##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|     |  |  |  |                                                                                         
|---- |  |  |  | ----------------------------------------------------------------------------------------
|[X]  |  |  |  | QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934 
|    
|    
|    
|    
|     |  |  |  | For the quarterly period ended September 30, 2001                                       
|    
|    
|    
|    
|[  ] |  |  |  | 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 November 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 OPERATION      
|                                                  |                                                                                                | 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.                                            
|                                                  | ITEM 3. DEFAULTS UPON SENIOR SECURITIES.                                                      
|                                                  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                     
|                                                  | SIGNATURE                                                                                     
|Second Amendment to Forbearance Agreement        
|Amendment to Promissory Notes                    
|Amendment to Promissory Notes                    
|Amendment to Employment Agreement                
|Amendment to Employment Agreement                
|Amendment to Employment Agreement                
|Escrow Agreement                                 
|Escrow Letter Agreement                          
|Securities Pledge Agreement                      
|Securities Pledge Agreement                      
|Limited Guaranty of Marshall B. Hunt             
|Limited Guaranty of Hunt Family Investments, LLLP



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended September 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 & 6 | 
|       
|       
|       
|       
|        |  |                       |  |                                                                                       |  | Interim Condensed Consolidated Statements of Cash Flows      |    |  | 7     | 
|       
|       
|       
|       
|        |  |                       |  |                                                                                       |  | Notes to Interim Condensed Consolidated Financial Statements |    |  | 8     | 
|       
|       
|       
|       
|        |  | ITEM 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                              | 17 | 
|       
|       
|       
|       
|        |  | ITEM 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |                                                              | 22 | 
|       
|       
|       
|       
|       
|PART II |  | OTHER INFORMATION     |  |                                                                                       |  |                                                             
|       
|       
|       
|       
|        |  | ITEM 1.               |  | Legal Proceedings                                                                     |  |                                                              | 23 | 
|       
|       
|       
|       
|        |  | ITEM 2.               |  | Changes in
Securities and Use of Proceeds                                             |  |                                                              | 23 | 
|       
|       
|       
|       
|        |  | ITEM 3.               |  | Defaults Upon
Senior Securities                                                       |  |                                                              | 23 | 
|       
|       
|       
|       
|        |  | ITEM 6.               |  | Exhibits and Reports on Form 8-K                                                      |  |                                                              | 24 | 
|       
|       
|       
|       
|        |  | SIGNATURE             |  |                                                                                       |  |                                                              |    |  | 25    | 

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 September 30, 2001 (unaudited) and December 31, 2000.

Interim Condensed Consolidated Statements of Operations for the three months ended September 30, 2001
and 2000 (unaudited).

Interim Condensed Consolidated Statements of Operations for the nine months ended September 30, 2001
and 2000 (unaudited).

Interim Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001
and 2000 (unaudited).

Notes to Interim Condensed Consolidated Financial Statements.

3



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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |            |             |            | 
|----------------------------------------------- | ----------------------------------------- | --------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------- | ---------- | ------------ | ---------- | ----------- | ---------- | 
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            | SEPTEMBER 30, |            | DECEMBER 31,
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            | 2001          |            | 2000        
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |             
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            | (UNAUDITED)   |            |              |            |            
|ASSETS                                         
|                                               
|                                               
|                                               
|                                               
|CURRENT ASSETS:                                 |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |             
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                 |                                   | $                                                                                                                                                              | 1,150,460                                  |            |               | $          | 537,954      |           
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable  trade, net          |                                   |                                                                                                                                                                | 11,964,234                                 |            |               |            | 14,452,768   |           
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories                               |                                   |                                                                                                                                                                | 17,227,802                                 |            |               |            | 20,721,483   |           
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses and other current assets |                                   |                                                                                                                                                                | 2,038,356                                  |            |               |            | 1,306,043    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Income tax receivable                     |                                   |                                                                                                                                                                |                                            |            |               |            | 1,903,802    |           
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   | Total current assets                                                                                                                                           |                                            |            | 32,380,852    |            |              |            | 38,922,050  |           
|                                               
|                                               
|                                               
|                                               
|Property and equipment, net                     |                                           |                                   | 2,855,080                                                                                                                                                      |                                            |            |               | 5,680,473  |             
|                                               
|                                               
|                                               
|                                               
|Intangible assets, net                          |                                           |                                   | 38,708,929                                                                                                                                                     |                                            |            |               | 41,902,486 |             
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                           |                                   | 185,608                                                                                                                                                        |                                            |            |               | 222,408    |             
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   | Total assets                                                                                                                                                   |                                            | $          | 74,130,469    |            |              | $          | 86,727,417  |           
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|LIABILITIES AND SHAREHOLDERS EQUITY           
|                                               
|                                               
|                                               
|                                               
|CURRENT LIABILITIES:                            |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |             
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Cash overdraft                    |                                                                                                                                                                |                                            |            |               |            | $            | 609,176    |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accounts payable  trade          |                                                                                                                                                                | $                                          | 7,631,158  |               |            |              | 8,897,350  |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued salaries and commissions  |                                                                                                                                                                |                                            | 333,388    |               |            |              | 178,408    |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued royalties                 |                                                                                                                                                                |                                            | 47,495     |               |            |              | 89,577     |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued interest                  |                                                                                                                                                                |                                            | 279,157    |               |            |              | 814,150    |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Accrued rebate payable            |                                                                                                                                                                |                                            | 605,144    |               |            |              | 688,931    |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Other accrued expenses            |                                                                                                                                                                |                                            | 1,163,819  |               |            |              | 955,229    |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Income taxes payable              |                                                                                                                                                                |                                            | 27,451     |               |            |              |            |            
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Current portion of long-term debt |                                                                                                                                                                |                                            | 44,224,056 |               |            |              | 11,430,228 |            
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   |                                                                                                                                                                | Total current liabilities                  |            |               | 54,311,668 |              |            |             | 23,663,049 | 
|                                               
|                                               
|                                               
|                                               
|Long-term debt, net of current portion          |                                           |                                   | 59,475                                                                                                                                                         |                                            |            |               | 40,597,750 |             
|                                               
|                                               
|                                               
|                                               
|Other liabilities                               |                                           |                                   | 123,460                                                                                                                                                        |                                            |            |               | 134,558    |             
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   |                                                                                                                                                                | Total liabilities                          |            |               | 54,494,603 |              |            |             | 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 September 30,
2001 and December 31, 2000 |                                            |            | 13,366        |            |              |            | 13,366      |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           |                                   | Additional paid-in capital                                                                                                                                     |                                            |            | 52,086,125    |            |              |            | 51,826,125  |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                           |                                   | Shareholders notes receivable                                                                                                                                 |                                            |            | (780,231      | )          |              |            | (1,428,939  | )         
|                                               
|                                               
|                                               
|                                               
|                                                |                                           |                                   | Accumulated deficit                                                                                                                                            |                                            |            | (31,683,394   | )          |              |            | (28,078,492 | )         
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   |                                                                                                                                                                | Total shareholders equity                 |            |               | 19,635,866 |              |            |             | 22,332,060 | 
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           
|                                                |                                           |                                   |                                                                                                                                                                | Total liabilities and shareholders equity |            | $             | 74,130,469 |              |            | $           | 86,727,417 | 
|                                                |                                           |                                   |                                                                                                                                                                |                                            |            |               |            |              |           

