Horizon Medical Products, Inc

Horizon Medical Products, Inc. HMP (Amex)

$1.47

December 12, 2003

BUY

Intermediate Term Target Price Estimates

Growth Rate in Next Few Years 30 35 40 45

Optimistic Forecast $1.90 $2.10 $2.40 $2.70

Base Forecast $1.40 $1.60 $1.90 $2.10

Pessimistic Forecast $1.10 $1.20 $1.40 $1.50

Quarterly and Annual EPS Reported and Estimated EPS

FY Ends December Estimated 2003 Shares Outstanding: 43.4 Million

Fiscal Year 2001 2002 2003E 2004 E

March -0.03 0.05 -0.02 0.00

June -0.10 -0.02 -0.01 0.01

September -0.14 0.17 0.00 0.01

December -0.11 -0.07 0.00 0.01

Annual -0.38 1.26 -0.03 0.03

(This report may not be reproduced.)

Cohen Independent Research Group, Inc.

HORIZON MEDICAL HMP Exchange AMEX

Fiscal Year 12/2002 Last Report Date 10/28/2003Industry MED/DENTAL-SUPP Next Report Date 02/19/2004

1.5 Sales - LTM $26.06PE - Next 12 mth consensus Frc 1.5 Sales Growth - LTM

Mkt Cap $54.3 EPS Growth - LTMDividend Payout Rate 0.0% EBITDA Growth - LTM 120.3%

Dividend Yield Dividend Growth - LTM

Share Data & Employees Latest Sell-Side Target Prices LatestDiluted Shares Outstanding (mil) 36.20 Mean Short Term Target Price (6-12mths) 2.85Number of Employees 143 # of Analysts in Price Target Consensus 1Price & Volume ( USD ) Today Price Related ( USD ) TodayPrice 1.50 Market Capitalization 54.295Price Date 5-Dec-03 Price to Free Cash Flow (LTM)12M High (closing price) 1.82 Price to Sales (LTM) 2.0812M Low (closing price) 0.35 Price/Book (common equity) 3.7752 Week % Price Change 200.00 Price/Tangible Book ValueDaily Average Volume (20 days) 52,690 P/E using 12 mo. forward EPS Estimate 85.7Daily Average Volume (1.5 years) 22,700 P/E using LTM Diluted EarningsFinancial Strength Today P/E 12 month - 5 year Average 0.0Quick Ratio 1.70 Per Share ( US$ ) LatestCurrent Ratio 3.13 LFY Basic EPSLT Debt/Equity 120.7% LFY Diluted EPSTotal LT Liab/Total Capital 52.3% LFY Diluted EPS (before non-recurr)Profitability Ratios LFY & Latest Qtr Sales per Share (LTM) 0.72Operating Margin - LFY Book Value per Share - (latest Qtr) 0.40Net Margin - LFY Tangible Book Value Per Share Operating Margin - Latest Quarter 1.39% Tangible Assets per Share 0.40Net Margin - Latest Quarter 0.93% Cash per Share (latest Qtr) 0.05Income Statement - LTM Latest 12 Months Free Cash Flow per Share (LTM)Revenue -LTM 26.06 Management LTM Data EBITDA Margin -LTM 2.42% ROE - Most Recent 12 months (%)Pretax Earnings - LTM ROI - Most Recent 12 months (%) 0.7%Net Income -LTM ROA - Most Recent 12 months (%) 0.7%Net Income, Excl Extra. Items Balance Sheet (USD) LatestDiluted EPS -LTM Cash 2.0Income Statement - Latest Qtr Sep-03 Tangible Assets 15.2Revenues - Latest Qtr 7.55 Total Assets 37.2EBITDA Margin -Latest Qtr 9.1% Ownership LatestPretax Earnings - Latest Qtr 0.070 Institutions Own % Shares Out 14.0%Net Income 0.073 Insiders Own % Shares Out 50.3%Diluted EPS -Latest Qtr $0.00 Short Interest (latest month) 6,403Dividend Per Share $0.00 Short Interest (1 month ago) 6,740Dividend Yield 0.00% % Change Short Interest - 1 Month

Short Ratio 0.042

Please Insert One Year Chart with Volume.

Horizon Medical Products, Inc. manufactures and markets vascular access products. Their oncology product lines include implantable ports, tunneled central venous catheters, and stem cell transplant catheters. They have a line of acute and chronic dialysis catheters and immediate access hemodialysis grafts and a specialty line of embolectomy balloon catheters, carotid balloon shunts and occlusion balloon products. They also distribute devices used in surgery, radiology, anesthesiology, respiratory therapy, and blood filtration and critical care settings.

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TABLE OF CONTENTS

THE COMPANY .......................................................................................................................................3

Company History ..................................................................................................................................2 Table 1: Significant Acquisitions and Divestitures....................................................................................... 2

Shift in Focus from Distribution to Proprietary Products .......................................................................2 Co-Promotion Agreement with Medtronic .............................................................................................2

The Vascular Access Product Industry and Competition ................................................................................. 3 Table 2: Domestic Competition Estimates .................................................................................................. 3

MARKETING ............................................................................................................................................3 Table 3: Customers/End Users ................................................................................................................... 4

Trends Impacting the Vascular Access Product Industry .....................................................................4 Healthcare Industry...............................................................................................................................4 Manufacturing Facility ...........................................................................................................................5 Recent Quarter .....................................................................................................................................5

Table 4: Revenues by Product Line ............................................................................................................ 6 Table 5: Percent of Total Revenues............................................................................................................ 6 Table 6: Percentage of Total Non-Distribution Revenues........................................................................... 6

Growth Rates ........................................................................................................................................6 Table 7: Growth Rates................................................................................................................................. 7

Historical Growth and Projected Growth Rates ................................................................................................ 7 Chart 1: Historical Quarterly Year/Year Growth ........................................................................................... 7 Chart 2: Future Quarterly Year/Year Growth............................................................................................... 8

Earnings Forecast............................................................................................................................................. 8 Table 8: Earnings Forecast ......................................................................................................................... 8

Valuation ........................................................................................................................................................... 8 Table 9: Five-Year Forecast Growth Assumptions...................................................................................... 9 Chart 3: Price Targets for 3 Scenarios Based on Y+5 Growth Rate........................................................... 9 Table 10: Base Target Prices .................................................................................................................... 10

Bull Case.............................................................................................................................................10 Bear Case ...........................................................................................................................................10

THE SCIENCE BEHIND THE PRODUCTS............................................................................................11 What Are Ports and Catheters? ..........................................................................................................11

Figure 1: Placement of Central Venous Port and Catheter....................................................................... 11 Implantable Vascular Access Ports ................................................................................................................ 12

