowing under the Credit Facility, except as may be available
under the sweep arrangement (see below). In addition, the Company had
outstanding standby letters of credit at June 30, 2001 and December 31, 2000 of
approximately $2.4 million and $2.5 million, respectively, which collateralize the
Companys obligations to third parties in connection with a 1998 acquisition.

The Companys Credit Facility contains certain restrictive covenants that
require a minimum net worth, cash flow from operations 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. On March 30, 2001, the effective date of the
Forbearance Agreement, the Company and Bank of America revised the covenants
and, as of June 30, 2001, the Company is in compliance with these covenants.
However, Management believes its is likely that the Company will not achieve
the Plan during the third quarter of 2001 and as a result, is revising the Plan
and beginning negotiations with Bank of America to amend the Forbearance
Agreement in order to adjust the financial covenants contained in the
Forbearance Agreement. If the Company is unsuccessful in its negotiations with
Bank of America to amend the Forbearance Agreement, there could be a material
adverse effect on the Companys business, consolidated financial position and
results of operations.

The Company and Bank of America amended the 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 Note 5 to the Companys interim condensed consolidated financial statements included
elsewhere in this Form 10-Q). The Bridge Loan, the Shareholder Bridge Loan,
and related interest were due on August 30, 2000 but were not
paid at that time. The payment terms of the
Bridge Loan were restructured under the Forbearance Agreement (see above). As
of June 30, 2001, the Company received $300,000 from the CEO as payment on the
Shareholder Bridge Loan and that amount has been applied to the
Company's Bridge Loan under the terms of the Forbearance Agreement.

As permitted under the Credit Facility and Bridge Loan documents, Bank of
America has instituted a sweep arrangement whereby funds collected in the
Companys lockbox accounts are swept periodically into a Bank of America
account and applied against the outstanding loan balance under the Credit
Facility. The financial institutions which hold such accounts have been
notified by Bank

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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 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 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.

During the third quarter of 2000, the Company retained a management consulting
firm (the Consulting Firm) to assist the Company in developing a plan (the
Plan) to improve cash flow and financial controls, increase operating
efficiencies, reduce costs and expenses, and restructure its current senior
indebtedness. The Plan is designed to maintain liquidity throughout 2001.

The Company began implementation of the Plan during the fourth quarter of 2000.
As of December 31, 2000, the Company had reduced the executive management
group, reduced certain of its product offerings, discontinued plans to rework
product not meeting specification, wrote off its inventory valuation of its
Possis Perma-Seal graft line (see Note 6 to the Companys
interim condensed consolidated financial statements included
elsewhere in this Form 10-Q), and modified its inventory purchasing
procedures to provide better controls and to match purchases to forecasted and
actual demand. During the six months ended June 30, 2001, the Company has
continued to implement components of the Plan by reducing costs, improving
production planning, and by launching new versions of existing products: the
titanium LifePort® VTX at the end of March 2001 and the plastic LifePort® VTX
during June 2001. In addition, the Company is planning further new product
introductions (Triumph VTX port and the LifeJet CTX hemodialysis catheter
(pending 510k clearance)) later during 2001.

In an effort to maintain adequate liquidity throughout 2001, the Company has
completed the following as of June 30, 2001:



|1. |  | Established a financial forecast for 2001 taking into consideration the
elements of the Plan.                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Entered into a Forbearance Agreement with Bank of America wherein Bank of
America will forebear until March 31, 2002 from exercising its rights and
remedies allowed under the Credit Facility. Compliance with the financial
covenants in the Forbearance Agreement is designed around the achievement
of the Companys financial forecast.
|  
|3. |  | Sold the assets of IFM effective March 30, 2001 for cash of $2,400,500
(to be adjusted as described in Note 7 to the Companys interim condensed
consolidated financial statements included elsewhere in this Form 10-Q) and the assumption of approximately
$5.6 million of the Companys long-term debt related to IFM.                   

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|4. |  | Entered into a Settlement Agreement with two of the former Stepic
shareholders calling for revised payment terms of $9,400 per month through
February 10, 2002, thus eliminating the default conditions that existed
and settling the outstanding legal action commenced during the first
quarter of 2001.                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Reached agreement with the Companys CEO to collect $900,000 in 2001 in
connection with the Shareholder Bridge Loan. The proceeds from these
collections will be used to reduce the Companys indebtedness with Bank of
America. During the second quarter of 2001, the CEO also provided
additional liens on certain of the CEOs assets to further collateralize
the indebtedness. As of the date of this filing, the CEO has paid approximately $674,000 on the
Shareholder Bridge Loan and this amount has been applied to the Companys Bridge Loan.

The Company exceeded the Plan for the six months ended June 30, 2001 and thus,
was in compliance with the financial covenants contained in the Forbearance
Agreement at June 30, 2001. However, Management believes it is likely that the Company will not
achieve the Plan during the third quarter of 2001 and as a result, is revising
the Plan and beginning negotiations with Bank of America to amend the
Forbearance Agreement in order to adjust the financial covenants contained in
the Forbearance Agreement. If the Company is unsuccessful in its negotiations
with Bank of America to amend the Forbearance Agreement, there could be a
material adverse effect on the Companys business, consolidated financial
position and results of operations.