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

4



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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                               |                        |                          |            |                    |            |             |            |            |            |  
|-------------------------------------------------------------- | ---------------------- | ------------------------ | ---------- | ------------------ | ---------- | ----------- | ---------- | ---------- | ---------- | -
|                                                               |                        |                          |            | THREE MONTHS ENDED
|                                                               |                        |                          |            | SEPTEMBER 30,     
|                                                               |                        |                          |            |                   
|                                                               |                        |                          |            | 2001               |            | 2000       
|                                                               |                        |                          |            | (UNAUDITED)        |            | (UNAUDITED)
|                                                               |                        |                          |            |                    |            |            
|Net sales                                                      |                        | $                        | 13,971,583 |                    |            | $           | 16,115,269 |           
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of goods sold                                             |                        |                          | 9,656,199  |                    |            |             | 10,576,298 |           
|                                                               |                        |                          |            |                    |            |             |            |           
|                                                               |                        | Gross profit             |            |                    | 4,315,384  |             |            |            | 5,538,971  |  
|                                                              
|                                                              
|                                                              
|                                                              
|Selling, general and administrative expenses                   |                        |                          | 5,065,607  |                    |            |             | 5,023,023  |           
|                                                               |                        |                          |            |                    |            |             |            |           
|                                                               |                        | Operating (loss) income  |            |                    | (750,223   | )           |            |            | 515,948    |  
|                                                               |                        |                          |            |                    |            |             |            |           
|Other income (expense):                                        |                        |                          |            |                    |            |             |            |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Interest expense       |                          |            | (1,098,782         | )          |             |            | (1,464,019 | )         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Other income (expense) |                          |            | 19,163             |            |             |            | (55,880    | )         
|                                                               |                        |                          |            |                    |            |             |            |           
|                                                               |                        |                          | (1,079,619 | )                  |            |             | (1,519,899 | )         
|                                                               |                        |                          |            |                    |            |             |            |           
|                                                               |                        | Loss before income taxes |            |                    | (1,829,842 | )           |            |            | (1,003,951 | )
|                                                              
|                                                              
|                                                              
|                                                              
|Income tax benefit                                             |                        |                          |            |                    |            |             | 303,211    |           
|                                                               |                        |                          |            |                    |            |             |            |           
|                                                               |                        | Net loss                 |            | $                  | (1,829,842 | )           |            | $          | (700,740   | )
|                                                               |                        |                          |            |                    |            |             |            |           
|Net loss per share  basic and diluted                         |                        | $                        | (0.14      | )                  |            | $           | (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

|                                                               |                  |                          |            |                   |            |             |            |            |            |  
|-------------------------------------------------------------- | ---------------- | ------------------------ | ---------- | ----------------- | ---------- | ----------- | ---------- | ---------- | ---------- | -
|                                                               |                  |                          |            | NINE MONTHS ENDED
|                                                               |                  |                          |            | SEPTEMBER 30,    
|                                                               |                  |                          |            |                  
|                                                               |                  |                          |            | 2001              |            | 2000       
|                                                               |                  |                          |            |                   |            |            
|                                                               |                  |                          |            | (UNAUDITED)       |            | (UNAUDITED)
|Net sales                                                      |                  | $                        | 45,461,465 |                   |            | $           | 49,579,009 |           
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of goods sold                                             |                  |                          | 29,914,933 |                   |            |             | 32,897,319 |           
|                                                               |                  |                          |            |                   |            |             |            |           
|                                                               |                  | Gross profit             |            |                   | 15,546,532 |             |            |            | 16,681,690 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Selling, general and administrative expenses                   |                  |                          | 15,672,801 |                   |            |             | 14,415,108 |           
|                                                               |                  |                          |            |                   |            |             |            |           
|                                                               |                  | Operating (loss) income  |            |                   | (126,269   | )           |            |            | 2,266,582  |  
|                                                               |                  |                          |            |                   |            |             |            |           
|Other income (expense):                                        |                  |                          |            |                   |            |             |            |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Interest expense |                          |            | (3,547,631        | )          |             |            | (3,964,600 | )         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Other income     |                          |            | 68,998            |            |             |            | 18,525     |           
|                                                               |                  |                          |            |                   |            |             |            |           
|                                                               |                  |                          | (3,478,633 | )                 |            |             | (3,946,075 | )         
|                                                               |                  |                          |            |                   |            |             |            |           
|                                                               |                  | Loss before income taxes |            |                   | (3,604,902 | )           |            |            | (1,679,493 | )
|                                                              
|                                                              
|                                                              
|                                                              
|Income tax benefit                                             |                  |                          |            |                   |            |             | 445,240    |           
|                                                               |                  |                          |            |                   |            |             |            |           
|                                                               |                  | Net loss                 |            |                   | (3,604,902 | )           |            |            | (1,234,253 | )
|                                                               |                  |                          |            |                   |            |             |            |           
|Net loss per share  basic and diluted                         |                  | $                        | (0.27      | )                 |            | $           | (0.09      | )         
|                                                               |                  |                          |            |                   |            |             |            |           
|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

|                                                                                |                                                               |                                        |             |                   |            |             |            |            |           |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------- | ----------- | ----------------- | ---------- | ----------- | ---------- | ---------- | --------- | -
|                                                                                |                                                               |                                        |             | NINE MONTHS ENDED
|                                                                                |                                                               |                                        |             | SEPTEMBER 30,    
|                                                                                |                                                               |                                        |             |                  
|                                                                                |                                                               |                                        |             | 2001              |            | 2000       
|                                                                                |                                                               |                                        |             |                   |            |            
|                                                                                |                                                               |                                        |             | (UNAUDITED)       |            | (UNAUDITED)
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                                                               |                                        |             |                   |            |             |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net loss                                                                        |                                                               | $                                      | (3,604,902  | )                 |            | $           | (1,234,253 | )         
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                               |                                        |             |                   |            |             |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Depreciation expense                                          |                                        |             | 695,806           |            |             |            | 584,571    |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Amortization expense                                          |                                        |             | 1,990,567         |            |             |            | 2,198,981  |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Amortization of discount                                      |                                        |             | 41,370            |            |             |            |            |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Loss on disposal of property and equipment                    |                                        |             |                   |            |             |            | 83,850     |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Non-cash increase in notes receivable-shareholders            |                                        |             | (76,902           | )          |             |            | (35,799    | )        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | (Increase) decrease in operating assets and liabilities, net: |                                        |             |                   |            |             |            |            |          
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accounts receivable-trade              |             |                   | 2,488,534  |             |            |            | 1,099,974 |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Inventories                            |             |                   | 213,533    |             |            |            | (617,490  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Prepaid expenses and other assets      |             |                   | (99,949    | )           |            |            | (628,167  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Income tax receivable/payable          |             |                   | 1,931,253  |             |            |            | (231,855  | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accounts payable-trade                 |             |                   | (1,266,192 | )           |            |            | 386,407   |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                               | Accrued expenses and other liabilities |             |                   | (492,057   | )           |            |            | 284,279   |  
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|                                                                                | Net cash provided by operating activities                     |                                        |             | 1,821,061         |            |             |            | 1,890,498  |          
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|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                                                            |                                                               |                                        | (226,589    | )                 |            |             | (348,404   | )         
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|                                                                                | Net cash provided by (used in) investing activities           |                                        |             | 2,323,911         |            |             |            | (1,248,404 | )        
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                                                               |                                        |             |                   |            |             |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Debt issuance costs                                                             |                                                               |                                        | (179,214    | )                 |            |             |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Change in cash overdraft                                                        |                                                               |                                        | (609,176    | )                 |            |             | 711,508    |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Proceeds from issuance of long-term debt                                        |                                                               |                                        | 51,328,333  |                   |            |             | 6,428,000  |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Principal payments on long-term debt                                            |                                                               |                                        | (54,072,409 | )                 |            |             | (9,120,284 | )         
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|                                                                                | Net cash used in financing activities                         |                                        |             | (3,532,466        | )          |             |            | (1,980,776 | )        
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|                                                                                | Net increase (decrease) in cash and cash equivalents          |                                        |             | 612,506           |            |             |            | (1,338,682 | )        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash and cash equivalents, beginning of period                                  |                                                               |                                        | 537,954     |                   |            |             | 1,991,427  |           
|                                                                                |                                                               |                                        |             |                   |            |             |            |           
|Cash and cash equivalents, end of period                                        |                                                               | $                                      | 1,150,460   |                   |            | $           | 652,745    |           
|                                                                                |                                                               |                                        |             |                   |            |             |            |           