Figure 2: HMP’s Implantable Vascular Access Ports ................................................................................ 12 Table 11: Complications Using a Vortext Port -vs- Conventional Ports in Cancer Patients ..................... 13

Implantable Vascular Access Catheters ......................................................................................................... 14 Figure 3: HMP’s Implantable Vascular Access Catheters......................................................................... 14 Figure 4: Model of LifeJet™ Chronic Hemodialysis/Apheresis Catheter .................................................. 14 Figure 5: The LifeGuard™ Safety Infusion Set ......................................................................................... 15

The SyncroMed® and IsoMed® Implantable Delivery Systems....................................................................... 15 Figure 6: The SynchroMed® EL Pump with a Screened Catheter Access Port ....................................... 16 Figure 7: Representation of Intrathecal Drug Delivery with the SynchroMed® Infusion System............... 16 Table 12: Results of Pain Management with and without Intratecal Drug Delivery System (IDDS) ......... 17 Figure 8: Cutaway view of the IsoMed® Pump ......................................................................................... 18 Figure 9: Representation of the IsoMed® Constant-Flow Infusion System for HAI................................... 18 Chart 4: Proportion of Tumor Responses Among 143 Percents............................................................... 19 Chart 5: Median Time to Progression Among 143 Percents..................................................................... 19

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COMPETITION.......................................................................................................................................19 CAPITALIZATION..................................................................................................................................21

Figure 10: Long-Term Debt, Equity -vs- LTD/Equity ................................................................................. 22 Capitalization Covenants ....................................................................................................................22

SHARES OUTSTANDING......................................................................................................................22 Percentage of Common Stock ............................................................................................................23

Table 13: Percentage of Common Stock .................................................................................................. 23 LEGAL PROCEEDINGS ........................................................................................................................23

A Review of HMP Growth Drivers.......................................................................................................24 Table 14: Growth Driver Metrics, Annual and Quarterly............................................................................. 24

CASH FLOW ANALYSIS.......................................................................................................................24 Table 15: Top-Down Cash Flow................................................................................................................ 25 Chart 6: LTM Cash Flow per Share & EPS ............................................................................................... 25

An Argument for Share Price Increase: NCFO vs. EPS. ...................................................................25 Chart 7: Stock Price vs. Free Cash Flow/Assets....................................................................................... 26

LIQUIDITY AND LEVERAGE.................................................................................................................26 Table 16: Leverage.................................................................................................................................... 26 Chart 8: Leverage, Quarterly ..................................................................................................................... 27 Table 17: Liquidity Performance Metrics ................................................................................................... 27 Chart 9: Quarter DSO, DPO, DIO, Cash Cycle ......................................................................................... 28 Table 18: Liquidity Metrics......................................................................................................................... 29 Chart 10: Liquidity Metrics, Quarterly ........................................................................................................ 29 Chart 11: Liquidity Metrics, Annual............................................................................................................ 30

CONCLUSION........................................................................................................................................30 MANAGEMENT......................................................................................................................................32

HMP Management Team and Board of Directors...............................................................................32 Mr. Marshall B. Hunt – Chairman and Chief Executive Officer....................................................................... 32 Mr. Robert (“Bob”) Wenzel – President and Chief Operating Officer ............................................................. 33 Mr. Bruce Maloy – Vice President of Administration ...................................................................................... 33 Mr. Robert R. Singer – Vice President of Sales.............................................................................................. 34 Mr. Michael J. Fowler – Vice President of Manufacturing .............................................................................. 34 Mr. Anthony David Smith – Vice President of Engineering & New Product Development............................. 34 Mr. Brad Maruca – Director of Marketing........................................................................................................ 34 Ms. Lauren Hart –Oncology Business Manager ............................................................................................. 35 Mr. Kyle Coddington - HAI and Dialysis Product Manger............................................................................... 35 Mr. Scott R. Moeller – Director of Quality Assurance ..................................................................................... 35 Ms. Elaine G. Swygert – Controller................................................................................................................. 36

BALANCE SHEET: HORIZON MEDICAL (HMP)..................................................................................37 CASH FLOW: HORIZON MEDICAL (HMP)..........................................................................................38 MODEL: HORIZON MEDICAL (HMP) ..................................................................................................39

Annual Income Statement...................................................................................................................39 Quarterly Income Statement ...............................................................................................................40 Growth Drivers ....................................................................................................................................41

Chart 12: Forecasted Growth, Annual........................................................................................................ 41 Chart 13: Forecasted Margins, Annual....................................................................................................... 41 Chart 14: Forecast of Expenses, Annual.................................................................................................... 42

Cash Metrics .......................................................................................................................................42 Chart 15: LTM EPS & Cash Flow/EPS...................................................................................................... 42

GLOSSARY............................................................................................................................................43

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HORIZON MEDICAL PRODUCTS (HMP) $1.47 Amex

December 12, 2003

THE COMPANY Horizon Medical Products (HMP) is a medical device company. HMP specializes in the design, manufacture, and marketing of vascular and spinal access systems used in oncology and nephrology.

The company’s implantable vascular access ports, tunneled central venous catheters, and stem cell transplant catheters are used primarily in cancer treatment. Some of the implantable ports feature

We recommend purchasing shares of HMP common, with a target price of $2.10 - $2.40, based on the following:

• The alliance with Medtronic and the success of the IsoMed® product line are expected to drive top line revenues

• Continual introduction of exciting new proprietary products in the next few years • Excellent management • Strong corporate financial structure, the result of HMP’s recapitalization plan • 9/30/03 Quarter reported sequential EBITDA growth of 244% • Medtronic which owns 17% of HMP, signed a second marketing deal. HMP is the exclusive seller of

the pumps (IsoMed®) • The direct sales force of 45 representatives covers the U.S. and are directly involved with the

implantation of products. This provides valuable service to customers and feedback to HMP. • 2004 estimates include $3.6 MM in EBITDA and 35 MM in sales • New product improvements in Port and catheter line • New board, governance • HMP’s Medtronics relationship should drive additional growth in HMP's core product by opening the

door for HMP salespeople into some hospitals they may not have been able to get in otherwise • Sales will be generated via credibility of the partnership and ownership from Medtronics and/or actual

referrals led by the IsoMed® pump.

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HMP’s patented VTX® technology. HMP also markets a complete line of dialysis (indwelling) catheters for use in acute and chronic dialysis for patients with reduced kidney function. A Safety Infusion Set was developed by HMP to prevent potential infection from needle sticks among health care providers. Finally, HMP also co-promotes with Medtronic, Inc. the manufacturer, the IsoMed® and SynchroMed® implantable delivery systems for cancer and pain management.

Company History

Horizon began operations in 1990 as a distributor of medical devices.

• In 1992 the company entered into a collaborative effort with a leading heart valve manufacturer to design and develop a new line of vascular access ports for the company.