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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 possible
inadequacy of the Companys cash flow from operations and cash available from
external financing, 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 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, the
Companys inability to pay its indebtedness, the Companys
failure to achieve its Plan, the Companys inability to comply
with the financial covenants set forth in the Forbearance Agreement
and the Companys inability to negotiate an amendment to the
Forbearance Agreement in order to adjust the financial covenants. 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, 2000.

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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. If market interest rates were to increase
immediately and uniformly by 10% from levels as of June 30, 2001, the
additional interest expense would be material to the Companys consolidated
financial position, results of operations and cash flows.

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PART II.     OTHER INFORMATION




ITEM 1.     LEGAL PROCEEDINGS

On December 11, 1998, the Company entered into a multi-year distribution
agreement with Possis for the Perma-Seal dialysis access graft. On February 14,
1999, the Company launched the Perma-Seal dialysis access graft and began
marketing the product on a worldwide basis. In January and April 2001, Possis
filed suits in United States District Court for the District of Minnesota for
alleged breaches of this agreement. The Company asserted
counterclaims against Possis.
In June 2001, the Company settled all litigation with Possis, and in such settlement
terminated the distribution agreement. The Company had ceased all sales of the
graft in January 2001. The settlement had no material impact on the financial
statements for the second quarter of 2001 or the six months ended June 30,
2001. The Company had previously written off related inventory during its
fiscal year ended December 31, 2000.




ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

|    |  |                                                                          |                                    
|--- |  | ------------------------------------------------------------------------ | -----------------------------------
|(a) |  | The Companys Annual Meeting of Shareholders was held on May 8, 2001.   
|   
|(b) |  | Not applicable.                                                         
|   
|(c) |  | The following proposals were adopted by the shareholders of the Company:
|   
|    |  | (i)                                                                      | The election of three Directors.   
|   
|    |  |                                                                          | The vote on the above proposal was:

|                         |  |     |            |                    |  |  |        | 
|------------------------ |  | --- | ---------- | ------------------ |  |  | ------ | 
|                         |  | For |            | Withhold Authority
|                         |  |     |            |                   
|Marshall B. Hunt         |  |     | 11,369,603 |                    |  |  | 88,465 | 
|                        
|                        
|                        
|                        
|William E. Peterson, Jr. |  |     | 11,368,351 |                    |  |  | 89,717 | 
|                        
|                        
|                        
|                        
|A. Gordon Tunstall       |  |     | 11,366,151 |                    |  |  | 91,917 | 



| |  |  | 
| |  |  | 

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| |  |      |                                                                                                                   
| |  | ---- | ------------------------------------------------------------------------------------------------------------------
| |  | (ii) | A proposal to ratify the appointment of PricewaterhouseCoopers
LLP as the Companys independent auditors for 2001.
|
| |  |      | The vote on the above proposal was:                                                                               

|           |  |         |        |           |  |  |       | 
|---------- |  | ------- | ------ | --------- |  |  | ----- | 
|For        |  | Against |        | Abstained
|           |  |         |        |          
|11,421,493 |  |         | 27,800 |           |  |  | 8,775 | 

| |  |       |                                                                                                                                                                                                      
| |  | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (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 800,000 shares to 1,400,000 shares.
|
| |  |       | The vote on the above proposal was:                                                                                                                                                                  

|           |  |         |         |           |  |  |       | 
|---------- |  | ------- | ------- | --------- |  |  | ----- | 
|For        |  | Against |         | Abstained
|           |  |         |         |          
|11,191,705 |  |         | 259,488 |           |  |  | 6,875 | 

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ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.



|    |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                                                                                                                                                                                                                                                                                                    
|   
|    |  | Exhibit Number                                                                                                                                                                                                                                                                                               |  | Description                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                               
|    |  | 10.1                                                                                                                                                                                                                                                                                                         |  | Common Stock Purchase Warrant, dated as of June 19, 2001, by
and between the Company and Bank of America, N.A.
|   
|   
|   
|   
|   
|    |  | 10.2                                                                                                                                                                                                                                                                                                         |  | Employment Agreement, dated as of June 21, 2001, by and between
Robert R. Singer and the Company              
|   
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                         
|   
|    |  | On April 16, 2001 the Company filed a Current Report on Form 8-K relating
to the disposition of certain assets to Vascutech, Inc. and the Companys
execution of a Forbearance Agreement and a First Amendment to Forbearance
Agreement relating to the Companys Credit Facility with Bank of America,
N.A.

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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, 2001 |  | /s/ William E. Peterson, Jr.                                       
|                |  |                                                                    
|                |  | President
(Principal Financial Officer and
Duly Authorized Officer)

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