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

7



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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 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 September 30, 2001, and for the three and nine months ended
September 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 Effective January 1, 2001, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133, as amended, 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. The Company does not
hold derivative instruments or engage in hedging activities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In June 2001, the FASB issued SFAS No. 141, Business Combinationsand 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, 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 September 30, 2001, the Company has goodwill
and other intangible assets of $38.7 million and has recognized amortization
expense of approximately $2 million during the nine months ended September
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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In August 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations(ARO), which has an effective date for financial statements
for fiscal years beginning after June 15, 2002. This statement addresses the
diversity in practice for recognizing asset retirement obligations and
requires that obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an ARO, an entity must capitalize
the cost by recognizing an increase in the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss upon
settlement. The impact of SFAS No. 143 is not expected to be material to the
Companys financial statements.           

8



---



##### Table of Contents





|   |  | In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets,which has an effective date for financial
statements for fiscal years beginning after December 15, 2001. This
statement, which supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, this
statement expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction. The impact of SFAS No.
144 is not expected to be material to the Companys financial statements.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | A summary of inventories is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                        |  |               |            |              |  |   |            |  
|----------------------- |  | ------------- | ---------- | ------------ |  | - | ---------- | -
|                        |  | September 30, |            | December 31,
|                        |  | 2001          |            | 2000        
|                        |  |               |            |             
|Raw materials           |  | $             | 3,902,593  |              |  | $ | 4,013,959  |  
|                       
|                       
|                       
|                       
|Work in process         |  |               | 1,572,155  |              |  |   | 3,706,925  |  
|                       
|                       
|                       
|                       
|Finished goods          |  |               | 15,377,417 |              |  |   | 17,805,996 |  
|                        |  |               |            |              |  |   |            |  
|                        |  |               | 20,852,165 |              |  |   | 25,526,880 |  
|                       
|                       
|                       
|                       
|Less inventory reserves |  |               | (3,624,363 | )            |  |   | (4,805,397 | )
|                        |  |               |            |              |  |   |            |  
|                        |  | $             | 17,227,802 |              |  | $ | 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 Nine Months Ended
|            |  | September 30, 2001         |            | September 30, 2001       
|            |  |                            |            |                          
|            |  | Loss                       |            | Shares                    |  | Per-share |            | Loss      |  | Shares      |       | Per-share
|            |  | Numerator                  |            | Denominator               |  | Amount    |            | Numerator |  | Denominator |       | Amount   
|            |  |                            |            |                           |  |           |            |           |  |             |       |          
|Basic EPS   |  | $                          | (1,829,842 | )                         |  |           | 13,366,278 |           |  | $           | (0.14 | )         |  | $ | (3,604,902 | ) |  |  | 13,366,278 |  |  | $ | (0.27 | )
|            |  |                            |            |                           |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (1,829,842 | )                         |  |           | 13,366,278 |           |  | $           | (0.14 | )         |  | $ | (3,604,902 | ) |  |  | 13,366,278 |  |  | $ | (0.27 | )
|            |  |                            |            |                           |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  

|            |  |                            |          |                           |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|----------- |  | -------------------------- | -------- | ------------------------- |  | --------- | ---------- | --------- |  | ----------- | ----- | --------- |  | - | ---------- | - |  |  | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended |          | For the Nine Months Ended
|            |  | September 30, 2000         |          | September 30, 2000       
|            |  |                            |          |                          
|            |  | Loss                       |          | Shares                    |  | Per-share |            | Loss      |  | Shares      |       | Per-share
|            |  | Numerator                  |          | Denominator               |  | Amount    |            | Numerator |  | Denominator |       | Amount   
|            |  |                            |          |                           |  |           |            |           |  |             |       |          
|Basic EPS   |  | $                          | (700,740 | )                         |  |           | 13,366,278 |           |  | $           | (0.05 | )         |  | $ | (1,234,253 | ) |  |  | 13,366,278 |  |  | $ | (0.09 | )
|            |  |                            |          |                           |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (700,740 | )                         |  |           | 13,366,278 |           |  | $           | (0.05 | )         |  | $ | (1,234,253 | ) |  |  | 13,366,278 |  |  | $ | (0.09 | )
|            |  |                            |          |                           |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  



| |  | Options to purchase 725,020 shares of common stock and warrants to purchase
435,157 shares of common stock were outstanding as of September 30, 2001 but
are not included in the computation of the September 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. The warrants
have an exercise price of $.05 per share and expire June 19, 2004.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Options to purchase 311,819 shares of common stock and warrants to purchase
400,000 shares of common stock were outstanding as of September 30, 2000 but
are not included in the computation of the September 30, 2000 diluted EPS
because the effect would be anti-dilutive. The options have exercise prices
ranging from $1.63 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.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