• In 1994, the Triumph-1® was introduced. This new vascular access port was initially manufactured by ACT Medical, but since September 2001, it is now manufactured in-house.

• In May 1995, HMP began to distribute the NeoStar Medical® line of hemodialysis catheters.

• In October 1995, HMP acquired the NeoStar Medical ® line.

• In July 1997, the company acquired the port business of Strato/Infusaid. Products acquired include the LifePort® and Infuse-a-Port® vascular access ports and the Infuse-a-Cath® line of catheters.

• In 1998, the company acquired the Vortex®, TitanPort™ and OmegaPort® lines from Norfolk Medical. The company also acquired two device distribution businesses, Columbia Vital Systems (CVS) and Stepic Medical.

• In October 2000, the company purchased the medical device manufacturing assets from Ideas for Medicine (IFM), a wholly owned subsidiary of CyroLife.

• In March 2001, the company sold the IFM business to Vascutech, Inc.

• In September 2002, the company divested the Stepic business.

The following table summarizes HMP’s significant acquisitions and divestitures.

Table 1: Significant Acquisitions and Divestitures

Date Acquisition Price Product/Capability

June 1998

Norfolk Medical Products, Inc. $9.3 million Ports; Enabled port product line expansion

September 1998

Columbia Vital Systems $4.2 million Distributor of medical products; Enabled greater distribution capabilities to the Midwest

September 1998

Ideas for Medicine (Later divested in April 2001)

$15.6 million Catheters, Carotid Shunts, and Ports; Enabled product line expansion

October 1998

Stepic Corporation (Later divested in September 2002 – see below)

$30.0 million Specialty medical products distributor; Enabled greater distribution capabilities to New York city and the Northeast

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The company has also developed exciting new products. In 2000, HMP introduced VTX® technology featured in its Vortex® port, the new LifePort® VTX® titanium and plastic ports, and the new Triumph™ VTX® titanium and plastic ports.

In December 2001, the company introduced a chronic hemodialysis catheter, LifeJet™. In January 2003, the company introduced LifeJet™ F-16. In June 2002, LifeGuard™, the new safety infusion needle designed for use with vascular access ports was introduced. In October 2002, LiveValve™, the new central venous catheter was released. In September 2003, LiveValve® Platinum was introduced. According to management, the LifeValve® Platinum marks the first real innovation in central venous catheters in years. The company expects to launch the Vortex®MP Peripheral Access Port in 4Q03 after receiving FDA approval in September 2003.

Shift in Focus from Distribution to Proprietary Products

Horizon purchased Stepic in October 1998, and CVS in September 1998 to form the medical device distribution business. This business distributed general and emergency surgery, radiology, anesthesiology and respiratory therapy. Blood filtration and critical care products are manufactured by Horizon. In September 2002, HMP sold the distribution business to Arrow International for $12.6 million. The company retained $1.1 million in assets.

The distribution business was originally acquired as a captive distribution channel for its vascular access products. Revenue contribution was greater than 60% of total revenues, but margin contribution was far less than that realized from the sale of HMP’s proprietary products. With the sale of Stepic, the company has completed its transition from that of a

third-party distributor of specialty medical devices to a pure play developer, manufacturer and marketer of proprietary vascular access technologies.

Horizon targets the oncology and dialysis markets. The broad product line is used in a wide range of treatments. The Vascular Access Ports are used in systemic or regional therapy that requires frequent infusion of highly concentrated or toxic medication such as chemotherapy agents, antibiotics or analgesics for oncology patients. Specialty Catheters are used for hemodialysis in the treatment of patients with renal failure and for the treatment of stem cell transplants for cancer patients. HMP’s products are differentiated by their high quality, unique design and flexible features. This differentiation has created significant product loyalty among healthcare providers and allows the company to receive a higher average selling price relative to competitors.

Co-Promotion Agreement with Medtronic

In March 2002, the company entered into a Co-Promotion agreement with Medtronic. Horizon is required to provide technical assistance for Medtronic’s implantable drug delivery systems. These systems are used for the treatment of hepatic arterial infusion (HAI) and malignant pain. HMP is compensated from MDT for (a) identification of appropriate patients, (b) implantation of the device, and (c) assistance in the refill procedure. Appropriate patients are those experiencing chronic pain associated (a) with metastatic cancer, and (b) patients with lung, breast, prostate or colorectal cancer who have intractable pain.

In April 2003, HMP acquired the exclusive US distribution rights to Medtronic’s HAI product line. This product line includes the IsoMed® Infusion System.

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MARKETING The Vascular Access Product Industry

and Competition Horizon employs 52 full time sales and marketing employees. The focus on building the direct sales force is aligned with the strategy of creating proprietary value-added products. The direct sales force is critical in communicating the differentiating features of HMP’s products to the end user. Agreements with US based distributors were discontinued. The direct sales force focuses primarily on vascular and general surgeons and interventional radiologists.

The vascular access product industry is generally defined as those products used to access or enhance a patient’s vascular system and is categorized into central access and peripheral access items. The primary differences among these products are where the devices are inserted, how long they are used, and the type of therapy or procedures required. Central access devices are used for short term and long-term treatments and are typically placed into the superior vena cava for access to the bloodstream. These devices consist of ports, grafts, acute dialysis catheters, chronic dialysis catheters, central venous catheters, critical care catheters, intravenous access devices, and other ancillary products. Conversely, peripheral access devices such as peripheral inserted central catheters are used for short-term treatments, including chemotherapy and blood sampling.

Part of the value-added services includes the presence of a sales person during the first few surgical procedures using a new product for each new user. HMP’s sales people are regularly involved with surgical procedures for the implantation of Medtronic’s IsoMed® product line. The relationship building marketing approach provides feedback to the company and enhances the ability to modify the product line in response to new clinical protocols and to meet the changing needs of physicians.

This strong marketing platform enables new product offerings to immediately contribute to the company’s bottom line. The association with Medtronic and the relationship building marketing plan creates a readily available market for oncology and surgical medical products.

The worldwide, broadly defined vascular access product industry is estimated to total approximately $2.0 billion. However, a more refined look into the markets/product lines in which HMP competes domestically are represented by the following estimates:

Table 2: Domestic Competition Estimates

Market/Product Niche

Est. 2002 Domestic Industry Size

Estimated Growth Rate

Ports $ 84 million 5%

Specialty Catheters

$ 256 million 5%

Port Accessories $ 28 million 10%

Total Market Size $ 368 million

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Table 3: Customers/End Users • Aging Populations in North America, Europe,

and Japan – Advancements in medicine, focus towards a healthier lifestyle, the “Baby Boom” of the 1940s, and lower infancy death rates, have all resulted in both a prolongation of senior citizens’ lives, as well as a greater proportion of the elderly community reaching their “golden years.” As the risk of disease and illness typically increases with age, the elderly population is more susceptible to illnesses that require either temporary or long-term infusions utilizing the products offered by HMP.