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##### Table of Contents





|4. |  | Long-Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective March 30, 2001, the Company entered into a Forbearance Agreement
(as amended, the Forbearance Agreement) and a First Amendment to
Forbearance Agreement with Bank of America, N.A. (Bank of America) wherein
Bank of America agreed to forbear from exercising its rights and remedies
allowed under a $50 million amended and restated credit facility (the
Credit Facility) due to certain defaults. The Companys Credit Facility
contained certain restrictive covenants that required 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 placed 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 as provided for in the
Forbearance Agreement. Revised restrictive covenants were set in the
Forbearance Agreement, and the Company was not in compliance with certain of
those covenants as of September 30, 2001, including minimum net worth, debt
service coverage, leverage and minimum EBITDA. As a result, the Company was
in default of the Credit Facility under the terms of the Forbearance
Agreement.                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Effective October 15, 2001, the Company entered into a Second Amendment to
the Forbearance Agreement (the Second Amendment) as a result of defaults
under the terms of the Forbearance Agreement as of September 30, 2001. The
Second Amendment amended the terms of the Forbearance Agreement as follows:
(i) changed the termination date of the Forbearance Agreement (the
Termination Date) from March 31, 2002 to January 15, 2002 (the period from
March 30, 2001 through January 15, 2002 being defined as the Forbearance
Period); (ii) the Company must maintain a general operating account with
Bank of America and the use of funds in an calendar month shall be
restricted to payments equal to or less than the monthly budget submitted to
Bank of America as part of the Second Amendment; (iii) the Company will pay
any accrued or unpaid interest (but not principal) on the Note on the first
day of each month beginning November 1, 2001 and each month thereafter
during the Forbearance Period, and interest will continue to accrue at the
Bank of America Prime Rate plus two and one-half percent (2.5%) per annum;
and (iv) the Company must furnish to Bank of America certain reports which
include: (a) a weekly Borrowing Base Calculation, as defined in the Credit
Facility; (b) collections status reports, accounts receivable, cash on hand
and cash expenditures with copies of invoices twice a month; (c) weekly and
monthly income and expense statements comparing actual to budget; (d) a
monthly report listing inventory and equipment by location; (e) monthly
financial statements as required under the Credit Agreement; and (f) monthly
detail of accounts receivable and aged trial balance.                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Second Amendment also amended the Termination Events as defined in the
Forbearance Agreement to include the following: (i) the Company fails to execute and
deliver or to cause the Companys CEO, Marshall B. Hunt
(Hunt) and Hunt Family Investments, LLLP (Hunt
LLLP) to execute and deliver
within 10 days from the effective date of the Second Amendment a pledge to
Bank of America of all the stock owned by Hunt and documentation to
amend the current Pledge Agreement between Hunt, Hunt LLLP
and the Company. The pledge documents will be held in escrow and will be
released only in the event that Hunt interferes with the daily
operations of the Company determinable at Bank of Americas discretion at any
point prior to January 1, 2005; (ii) the Company fails to engage and hire
within five days from the effective date of the Second Amendment competent
crisis and turn around management and a new Chief Executive Officer who
shall report directly to the independent members of the Companys Board of
Directors; (iii) the Company fails to provide Bank of America within five days from
the effective date of the Second Amendment a copy of resolutions confirming
Hunts resignation as an officer and director of the Company and
that no further salary or bonuses shall be paid to Hunt; (iv) the
Company fails to make efforts to refinance the amounts
outstanding under the Credit Facility and fails to provide
weekly status reports; (v) on or before December 15, 2001, the Company fails
to provide Bank of America evidence that the Company has engaged an investment
banking firm to begin marketing the sale of the assets of the Company
if the amounts outstanding under the Credit Facility are not paid off by the Termination Date; or (vi) the Company fails to
execute and deliver to Bank of America within 24 hours of Bank of
Americas request a consent
order consenting to the appointment of a Receiver in the event of a
Termination Event. As of the date of this filing, none of such Termination
Events has occurred.
|  
|   |  | In addition, the Second Amendment reduced the Working Capital Sublimit to
$5,000,000 and limited the Working Capital Loan to the smaller of the
Working Capital Sublimit or an amount equal to the Borrowing Base, as
defined in the Credit Facility. The Second Amendment also removed several of
the financial covenants previously contained in the Forbearance Agreement,
including minimum net worth, debt service coverage, leverage, interest
coverage and minimum EBITDA, and added the following financial requirements:
(i) the actual expenses of Company paid in a given calendar month must not
exceed the budgeted expenses by more than 10%; (ii) the actual income of the
Company in a given calendar month must not fall below the budgeted income by
more than 10%; and (iii) the Companys Borrowing Base at any time must not
decline by more than 10% below the Companys Borrowing Base as of October
23, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

10



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##### Table of Contents





| |  | The Second Amendment became effective upon the satisfaction by the Company
of certain conditions, which included payment for unreimbursed Bank
of Americas
attorneys fees and expenses, Bank of Americas title insurance fees and accrued
interest on the amounts outstanding under the Credit Facility through October 1, 2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Forbearance Agreement provides for the 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.
The installments due on May 31, 2001 and August 31, 2001 under the Bridge
Loan were paid and as of September 30, 2001. Approximately $174,000 was
outstanding under the Bridge Loan as of September 30, 2001. The Forbearance Agreement also provides
for a forbearance and 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 September 30, 2001 and December 31, 2000, $3,901,139 and $2,561,661,
respectively, was outstanding under the Working Capital Loans and
$36,517,539 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 September 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 September 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, 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 currently does not have a
replacement as of the date of this filing. The Company sold the assets of
the IFM product line as of March 30, 2001 (see Note 7).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As of September 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 amended by the Second Amendment.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 Capital Loans under the
Credit Facility to the extent such loan has been paid down under the lockbox
arrangement. Under the Second Amendment, the Company must maintain a general
operating account with Bank of America (the Operating Account), from which
all loan proceeds will be deposited and all expenses (except payroll
expenses) will be paid. The Operating Account funds during any calendar
month are restricted to payments equal to or less than the monthly budget
amounts during the remaining term of the Forbearance Period. In addition,
under the Second Amendment, the Company must establish a separate payroll
account with Bank of America. Upon a Termination Event, Bank of
America may use
any funds in the Operating Account to offset the amount owed under the
Credit Facility.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 September 30, 2001, the Companys interest
rate on the Credit Facility is
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents





| |  | approximately 8.5%. 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
September 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 8.5% 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 Hunt and Hunt LLLP,
and by the collateral previously pledged by the Company to Bank of America
under the Credit Facility.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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, and
the Company has no further obligations under 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 Hunt.
As of September 30, 2001 and December 31, 2000, the interest rate is based
on the Index Rate with a resulting rate of
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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##### Table of Contents





| |  | approximately 8.5% 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 $105,963 and
$49,330 are recorded as contra-equity in the consolidated balance
sheets as
of September 30, 2001 and December 31, 2000, respectively. Under the terms
of the Forbearance Agreement, as of September 30, 2001, the Company has
received $300,000 from Hunt as payment on the Shareholder Bridge Loan
and has paid that amount to reduce the amount outstanding under the Bridge
Loan. In addition, Hunt paid approximately $426,000 directly to Bank of
America, which was applied against the Bridge Loan (and which the Company
applied to the Shareholder Bridge Loan) by the Company, which satisfied 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
$162,041 and $141,772 as of September 30, 2001 and December 31, 2000,
respectively. The notes require annual payments of interest at 8% beginning
on September 28, 1997. The notes were amended in September 2001 and are
now due December 31, 2002.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2001, the Company
terminated its distribution agreement with Possis Medical, Inc. (Possis) in connection
with settling ongoing litigation with Possis. See Part II, Item 1 contained
in the Companys Form 10-Q for the period ending June 30, 2001. As of March 31, 2001 and December 31, 2000, the
Company had accrued for expected product returns related to Possis
and had
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 September 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 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