HMP’s Customer Ultimate End User

Oncologist Cancer Patients

Vascular Surgeon Renal Failure Patients

General Surgeon Bone Marrow Cancer Patients

Nephrologists Sickle Cell Anemia Patients

Interventional Radiologists

AIDS Patients

Oncology Nurse

Dialysis Nurse

• Increasing Incidence of Chronic Diseases – The

world has been experiencing a rising occurrence of cancer and infectious diseases such as AIDS. These trends have impacted the need for long-term therapy devices, as well as home-care infusion, as discussed below.

In Europe, HMP has a network of 20 active distributors. There are 29 active international distributors outside of Europe. Hospital chains and large buying groups are an important market. Medical professionals and hospitals have organized group purchasing organizations (GPO) to gain purchasing power. Over time, the GPO’s have narrowed their list of suppliers. For undifferentiated products, there is much marketing leverage in marketing directly to the GPO’s. Horizon works with the GPO’s primarily for inclusion on the approved list of products. Direct marketing to the end user, the physician, is important in selling new and differentiated technologies.

• Continuing Growth of Home Care—Home infusion therapy has experienced continuous growth since it offers its patients greater control over treatment options and reduces the expense and inconvenience of hospital therapies. As a result, vascular access products have been inserted for analgesic, antibiotic, antifungal and antiviral agents, fluid replacement, chemotherapy, and total parenteral nutrition treatments. These treatments are then administered at a patient’s home, enabling a patient to live with fewer disturbances.

A sample of agreements with GPO’s include AmeriNet, a GPO that serves 2000 hospitals. The agreement covers substantially all HMP products and runs through the end of 2004. The company also has an agreement with MedAssets HSCA, a GPO that serves 1000 hospitals.

Healthcare Industry

In recent years, several comprehensive healthcare reform proposals were introduced in the United States Congress. Generally, the intent of these proposals has been to extend medical coverage and reduce the growth of total healthcare spending. None of these programs were adopted. The current healthcare reimbursement issue is centered around prescription benefits for Medicare patients.

Trends Impacting the Vascular Access Product Industry

The following trends are prevalent within the vascular access product industry:

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Medicare and Medicaid have periodically revised their payment methodologies and reimbursement policies to hospitals. The cost pressure on hospitals is leading to increased emphasis on the price and cost-effective benefit of any treatment and medical device.

All medical device manufacturers must list their product line with the FDA. The FDA must approve all life sustaining and life-support and implantable devices with a pre market approval (PMA). The PMA ensures safety and effectiveness. Modifications to existing products may receive clearance with a 510(k). Certain class II devices may only require 510(k) clearance. To date, HMP has only received marketing clearance through 510(k), which is less time consuming than the PMA process.

Medical device manufacturers are subject to periodic factory site inspections. In September 2002, the FDA inspected the Company’s Georgia facility and issued five observations as a result. The company has implemented corrective procedures as a result of the FDA observations and has submitted a written response to the FDA.

Manufacturing Facility

The company has a 60,000 square foot manufacturing, research and administration facility in Manchester, Georgia. The facility has received ISO9001 certification and the Community European Mark. One shift currently operates at the plant which

is capable of running three shifts. The company believes it has the capacity to handle projected growth through 2006. This facility highlights the transformation from a distribution company to a manufacturing concern.

Recent Quarter

Sales increased 42% to $7.5 million in 3Q03 from 3Q02. New product sales are driving revenue growth. New products include LifeGuard™ Huber Safety Needle, the new LiveValve® Platinum CVC, and Medtronic’s IsoMed ®Hepatic Arterial Infusion (HAI) product line that was introduced in June 2003. The LifeJet™ F-16 hemodialysis catheter was recently released and has contributed to sales growth.

Gross profit increased from 59.2% in 2Q03 to 60.2% in 3Q03 due to improved manufacturing efficiencies and increasing sales. The continued focus on expense control combined with the lack of recapitalization related expenses caused SG&A to decline. These positive impacts on SG&A were offset by the increase in direct sales costs and higher research and development costs. Overall SG&A declined from 59.8% of revenues to 51.2% of revenues from 1Q03 to 3Q03.

Tracking quarterly operating performance on product line basis indicates how well HMP products are accepted in the marketplace.

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Table 4: Revenues by Product Line

Quarterly Nine Months

9/30/03 9/30/02 9/30/03 9/30/02 Port $4,657.5 $4,142.0 $13,787.5 $12,187.7

Port Accessories 833.3 461.8 2,222.0 1,252.0

Catheters 936.7 608.5 2,502.4 2,246.0

Pumps 756.2 0.0 1,055.8 0.0

All Other 360.9 104.9 682.8 216.8

Total Revenues $7,544.5 $5,317.3 $20,250.6 $15,902.5

Table 5: Percent of Total Revenues


9/30/03 9/30/02 9/30/03 9/30/02 Port 61.7% 77.9% 68.1% 76.6%

Port Accessories 11.0% 8.7% 11.0% 7.9%

Catheters 12.4% 11.4% 12.4% 14.1%

Pumps 10.0% 0.0% 5.2% 0.0%

All Other 4.8% 2.0% 3.4% 1.4%

Total Revenues 100.0% 100.0% 100.0% 100.0%

The impact of the new products is readily seen. Pumps were not in the product line last year and now constitute 10% of revenues in 3Q03. Port products have declined in their percentage contribution even as their growth rate has been a healthy 12% to 13%. Port accessories and catheters have had strong growth in the past year

The company’s larger customers include MD Anderson Cancer Center, Moffit Cancer Center, Massachusetts General, Vanderbilt University, Baylor College of Medicine and Washington University.

Growth Rates

The following table highlights quarterly and nine months growth rates. They are impressive.

Table 6: Percentage of Total Non-Distribution Revenues

2000 2001 2002

Top 3 Customers

15% 19% 15%

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Table 7: Growth Rates


9/30/03 9/30/03

Port 12.4% 13.1%

Port Accessories 80.4% 77.5%

Catheters 53.9% 11.4%

Pumps

All Other 244.0% 214.9%

Total Revenues 41.9% 27.3%

Historical Growth and Projected Growth Rates

The following four graphs highlight historical quarterly growth and our forecasted growth estimates.

Chart 1: Historical Quarterly Year/Year Growth

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Chart 2: Future Quarterly Year/Year Growth

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Earnings Forecast

Table 8: Earnings Forecast

Forecast 12/31/05 12/31/04 12/31/03

EPS $0.04 $0.03 $-0.02

EPS Growth 33.3% 250%

Although earnings growth will eventually settle in the 20% range, the next several years could deliver 30% to 40% earnings growth.