13



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##### Table of Contents





|   |  | 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. Should a contingent payment be earned for the
third anniversary year, the payment will be due December 15, 2001. However,
the terms of the Forbearance Agreement prohibit the Company from making the
payment and, therefore, the Company 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.
Effective November 15, 2001, the Exclusive Distributor Agreement
between Stepic and Pall Medical Companies (Pall) will be
terminated. As part of the termination, Stepic will be permitted to
sell the Pall Critical Care products through November 14, 2001
and the Pall Blood products through January 15, 2002. In
addition, Stepic has the right to return for credit all remaining Pall inventory
within 30 days of the last permitted sale date.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
$605,000 and $689,000 as of September 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 September 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Pursuant to the IFM asset purchase agreement, the Second Installment
in the amount of $220,366.80 was due from the purchaser to the
Company on September 30, 2001. As of the date of this filing,
the Second Installment has not been paid and the purchaser has sought
indemnification under the asset purchase agreement for the Companys alleged breach of its representations
and warranties set forth in the agreement. On September 24,
2001, the Company filed a Complaint for Declaratory Judgment and
Breach of Contract against the purchaser in the Superior Court of
Fulton County in the State of Georgia. See Part II. Item 1.
contained elsewhere in this Form 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | 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
nine months ended September 30, 2001 and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

14



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##### Table of Contents



|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ------------------ |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Nine Months Ended 
|              |  | September 30, 2001 |            | September 30, 2001
|              |  |                    |            |                   
|              |  | Sales              |            | Gross Profit       |  | Sales |           | Gross Profit
|              |  |                    |            |                    |  |       |           |             
|Manufacturing |  | $                  | 5,564,436  |                    |  | $     | 2,742,568 |              |  | $ | 19,162,231 |  |  | $ | 10,187,970 | 
|             
|             
|             
|             
|Distribution  |  |                    | 8,978,537  |                    |  |       | 1,620,350 |              |  |   | 27,775,724 |  |  |   | 5,207,786  | 
|             
|             
|             
|             
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 
|              |  | $                  | 14,542,973 |                    |  | $     | 4,362,918 |              |  | $ | 46,937,955 |  |  | $ | 15,395,756 | 
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 

|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ------------------ |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Nine Months Ended 
|              |  | September 30, 2000 |            | September 30, 2000
|              |  |                    |            |                   
|              |  | Sales              |            | Gross Profit       |  | Sales |           | Gross Profit
|              |  |                    |            |                    |  |       |           |             
|Manufacturing |  | $                  | 7,127,052  |                    |  | $     | 3,583,882 |              |  | $ | 21,215,688 |  |  | $ | 10,369,061 | 
|             
|             
|             
|             
|Distribution  |  |                    | 10,006,226 |                    |  |       | 1,978,822 |              |  |   | 31,281,466 |  |  |   | 6,340,027  | 
|             
|             
|             
|             
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 
|              |  | $                  | 17,133,278 |                    |  | $     | 5,562,704 |              |  | $ | 52,497,154 |  |  | $ | 16,709,088 | 
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |            | 



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

|                                  |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |            |  
|--------------------------------- |  | ------------------ | ---------- | ----------------- |  | ------------- | ---------- | ------------- |  | - | ---------- | - |  | - | ---------- | -
|                                  |  | Three Months Ended |            | Nine Months Ended
|                                  |  |                    |            |                  
|                                  |  | September 30,      |            | September 30,     |  | September 30, |            | September 30,
|                                  |  | 2001               |            | 2000              |  | 2001          |            | 2000         
|                                  |  |                    |            |                   |  |               |            |              
|Total segment sales               |  | $                  | 14,542,973 |                   |  | $             | 17,133,278 |               |  | $ | 46,937,955 |   |  | $ | 52,497,154 |  
|                                 
|                                 
|                                 
|                                 
|Elimination of intersegment sales |  |                    | (571,390   | )                 |  |               | (1,018,009 | )             |  |   | (1,476,490 | ) |  |   | (2,918,145 | )
|                                  |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |            |  
|Consolidated sales                |  | $                  | 13,971,583 |                   |  | $             | 16,115,269 |               |  | $ | 45,461,465 |   |  | $ | 49,579,009 |  
|                                  |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |            |  

|                                         |  |                    |           |                   |  |               |           |               |  |   |            |  |  |   |            |  
|---------------------------------------- |  | ------------------ | --------- | ----------------- |  | ------------- | --------- | ------------- |  | - | ---------- |  |  | - | ---------- | -
|                                         |  | Three Months Ended |           | Nine Months Ended
|                                         |  |                    |           |                  
|                                         |  | September 30,      |           | September 30,     |  | September 30, |           | September 30,
|                                         |  | 2001               |           | 2000              |  | 2001          |           | 2000         
|                                         |  |                    |           |                   |  |               |           |              
|Total segment gross profit               |  | $                  | 4,362,918 |                   |  | $             | 5,562,704 |               |  | $ | 15,395,756 |  |  | $ | 16,709,088 |  
|                                        
|                                        
|                                        
|                                        
|Elimination of intersegment gross profit |  |                    | (47,534   | )                 |  |               | (23,733   | )             |  |   | 150,776    |  |  |   | (27,398    | )
|                                         |  |                    |           |                   |  |               |           |               |  |   |            |  |  |   |            |  
|Consolidated gross profit                |  | $                  | 4,315,384 |                   |  | $             | 5,538,971 |               |  | $ | 15,546,532 |  |  | $ | 16,681,690 |  
|                                         |  |                    |           |                   |  |               |           |               |  |   |            |  |  |   |            |  



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

|                                        |                      |   |                    |            |                   |   |            |            | 
|--------------------------------------- | -------------------- | - | ------------------ | ---------- | ----------------- | - | ---------- | ---------- | 
|                                        |                      |   | September 30, 2001 |            | December 31, 2000
|                                        |                      |   |                    |            |                  
|Manufacturing                           |                      | $ | 38,514,499         |            |                   | $ | 46,885,864 |           
|                                       
|                                       
|                                       
|                                       
|Distribution                            |                      |   | 35,618,326         |            |                   |   | 39,879,507 |           
|                                        |                      |   |                    |            |                   |   |            |           
|                                        | Total segment assets |   |                    | 74,132,825 |                   |   |            | 86,765,371 | 
|                                       
|                                       
|                                       
|                                       
|Elimination of intersegment receivables |                      |   | (2,356             | )          |                   |   | (37,954    | )         
|                                        |                      |   |                    |            |                   |   |            |           
|                                        | Consolidated assets  |   | $                  | 74,130,469 |                   |   | $          | 86,727,417 | 
|                                        |                      |   |                    |            |                   |   |            |           

15



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##### Table of Contents



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 nine months ended September 30, 2001 and 2000, is as follows:

|              |  |                    |            |                   |  |      |            |      |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Nine Months Ended
|              |  | September 30,      |            | September 30,    
|              |  |                    |            |                  
|              |  | 2001               |            | 2000              |  | 2001 |            | 2000
|              |  |                    |            |                   |  |      |            |      |  |   |            |  |  |   |            | 
|United States |  | $                  | 13,536,555 |                   |  | $    | 15,171,999 |      |  | $ | 43,915,100 |  |  | $ | 46,975,405 | 
|             
|             
|             
|             
|Foreign       |  |                    | 435,028    |                   |  |      | 943,270    |      |  |   | 1,546,365  |  |  |   | 2,603,604  | 
|              |  |                    |            |                   |  |      |            |      |  |   |            |  |  |   |            | 
|              |  | $                  | 13,971,583 |                   |  | $    | 16,115,269 |      |  | $ | 45,461,465 |  |  | $ | 49,579,009 | 
|              |  |                    |            |                   |  |      |            |      |  |   |            |  |  |   |            | 