Valuation

In calculating a target price using present value calculations, two critical components create a range of target prices. They are the discount rate and the growth rate investors will apply to the company. For a medical products company whose products are well received, we have used a 10% discount rate. Looking at the earnings progression expected in the next few years, investors will take note of the changing fortunes of HMP.

The company broke even in the recently reported quarter. We expect a few more quarters of break-even performance, and then we expect earnings growth to accelerate. To calculate a target price, we forecast revenues, operating income, capital expenditures, taxes and changes in working capital to determine free cash flow. We then discount the stream of free cash flows and compare it to the shares outstanding to determine an appropriate fair value range for the stock price. We believe revenues will continue to be driven by new product introduction during the forecast time period.

Our growth assumptions are:

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Table 9: Five-Year Forecast Growth Assumptions

12/31/07 12/31/06 12/31/05 12/31/04 12/31/03

Rev Growth 12.0% 15.0% 18.0% 26.7% 31.3%

Operating Margin 7.0% 6.0% 5.0% 3.5% -2.6%

Tax Rate 20.0% 10.0% 0.0% 0.0% 0.0%

Due to prior operating losses, no provision for taxes will be required in 2004 and 2005. The company is uncertain when federal income tax payments will be required. Not all of the net operating losses (NOL) may be allowed against future earnings because the Recapitalization Plan may be deemed a change of ownership. If HMP is not allowed to apply any of the NOL’s in question, then federal tax payments

will begin during 2005. If HMP is allowed to apply all the NOL’s in question, then tax payments will begin in 2007. Our forecast includes a blend of the two, with tax payments beginning in 2006. We do this because it is far too uncertain to accurately predict when federal tax payments will begin.

Chart 3: Price Targets for 3 Scenarios Based on Y+5 Growth Rate

Price Targets for 3 Scenarios based on Y+5 Growth Rate

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Y+5 Growth Rate

Optimistic $1.0 $1.3 $1.6 $1.9 $2.1 $2.4 $2.7

Base $0.8 $1.0 $1.2 $1.4 $1.6 $1.9 $2.1

Pessimistic $0.6 $0.7 $0.9 $1.1 $1.2 $1.4 $1.5

15 20 25 30 35 40 45

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Therefore, our Optimistic, Base and Pessimistic case Target Prices are as follows:

Table 10: Base Target Prices

Growth Rate in Next Few Years 30 35 40 45

Optimistic Forecast $1.90 $2.10 $2.40 $2.70

Base Forecast $1.40 $1.60 $1.90 $2.10

Pessimistic Forecast $1.10 $1.20 $1.40 $1.50

We believe investors should focus on the $2.10 to $2.40 range for the next year. This price range accounts for the higher growth rate of the next few years.

The optimistic forecast scenario assumes revenue growth will be incrementally 3% greater and operating margins will be incrementally 1.5% greater than the base forecast outlined above, from FY05 through FY07.

Bull Case

• Alliance with Medtronics

• Success of IsoMed® product line

• Success of Port Product products, catheters

• A $2 billion dollar market opportunity

• No manufacturing capacity restrictions for the next several years

• Recapitalization plan

• High quality management team

• Excellent cash flow management

• Good working capital management

• Focus on direct marketing force

• Proprietary products being sold by direct sale force

• New proprietary products will be introduced

• Company has gone from a loss to a break even status

• Recent quarter revenue growth indicates success of the strategy focusing on proprietary products

• Advancements in medicine, focus towards a healthier lifestyle,

• The “Baby Boom” and lower infancy death rates, have resulted in both a prolongation of senior citizens’ lives, as well as a greater proportion of the elderly community reaching their “golden years.”

• As the risk of disease and illness typically increases with age, the elderly population is more susceptible to illnesses that require either temporary or long-term infusions utilizing the products offered by HMP.’

• Increase in chronic disease

• Increase in home care

Bear Case

• The company may be unable to introduce new products in a timely manner.

• HMP has limited manufacturing experience.

• Defending and maintaining the company’s patent rights could be difficult and costly.

• HMP relies on trademarks and trade names for the success of the business. Loss of one or any

10


of these trademarks or names could materially hurt the company.

• HMP is potentially subject to product liability suits.

• The company’s executive officers, together with other parties to the Recapitalization plan have the ability to exercise control over the company.

• The regulatory and economic environment in the healthcare business could adversely affect the company.

• The company’s revenues are dependent on Medicare and Medicaid reimbursement which are subject to change.

• Can not acquire another company without approval of their creditors

THE SCIENCE BEHIND THE PRODUCTS

What Are Ports and Catheters?

Ports and catheters provide easy access to the bloodstream or a specific body part. Venous ports and catheters are used to provide a reliable route of administration for patients who must receive medication on a regular basis for an extended period of time. A port is surgically implanted (put in place) by a physician in the operating or special procedures room. The port is implanted under the skin; all that is visible is a small raised area of the skin over the port. A central venous port, for example, lies under the skin just below the collarbone and provides access to the superior or inferior vena cava (

) via a central venous catheter. To utilize the port for therapy, a special anti-coring infusion needle is placed into the port.

Figure 1

Figure 1: Placement of Central Venous Port and Catheter

Figure reprinted with permission from Pediatric Education Services Primary Children’s Medical Center. Available at:

www.ihc.com/xp/ihc/documents/pcmc/portline.pdf.

Dialysis catheters are used for patients with kidney failure to remove and replace blood after cleansing. The functions of the kidney are to remove toxic and waste products and excess water from the body and to maintain the body's balance of various salts (eg, sodium, potassium, calcium, phosphate) and acid. Kidney failure will result in high blood pressure, metabolic acidosis, brittle bones, toxic waste accumulation in the blood, and, ultimately, death. The only real treatment for end-stage kidney failure is kidney transplantation. Patients awaiting a kidney transplant and those with other causes of temporary loss of kidney function must have their blood cleansed and buffered by dialysis. There are two types of dialysis:

• In hemodialysis, excess waste products and water are removed from the patient's blood using catheters, drawn into a dialysis machine,

11


cleansed and buffered, and replaced into the patient. Usually one session takes about 4 hours to complete and the patient requires dialysis 3 times a week.

• The Infuse-A-Port™ Access System offers a line of venous, arterial, and peritoneal ports all available in polysulfone

• The Triumph-1™ Port Access System includes a line of single, dual, and low-profile ports that provide a silicone catheter rated for high strentgh (200 p.s.i.)

• Peritoneal dialysis takes place inside the body and can be done by the patient at home. A dialysis solution is introduced through a catheter into the peritoneal (abdominal) cavity, which acts like a natural dialysis machine. The lining of the peritoneal cavity acts as a semi-permeable membrane through which waste products and excess water from the body can pass into the dialysis solution (dialysate), which is drained out of the abdomen into a bag, discarded, and replaced with fresh solution. Each exchange takes about 45 minutes and must be done 4 times a day, but may be done during the night for some patients.

• The Omega Port line has an “omni-directional septum” that can be accessed from many angles. This port has a soft, silicone body and catheter that increase patient comfort

Figure 2: HMP’s Implantable Vascular Access Ports

• Pheresis/apheresis catheters are used to withdraw whole blood and replace it again after the desired cellular components (platelets, red cells, white cells, stem cells) are isolated from cancer patients. The blood also contains small numbers of stem cells that can be harvested, expanded in culture, then later used for bone marrow transplantation for patients with cancer of the bone marrow or whose bone marrow has been dangerously depleted by chemotherapy.

Source: HMP website: http://www.opitsourcebook.com/HMPvascular.html

• The Titan Port™ System is a conventional port, providing customers and patients with a less expensive option

• The proprietary Vortex™ Port is the only access system with a rounded chamber and tangential outlet, designed to provide superior flow characteristics.

Implantable Vascular Access Ports

Implantable vascular access ports offered by HMP (Figure 2) include:

The Vortex® technology incorporates a unique concept in port design: a rounded chamber with no “sludge-harboring” corners or dead spaces that helps to reduce occlusions and infections. The tangential outlet increases flushing action to help cleanse the entire chamber.

Conventional vascular ports have been associated with several complications, with occlusions being

• The LifePort™ line of venous and arterial ports, which has a patented bayonet locking mechanism, includes a unique low-profile model. A variety of sizes and catheter materials are available in both preattached and detached options

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the most common. An occlusion is a blockage; occlusions in ports are usually the result of a thrombus (blood clot) within the port or catheter or formation of a fibrin sheath at the tip of the catheter. Occlusions have occurred in one fourth to one third of cases in which conventional ports have been used. The second major complication, not surprisingly, is infection. Whenever foreign bodies are introduced, infection is always a possibility. Infection rates of 5% to 15% have been reported in studies using ports. In a study by Memorial Sloan-Kettering Cancer Center, 14% of patients had to have their ports surgically removed before the end of therapy.

[Schwarz RE et al, Cancer. 1997;79:1635-1640.] A port that could reduce occlusions and infections would have a significant benefit for patients and the health care system alike.

The Vortex technology reduces complications and the subsequent necessary interventions by as much as 70%. In a study comparing the Vortex “Clear-Flow” Reservoir Port with conventional vascular ports, the Vortex port resulted in better patient outcomes, fewer complications, and less nursing time, which in turn should reduce health care costs (Table 11). In this study, no infections were noted in either group.

Table 11: Complications Using a Vortext Port -vs- Conventional Ports in Cancer Patients

Parameter Vortex Conventional

Number of patients Total indwelling days Mean implant duration Total number of accesses Mean accesses (per patient) Total port occlusion Partial port occlusion* Rate of occlusions† Repositioned needle Cough or deep breath moved port Extra flush solution required Instilled urokinase‡ Surgical removal of port Total interventions Rate of interventions

48 11,021

230 818 12 0

57 7% 39 55 51 8 0

156 19%

47 7,123 151 576

8 9

141 26% 91 131 104 15 4

354 62%

Adapted with permission from: Stevens B et al, JVAD, Summer 2000. Available at: http://www.hmpvascular.com/library/VortexData.pdf HMP Website * Occluded during infusion but not aspiration † As a percentage of access attempts ‡ Used for catheter clearance

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Implantable Vascular Access Catheters

HMP offers several lines of implantable vascular access catheters (Figure 3):

• The Circle C™ catheters for chronic and acute hemodialysis provide high flow rates with minimal negative pressure.

• The Pheres-Flow™ catheter for pheresis is the first triple-lumen, long-term catheter designed specifically for bone marrow pheresis/apheresis patients

• The Neostar™ tunneled central venous catheters, made of silicone, are available in single-, dual-, and triple-lumen configurations and a variety of sizes

• The Infuse-A-Cath™ tunneled central venous catheters, in silicone or polyurethane, are available in both single and dual models and a range of sizes. The Infus-A-Cath™ offering is unique due to its attachable hub system to ease placement and repair.

Figure 3: HMP’s Implantable Vascular Access Catheters

Source: OPIT Source Book. Available at: http://www.opitsourcebook.com

• The LifeJetTM F-16 catheter (Figure 4) for chronic hemodialysis or apheresis was launched

in January 2003. The LifeJetTM incorporates HMP’s unique CTX technology, which utilizes the strength of an arced dividing wall (septum) between the venous and arterial catheter lumens. This curved wall creates a strong bridge that can withstand the negative pressure of the arterial lumen, which results in more efficient dialysis—more blood can be moved at a lower pressure than with other available dialysis catheters. Its strong lumen walls allow easier insertion without kinking. The far end of the catheter was designed to resist fibrin sheath formation.

Figure 4: Model of LifeJet™ Chronic Hemodialysis/Apheresis Catheter

Source: HMP product catalogue. Available at: http://www.hmpvascular.com/images/HMP_catalog.pdf

• The LifeValve® Platinum, HMP’s newest central venous catheter, is being promoted as the first real innovation in central venous catheters in years. Catheter implantation should be a routine procedure, but difficulties that are often encountered with conventional catheters result in longer procedure times and prolonged time under anesthesia for the patient. HMP’s goal in designing the LifeValve® Platinum was to create the easiest-to-implant device on the market. This novel catheter has 2 separate one-way valves that are designated for both aspiration and infusion and a patented, pressure-sensitive valve

14


system that lowers the risk of air embolism and blood backflow compared with conventional catheters. Preventing blood reflux into the catheter lumen eliminates clotting and occlusion, reducing maintenance and other interventions. Cancer and cancer medications increase the risk of blood clotting; therefore, a catheter that reduces the likelihood of clotting should be in high demand. Another unique feature of the LifeValve® Platinum is an embedded platinum band that improves visibility during fluoroscopy, thus facilitating the positioning of the tip of the catheter during implantation. HMP’s future plans include launching an implantable port version of the LifeValve® technology that will permit longer duration of treatments and incorporating the LifeValve® technology into all vascular access products that will benefit from it.

The LifeGuard™ Safety Infusion Set

Federal legislation has mandated the use of safer medical devices whenever possible to reduce the chance of needle stick injury and the risk to health care workers of blood-borne disease such as HIV infection, hepatitis B, and hepatitis C that can be caused by exposure to infected blood through needle sticks. In response both to these regulations and to physician’s concerns, HMP designed and developed the LifeGuard™. LifeGuard™ is easy to use, with a minimum change to technique ( ). The LifeGuardTM completely encompasses the needle during removal from the port, which is the part of the procedure during which needle sticks are most likely to occur. The product also has a small-profile design that should decrease discomfort for patients when the needle must remain in the port.