|9. |  | Liquidity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As of September 30, 2001,
the Company was in default under the Forbearance
Agreement entered into on March 30, 2001 with Bank of America due to
violation of certain of its financial covenants contained in the Forbearance
Agreement. Effective October 15, 2001, the Company entered into the Second
Amendment to Forbearance Agreement, which amended certain terms of the
Forbearance Agreement. The terms of the Second Amendment are described in
detail in Note 4 to the interim condensed consolidated financial statements
contained elsewhere in this Form 10-Q.                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Second Amendment reduced the Working Capital Sublimit to $5,000,000 and
limited the Working Capital Loan to the smaller of the Working Capital
Sublimit or an amount equal to the Borrowing Base, as defined in the Credit
Facility. The Second Amendment also removed several of the financial
covenants previously contained in the Forbearance Agreement, including
minimum net worth, debt service coverage, leverage, interest coverage and
minimum EBITDA and added the following financial requirements: (i) the
actual expenses of the Company paid in a given calendar month must not exceed
the budgeted expenses by more than 10%; (ii) the actual income of the
Company in a given calendar month must not fall below the budgeted income by
more than 10%; and (iii) the Companys Borrowing Base at any time must not
decline by more than 10% below the Companys Borrowing Base as of October
23, 2001.
|  
|   |  | In addition, under the Second Amendment, the Company must maintain a general
operating account with Bank of America (the Operating Account), from which
all loan proceeds will be deposited and all expenses (except payroll
expenses) will be paid. The Operating Account funds during any calendar
month are restricted to payments equal to or less than the monthly budget
amounts during the remaining term of the Forbearance Period. In addition,
under the Second Amendment, the Company must establish a separate payroll
account with Bank of America. Upon a Termination Event, the Lender may use
any funds in the Operating Account to offset the amount owed under the
Credit Facility.                                                                                                                                                                                                                    
|  
|   |  | In order to maintain liquidity, the Company is making efforts to refinance
its loan outstanding to Bank of America and to obtain an equity
infusion in the Company. Additionally the Company is required under the terms of
the Second Amendment to engage an investment banking firm by December 15,
2001 to begin marketing the sale of the assets of the Company if the loan is
not paid off by the Termination Date. The uncertainty inherent in
refinancing its debt by January 15, 2002 raises substantial doubt as to the
Companys ability to continue as a going concern.                                                                                                                                                                                                                                                                                                                                         

16



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##### Table of Contents






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

Results of Operations

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

Net Sales.Net sales decreased 13.3% to $14 million for the third quarter
of 2001 from $16.1 million for the third 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
third quarter of 2001 due to changes at the manufacturer level in both
technology and market place conditions as well as the events that occurred in
New York on September 11, 2001. The allocation of net sales on a segment basis
for the three months ended September 30, 2001 resulted in net sales of $5.6
million from the manufacturing segment and $9 million from the distribution
segment, before intersegment eliminations. The allocation of net sales on a
segment basis for the three months ended September 30, 2000 resulted in net
sales of $7.1 million from the manufacturing segment and $10 million from the
distribution segment, before intersegment eliminations.

Gross Profit.Gross profit decreased 22.1% to $4.3 million for the third
quarter of 2001 from $5.5 million for the third quarter of 2000. Gross margin
decreased to 30.9% in the third quarter of 2001 from 34.4% in the third quarter
of 2000. The decrease in gross margin is the result of loss of margin at the
distribution segment as well as distribution sales, which generate a lower gross
margin, comprising a larger percentage of total sales in the third quarter of
2001 compared to the third quarter of 2000. The allocation of gross profit
between segments for the three months ended September 30, 2001 resulted in gross
profit of $2.7 million from the manufacturing segment and $1.6 million from the
distribution segment, before intersegment eliminations. The allocation of gross
profit between segments for the three months ended September 30, 2000 resulted
in gross profit of $3.6 million from the manufacturing segment and $2 million
from the distribution segment, before intersegment eliminations.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $43,000 or 1% to
approximately $5.1 million for the third quarter of 2001 compared with $5
million for the third quarter of 2000. This increase is substantially due to
expenses in the third quarter of 2001, which consist of product development
costs, turnaround consulting fees, PR campaign fees and severances offset by
lower salaries, professional fees, and amortization expense in the third quarter
2001 as compared to the third quarter 2000. SG&A expenses increased as a
percentage of net sales to 36.3% for the third quarter of 2001 from 31.2% for
the third quarter of 2000. This increase is primarily due to decreased sales in
the third quarter of 2001 from the third quarter of 2000.

Interest Expense.Net interest expense decreased to approximately $1.1
million in the third quarter of 2001 compared to approximately $1.5 million in
the third quarter of 2000. The decrease in 2001 is due to lower debt outstanding
during the third quarter of 2001 compared to the third quarter of 2000 as well
as lower interest rates under the Companys Credit Facility in the third quarter
of 2001.

Income Tax Expense.The Company generated an income tax benefit of
approximately $752,000 during the third 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 third
quarter of 2001 and the year ending December 31, 2000 and the forecasted taxable loss for the year
ending December 31, 2001. The third quarter 2000 income tax benefit of
approximately $303,000 was a result of the pretax loss during the third quarter
of 2000 of approximately $1 million.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000

Net Sales.Net sales decreased 8.3% to $45.5 million for the nine months
ended September 30, 2001 from $49.6 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 nine
months ended September 30, 2001 due to changes at the manufacturer level in both
technology and market place conditions as well as the events that occurred in
New York on September 11, 2001. The allocation of net sales on a segment basis
for the nine months ended September 30, 2001 resulted in net sales of $19.2
million from the manufacturing segment and $27.8 million from the distribution
segment, before intersegment eliminations. The allocation of net sales on a
segment basis for the nine months ended September 30, 2000 resulted in net sales
of $21.2 million from the manufacturing segment and $31.3 million from the
distribution segment, before intersegment eliminations.

Gross Profit.Gross profit decreased to $15.5 million for the nine months
ended September 30, 2001 from $16.7 million for the same period

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in 2000. Gross
margin increased to 34.2% in the nine months ended September 30, 2001 from 33.6%
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 nine months ended September 30, 2001 resulted in gross profit
of $10.2 million from the manufacturing segment and $5.2 million from the
distribution segment, before intersegment eliminations. The allocation of gross
profit between segments for the nine months ended September 30, 2000 resulted in
gross profit of $10.4 million from the manufacturing segment and $6.3 million
from the distribution segment, before intersegment eliminations.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $1.3 million or 8.7% to
approximately $15.7 million for the nine months ended September 30, 2001
compared with $14.4 million for the nine months ended September 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 34.5% for the nine
months ended September 30, 2001 from 29.1% 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 $3.5
million in the nine months ended September 30, 2001 compared to approximately $4
million in the nine months ended September 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.

Income Tax Expense.The Company recorded an income tax benefit of
approximately $1.4 million during the nine months ended September 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 nine months ended September 30, 2001 as well as
during the year ending December 31, 2000 and the
forecasted taxable loss for the year ending December 31, 2001. The nine-month
period ended September 30, 2000 income tax benefit of approximately $445,000 was
a result of the pretax loss during 2000 of approximately $1.7 million.