Figure 5

Figure 5: The LifeGuard™ Safety Infusion Set

Source: HMP Website. Available at: http://www.hmpvascular.com/images/HMP_catalog.pdf

The SyncroMed® and IsoMed® Implantable Delivery Systems

HMP also co-promotes with Medtronic, Inc., the manufacturer, the SynchroMed® and IsoMed® implantable delivery systems used in management of cancer pain and treatment of liver cancer, respectively.

The SynchroMed®Infusion System is used for delivering drugs directly to the central nervous system (CNS) to treat cancer pain. Cancer pain may be caused by nerve damage (neuropathic pain) caused by the tumor pressing on a nerve or group of nerves or by tissue damage (nociceptive pain) caused by tumor growth that crowds body parts near the tumor or blocked an organ or blood vessels, or from cancer that has spread to the bones, muscles, or joints.

15


Intrathecal drug infusion systems have been in use since the early 1980s. Since the first implant of a Medtronic programmable pump for intrathecal delivery of morphine in 1982, more than 50,000 patients worldwide have received a Medtronic drug infusion system to treat chronic pain or severe spasticity. The SynchroMed® pump for intraspinal morphine for nonmalignant and cancer pain was launched in the U.S. in 1991.

Figure 7: Representation of Intrathecal Drug Delivery with the SynchroMed® Infusion System

The SynchroMed® infusion system consists of an infusion pump (Figure 6) that is implanted under the skin of the adbomen and a catheter that is inserted into the intrathecal space of the spine and “tunneled” under the skin to connect to the pump (Figure 7).

Figure 6: The SynchroMed® EL Pump with a Screened Catheter Access Port

Source: Medtronic website. Available at: http://www.medtronic.com/neuro/paintherapies/pain_treatment_la

dder/pain_clin_treatments.html

The SynchroMed pump is a battery-powered device that stores medication and delivers it according to programmed instructions. The various pump models differ primarily by the size of the reservoir and the presence of a side catheter access port. SynchroMed pumps have a reservoir valve, a safety feature incorporated into the septum of the pump that seals the reservoir when its fluid capacity has been reached, preventing overfilling and resulting overpressurization. A pump is refilled by inserting a needle through the skin into the septum in the center of the pump. Pumps usually require refilling every 1-3 months, depending on the programmed treatment regimen.

Programming of instructions is done noninvasively via the SynchroMed programmer, which includes a computer, printer, and programming head contained in a carrying case, very much like a laptop computer. The programmer allows physicians to establish a 2-way exchange (telemetry)—to receive status reports

Source: Medtronic website. Available at: http://staff.bath.ac.uk/mpstsd/Bime_files

16


and to transmit programming information—with the implanted pump.Medtronic provides both one- and two-piece intraspinal catheters made of silicone. The catheter body is made of silicone, radiopaque, and flexible and can be trimmed to the desired length.

The sensation of pain occurs when a pain message is transmitted from receptors throughout the body to the spinal cord to the brain and then up through the spinal cord to the brain, which perceives the message as pain. Intrathecal drug delivery places the medication (eg, morphine) directly into the cerebrospinal fluid (CSF) that surrounds the spinal cord, blocking the pain message before it reaches the brain. The benefits of such a system include:

• Intrathecal is much more effective than any other route of administration because the medication does not have to be absorbed through the stomach or circulate through the bloodstream before it gets to the CSF; this allows much smaller doses (1/300th of the usual dose) to be used

• The use of smaller doses reduce the frequency of side effects

• Because it is fully implantable, the risk of infection during long-term use is reduced compared with systems that have external parts

• A fully implanted system does not restrict daily activities

• The physician can adjust doses without an invasive procedure, minimizing patient discomfort

• The drug-delivery schedule can be individualized—the pump can be programmed to deliver medication at constant or variable flow rates and different doses at different times of the day

Results of a randomized clinical trial (Smith et al, J Clin Oncol, 2002) among 202 patients with

refractory pain showed better control of pain, less toxicity, and increased overall survival using HMP/Medtronic’s intrathecal drug-delivery system in combination with conventional medical pain management versus conventional medical pain management alone (Table 12). Although this study had some methodological limitations, the results are highly provocative. Confirmation of these results in additional studies and a cost-benefit analysis are needed.

Table 12: Results of Pain Management with and without Intratecal Drug Delivery System (IDDS)

Parameter Pain Rx Alone

Pain Rx With IDDS

Number of patients 72 71

Clinical success, no. (%)*

51 (71%) 60 (84%)†

Patients with ≥20% reduction in pain and toxicity

27 (38%) 41 (58%)†

Mean reduction in pain score

39% 52%‡

Mean reduction in toxicity score

17% 50%†

6-month survival rate 37% 54%‡ * Defined as a reduction of 20% or more in pain score or a 20% or more reduction in toxicity with no change in pain score † Statistically significant (P ≤.05) versus conventional pain treatment alone ‡ A strong trend (P =.055, P =.06) Rx: therapy; ≥: at least, equal to or more than

The IsoMed® Constant-Flow Infusion System is used for hepatic arterial infusion (HAI) to treat primary liver cancer or colorectal cancer that has spread to the liver. The System consists of an implantable pump with drug reservoir and access port ( ) and a catheter. Figure 8

17


Figure 8: Cutaway view of the IsoMed® Pump • Bacteriostatic water or physiological saline to

achieve the physician-prescribed concentration of chemotherapy drugs or to flush the pump reservoir

• Saline or heparinized physiological saline (unless contraindicated) during an interruption in chemotherapy to maintain catheter patency

• Preservative-free morphine sulfate sterile solution by chronic intrathecal infusion for the treatment of chronic intractable pain

Source: Medtronic website. Available at: http://www.medtronic.com/neuro/hai/physician/prodinfo.html • 0.9% solution of preservative-free Sodium

Chloride Injection, USP, to achieve the physician-prescribed concentration of preservative-free morphine sulfate sterile solution

The pump is inserted under the skin of the abdomen, on the right side just above or below the belt line, and the catheter is attached to the hepatic artery, which is the main artery through which the liver receives its blood supply ( ). Every year in the U.S. alone 160,000 people are

diagnosed with colorectal cancer (also called colon cancer). Approximately 35% of these will eventually have recurrences that metastasize to the liver. Since only 30% of patients survive for 5 years after surgical removal of hepatic metastases, effective adjuvant treatment is clearly necessary. Colorectal tumors metastatic to the liver get more than 80% of their blood supply from the hepatic artery, which makes HAI an ideal treatment for this disease. HAI for liver metastases of colorectal cancer may be used alone or in combination with systemic chemotherapy.