Liquidity and Capital Resources

Net cash provided by operating activities was $1.8 million for the nine months
ended September 30, 2001 compared with approximately $1.9 million for the nine
months ended September 30, 2000. The slight decrease in cash provided by
operations during 2001 compared to 2000 was primarily attributable to lower
reductions in accounts payable and accrued expenses offset by reductions in
accounts receivable, inventories and income tax receivable. 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 September 30, 2001, the two
distributors have complied with the restructuring terms.

Net cash provided by (used in) investing activities was $2.3 million for the
nine months ended September 30, 2001 compared to ($1.2 million) for the nine
months ended September 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 financing activities was approximately $3.5 million for the
nine months ended September 30, 2001 compared to approximately $2 million for
the nine months ended September 30, 2000. Financing activities in both 2001 and
2000 consisted primarily of principal payments on outstanding debt attributable
to depository funds of approximately $50.1 million and $8.2 million in 2001 and
2000, respectively, 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 in 2001 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, in 2001, the Company made principal payments of $675,000 and $300,000
(the Bridge Loan payments) on its Credit Facility, both pursuant to the terms of
the Forbearance Agreement. The payments for both years were offset by cash
proceeds issued to the Company of approximately $51.3 million
and $5.5 million
in 2001 and 2000, respectively, from Bank of America under the same sweep
arrangement.

As discussed more fully in Note 4 of the Companys interim condensed
consolidated financial statements included in this Form 10-Q, effective March
30, 2001, the Company entered into a Forbearance Agreement and a First Amendment
to Forbearance Agreement (collectively, the Forbearance Agreement) with Bank
of America, N.A. (Bank of America) wherein Bank of America agreed to forbear
from exercising its rights and remedies allowed under a $50 million amended and
restated credit facility (the Credit Facility)

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due to certain defaults. The
Companys Credit Facility contained certain restrictive covenants that required
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 placed 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 as provided for in the Forbearance Agreement.
Revised restrictive covenants were set in the Forbearance Agreement, and the
Company was not in compliance with certain of those covenants as of September
30, 2001, including minimum net worth, debt service coverage, leverage and
minimum EBITDA. As a result, the Company was in default of the Credit Facility
under the terms of the Forbearance Agreement.

Effective October 15, 2001, the Company entered into a Second Amendment to the
Forbearance Agreement (the Second Amendment) as a result of defaults under the
terms of the Forbearance Agreement as of September 30, 2001. The Second
Amendment amended the terms of the Forbearance Agreement as follows: (i) changed
the termination date of the Forbearance Agreement (the Termination Date) from
March 31, 2002 to January 15, 2002 (the period from March 30, 2001 through
January 15, 2002 being defined as the Forbearance Period); (ii) the Company
must maintain a general operating account with Bank of America and the use of
funds in an calendar month shall be restricted to payments equal to or less than
the monthly budget submitted to Bank of America as part of the Second Amendment;
(iii) the Company will pay any accrued or unpaid interest (but not principal) on
the amounts outstanding under the credit facility on the first day of each month beginning November 1, 2001 and each
month thereafter during the Forbearance Period, and interest will continue to
accrue at the Bank of America Prime Rate plus two and one-half percent (2.5%)
per annum; and (iv) the Company must furnish to Bank of America certain reports
which include: (a) a weekly Borrowing Base Calculation, as defined in the Credit
Facility; (b) collections status reports, accounts receivable, cash on hand and
cash expenditures with copies of invoices twice a month; (c) weekly and monthly
income and expense statements comparing actual to budget; (d) a monthly report
listing inventory and equipment by location; (e) monthly
financial statements as
required under the Credit Agreement; and (f) monthly detail of accounts
receivable and aged trial balance.

The Second Amendment also amended the Termination Events as defined in the
Forbearance Agreement to include the following: (i) the Company fails to execute and deliver
or to cause Hunt and Hunt LLLP to execute and deliver within 10 days
from the effective date of the Second Amendment a pledge to Bank of America of
all the stock owned by Hunt and documentation to amend the current
Pledge Agreement between Hunt, Hunt LLLP and the Company. The
pledge documents will be held in escrow and will be released only in the event
that Hunt interferes with the daily operations of the Company
determinable at Bank of Americas discretion at any point prior to January 1, 2005;
(ii) the Company fails to engage and hire within five days from the effective
date of the Second Amendment competent crisis and turn around management and a
new Chief Executive Officer who shall report directly to the independent members
of the Companys Board of Directors; (iii) the Company
fails to provide Bank of America
within five days from the effective date of the Second Amendment a copy of
resolutions confirming Hunts resignation as an officer and director of
the Company and that no further salary or bonuses shall be paid to Hunt;
(iv) the Company fails to make efforts to refinance the amounts
outstanding under the Credit Facility and fails to
provide weekly status reports; (v) on or before December 15, 2001, the Company
fails to provide Bank of America evidence that the Company has engaged an investment
banking firm to begin marketing the sale of the assets of the Company if the
amounts outstanding under the Credit Facility are not paid off by the Termination Date; or (vi) the Company fails to
execute and deliver to Bank of America within 24 hours of Bank of
Americas request order consenting to the appointment of a Receiver in the event of a Termination
Event. As of the date of this filing, none of such Termination Events has
occurred.

In addition, the Second Amendment reduced the Working Capital Sublimit to
$5,000,000 and limited the Working Capital Loan to the smaller of the Working
Capital Sublimit or an amount equal to the Borrowing Base, as defined in the
Credit Facility. The Second Amendment also removed several of the financial
covenants previously contained in the Forbearance Agreement, including minimum
net worth, debt service coverage, leverage, interest coverage and
minimum EBITDA,
and added the following financial requirements: (i) the actual expenses of
Company paid in a given calendar month must not exceed the budgeted expenses by
more than 10%; (ii) the actual income of the Company in a given calendar month
must not fall below the budgeted income by more than 10%; and (iii) the
Companys Borrowing Base at any time must not decline by more than 10% below the
Companys Borrowing Base as of October 23, 2001.

The Second Amendment became effective upon the satisfaction by the Company of
certain conditions, which included payment for unreimbursed Bank of
Americas attorneys
fees and expenses, Bank of Americas title insurance fees and accrued interest on the
amounts outstanding under the Credit Facility through October 1, 2001.

The Forbearance Agreement provides for the 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

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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 of the Companys Interim
Condensed Consolidated Financial Statements in this Form 10-Q).

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. The
installments due on May 31, 2001 and August 31, 2001 under the Bridge Loan were
paid. The Forbearance Agreement also provides for a forbearance and
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 September 30, 2001 and December 31, 2000, $3,901,139 and $2,561,661,
respectively, was outstanding under the Working Capital Loans and $36,517,539
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 September 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 September 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).

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.

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 September 30, 2001 and December 31, 2000, the Companys
interest rate was 8.5% and 11.0062%, respectively. The total balance outstanding
under the Credit Facility was approximately $43 million and $42.9 million at September
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 September 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 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). Under the terms of the Forbearance Agreement, as of
September 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, the CEO paid approximately
$426,000 directly to Bank of America, which was applied against the Bridge Loan
(and which the Company applied to the Shareholder Bridge Loan) by the Company,
which satisfied the second payment due by the Company on August 31, 2001.

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 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. Under the

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Second Amendment, the Company must maintain a general operating account with
Bank of America (the Operating Account), from which all loan proceeds will be
deposited and all expenses (except payroll expenses) will be paid. The Operating
Account funds during any calendar month are restricted to payments equal to or
less than the monthly budget amounts during the remaining term of the
Forbearance Period. In addition, under the Second Amendment, the Company must
establish a separate payroll account with Bank of America. Upon a termination
Event, Bank of America may use any funds in the Operating Account to offset the
amount owed under the Credit Facility.

In order to maintain liquidity, the Company is
making efforts to refinance the Credit Facility with Bank of America
and to obtain an equity infusion in the Company. Additionally the
Company is required under the terms of the
Second Amendment to engage an investment banking firm by December 15, 2001 to
begin marketing the sale of the assets of the Company if the amounts
outstanding under the Credit Facility are not paid
off by the Termination Date. The uncertainty inherent in refinancing its debt
by January 15, 2002 raises substantial doubt as to the Companys ability to
continue as a going concern.

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 flows 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, and the Companys inability to comply with
the financial covenants set forth in the Forbearance Agreement. The Companys
inability to negotiate an amendment to the Forbearance Agreement in order to
adjust the financial covenants and the Companys inability to
refinance its debt, sell its assets or renegotiate the Forbearance
Agreement. 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 September 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 March 30, 2001, the Company and Vascutech Acquisition, LLC (Vascutech)
entered into an asset purchase agreement (the IFM Agreement) whereby the
Company sold to Vascutech the IFM product line and related assets. Pursuant to
the IFM Agreement, the second installment of the purchase price in the amount of
$220,366.80 (the Second Installment) was due from Vascutech to the Company on
September 30, 2001. On September 7, 2001, LeMaitre Vascular, Inc. (formerly
known as Vascutech, Inc.) (LeMaitre) sent a letter to the Company seeking
indemnification under the IFM Agreement in an amount equal to $800,000 for the
Companys alleged breach of its representations and warranties set forth in the
IFM Agreement. The Company responded to LeMaitre by letter on September 19,
2001, notifying LeMaitre of the Companys position that it had not breached the
IFM Agreement and indicating that the Company expected receipt of the Second
Installment on September 30, 2001. On September 24, 2001, the Company filed a
Complaint for Declaratory Judgment and Breach of Contract against LeMaitre and
Vascutech in the Superior Court of Fulton County in the State of Georgia. The
Company has requested (i) judgment in the amount of $220,366.80, the amount owed
to the Company under the IFM Agreement; and (ii) that the Court declare that the
Company has not breached the representations and warranties in the IFM Agreement
and that its obligations under the IFM Agreement have been fully satisfied. On
November 8, 2001, LeMaitre filed its Answer to the Complaint, denying both the
breach of contract claim and the grounds for the Companys request for a
declaratory judgment. LeMaitre also filed a counterclaim against the Company for
breach of contract, fraud and deceit, and punitive damages. LeMaitre seeks in
excess of $800,000 in actual damages.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a)  As of
October 15, 2001, the Company entered into a Second Amendment to the Forbearance
Agreement with Bank of America relating to the Credit Facility. The Credit Facility,
as amended, currently prohibits the payment of dividends on the Companys capital
stock and also restricts the Companys capital expenditures.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

(a)  Effective March 30, 2001,
the Company entered into a Forbearance Agreement and a First
Amendment to Forbearance
Agreement with Bank of America, wherein Bank of America agreed to forbear from
exercising its rights and remedies allowed under the Companys Credit Facility due
to certain defaults. The Companys Credit Facility contained certain restrictive
covenants that required 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 placed 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 as provided for in the Forbearance
Agreement. Revised restrictive covenants were set in the Forbearance Agreement, and the
Company was not in compliance with certain of those covenants as of September 30, 2001,
including minimum net worth, debt service coverage, leverage and minimum EBITDA. As a result,
the Company was in default of the Credit Facility under the terms of the Forbearance Agreement.
Effective October 15, 2001, the Company entered into a Second Amendment to the
Forbearance Agreement as a result of defaults under the terms of the Forbearance
Agreement as of September 30, 2001.

As of September 30, 2001, the total
amount outstanding under the Credit Facility was approximately $40.4 million. In addition,
the Company has outstanding letters of credit of approximately $2.4 million, which
collateralize the Companys obligations to third parties in connection with a 1998 acquisition.
The total amount outstanding under the Bridge Loan is $174,000, plus accrued unpaid interest
since August 30, 2000. As of September 30, 2001, the Company has classified
the Credit Facility as due in 2002 in accordance with the terms of the Forbearance Agreement,
as amended by the Second Amendment.

See Notes 4 and 5 to the Companys
unaudited interim condensed consolidated financial statements included in this Form
10-Q and the Liquidity and Capital Resources section in Item 3 of Part I for further
discussion regarding the Forbearance Agreement, the Second Amendment and the
Companys defaults under the Credit Facility and the Bridge Loan.

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

(a)  Exhibits

|               |  |                                                                                                                                       |  |  |  | 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Description                                                                                                                           |  |  |  | 
|               |  |                                                                                                                                       |  |  |  | 
|10.1           |  | Second Amendment to Forbearance Agreement, dated as of October 15, 2001, by and between the Company and Bank of America, N.A.        
|              
|              
|              
|              
|10.2           |  | Amendment to Promissory Notes, dated as of September 24, 2001, by and between the Company and Marshall B. Hunt                       
|              
|              
|              
|              
|10.3           |  | Amendment to Promissory Notes, dated as of September 24, 2001, by and between the Company and William E. Peterson, Jr.               
|              
|              
|              
|              
|10.4           |  | Amendment to Employment Agreement, dated as of September 24, 2001, by and between the Company and Marshall B. Hunt                   
|              
|              
|              
|              
|10.5           |  | Amendment to Employment Agreement, dated as of October 23, 2001, by and between the Company and Marshall B. Hunt                     
|              
|              
|              
|              
|10.6           |  | Amendment to Employment Agreement, dated as of September 24, 2001, by and between the Company and William E. Peterson, Jr.           
|              
|              
|              
|              
|10.7           |  | Escrow Letter Agreement, dated as of October 26, 2001, by and between Marshall B. Hunt and Bank of America, N.A.                     
|              
|              
|              
|              
|10.8           |  | Escrow Letter Agreement, dated as of October 26, 2001, by and between Hunt Family Investments, L.L.L.P. and Bank of
America, N.A.    
|              
|              
|              
|              
|10.9           |  | Securities Pledge Agreement, dated as of October 26, 2001, by and between Marshall B. Hunt and Bank of America, N.A.                 
|              
|              
|              
|              
|10.10          |  | Securities Pledge Agreement, dated as of October 26, 2001, by and between Hunt Family Investments, L.L.L.P. and Bank of
America, N.A.
|              
|              
|              
|              
|10.11          |  | Limited Guaranty of Marshall B. Hunt, dated as of October 26, 2001                                                                   
|              
|              
|              
|              
|10.12          |  | Limited Guaranty of Hunt Family Investments, L.L.L.P., dated as of October 26, 2001                                                  

(b)  Reports on Form 8-K

The Company did not file any reports on
Form 8-K during the quarter
ended September 30, 2001.

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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)                                                        |  |  |  | 
|                 
|                 
|November 14, 2001 |  | /s/ William E. Peterson, Jr.                                        |  |  |  | 
|                  |  |                                                                     |  |  |  | 
|                  |  | President (Principal Financial Officer and
Duly Authorized Officer) |  |  |  | 

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