Although HAI has been used for more than a decade, early studies had mixed results. Newer techniques, including the use of fully implantable intrathecal drug delivery systems, have significantly improved tumor response (Chart 4) and reduced time to progression (Chart 5) and shown a trend toward improved survival rates.

Figure 9

Figure 9: Representation of the IsoMed® Constant-Flow Infusion System for HAI

Source: Medtronic website. Available at: http://www.medtronic.com/

neuro/hai/physician/overview.html

The IsoMed® infusion system is FDA-approved to be used with the following drugs and fluids as indicated:

• Floxuridine (FUDR) by chronic intravascular infusion for the treatment of primary or metastatic cancer

18


Finally, and not inconsequentially, regional therapy with HAI improves the patient’s quality of life compared with systemic therapy:

Chart 4: Proportion of Tumor Responses Among 143 Percents

8

3442

5 510

0

10

20

30

40

50

Complete Major* All

HAISystemic

|-------------Tumor Response----------------

Perc

ent o

f

• Even with progressive disease, symptoms appear later in the course of the disease

• Implantable pumps allow greater mobility

• Patients require fewer office visits for treatment

• Pumps require less maintenance than ports

• Reduced side effects allow greater participation of the patient in normal, daily activities Source: Hohn et al, J Clin Oncol. 1989;7:1646-54. Report of the

California Oncology Group Trial: Regional (HAI) vs systemic (IV) FUDR for Hepatic Metastases of Colorectal Cancer

IV: intravenous; FUDR: fluorodeozyuridine * > 50% reduction in tumor size

** Statistically significant difference vs systemic (P =.009) COMPETITION Bard Access Systems, a subsidiary of C. R. Bard, Inc (NYSE: BCR) is HMP’s primary competitor for vascular access products in the United States. Headquartered in Salt Lake City, UT, Bard makes vascular access devices as well as other medical instruments and surgical accessories. They offer a comprehensive line of central venous, hemodialysis/pheresis, and peritoneal dialysis catheters for both acute and chronic applications that are available in a variety of designs, lengths, configurations, insertion kits, and procedural trays. Their patented technology includes:

Chart 5: Median Time to Progression Among 143 Percents

401

201

0

100

200

300

400

500

HAI Systemic

Day

s

*

Source: Source: Hohn et al, J Clin Oncol. 1989;7:1646-54. Report of the California Oncology Group Trial: Regional (HAI) vs

systemic (IV) FUDR for Hepatic Metastases of Colorectal Cancer * Statistically significant difference vs systemic (P =.009) • Groshong® technology for simplified

maintenance and safety. The Groshong catheter has a rounded, closed tip and the patented three-way Groshong valve that eliminates heparinization and clamping

The efficiency of tumor-cell killing is dose-dependent. However, systemic administration of drugs exposes the entire body to the drug, causing undesired effects (side effects), which are also dose-dependent. With HAI, exposure to the drug is regional—limited to the area of the liver—avoiding systemic exposure and allowing higher doses with fewer side effects. Thus, HAI with today’s technology is a useful treatment option for appropriately selected patients.

• The SureCuff® tissue in-growth cuff, which aids in catheter fixation

• The VitaCuff® Antimicrobial Cuff, which discourage bacterial invasion at the exit site.

Bard offers a low-cost, user-friendly dedicated ultrasound scanner, the Site-Rite 3 Portable

19


Ultrasound System, to aid physicians in guiding needles for percutaneous vascular punctures and nerve blocks. Bard also markets the CathTrack catheter locator system, a portable, hand-held device that uses a low-level electromagnetic field to determine catheter tip placement during implantation.

Bard also markets the CathLink 20 implanted ports, which consist of two primary components: a titanium injection port featuring a multi-layered silicone septum with a predetermined route of entry, and a radiopaque ChronoFlex® polyurethane catheter. All materials are biocompatible and can be used with a variety of injectable solutions. The CathLink 20 ports were designed with a funnel-shaped entrance to allow use with standard over-the-needle IV catheters rather than specialized non-coring needles.

In December 2002, Bard launched the LiftLoc™ Safety Infusion Set in the U.S. hospital market. The infusion set is produced by Specialized Health Products International, Inc. The LiftLoc Safety Infusion Set incorporates a Huber-type needle with an integral safety device.

In July 2003, Bard received FDA clearance to market the HemoSplitTM catheter for long-term renal dialysis care. Bard had previously acquired the exclusive rights to this patented technology from its French inventor, Dr. Thierry Pourchez.

As a value-added benefit, Bard has created a fellowship program to provide practicing radiologists with an opportunity to observe a wide variety of vascular access procedures and techniques from other leading interventional radiologists experienced in vascular access device placement.

Deltec, Inc., headquartered in St. Paul, MN, is part of Smiths Medical Systems, London, a subsidiary of Smiths Industries Plc. Deltec manufactures a wide

range of infusion and access systems (eg, the CADD® ambulatory infusion pumps and Pro-PORT®

and PORT-A-CATH® implantable access systems) for domestic and international markets.

• The ProPORT® implantable access system, designed for chest placement, incorporates the proprietary Slide-Lock™ connector, designed to provide easy and secure port-to-catheter locking. This plastic central venous access system was designed for cost-effective delivery of chemotherapeutic drugs, antibiotics, pain medications, nutritional solutions and other intravenous therapies

• The PORT-A-CATH implantable vascular access systems are among the most widely used worldwide. Deltec’s PORT-A-CATH® II T.A.P. (Trans-Arterial Percutaneous) implantable access system was specifically designed for HAI to treat liver metastases of colorectal cancer. The port is intended for chest implantation

• The P.A.S. PORT® peripheral implantable access system systems include the P.A.S. PORT® Elite, a small, low-profile port intended for comfortable arm placement. It has a large silicone septum designed for easy needle access. Implantation of this system can be performed in an outpatient procedure room, which eliminates inpatient, O.R. and other charges, making it a cost-effective alternative to many other systems

• Graseby Medical Ltd. is also part of Smiths Medical Systems. Graseby specializes in the arena of hospital infusion products such as pain-management infusion pumps.

• Medcomp, Inc, a private company based in Harleysville, PA, is the largest manufacturer of hemodialysis catheters for short and long term vascular access. The company also manufactures short term central venous catheters, PIC

20


catheters and Hickman silicone catheters for use in oncology.

• Tyco Healthcare-Kendall, located in Mansfield, MA, is a division of Tyco International that offers a complete line of catheters for short- and long-term hemodialysis and peritoneal dialysis. Tyco Healthcare is a global leader in the healthcare products industry with over 50 manufacturing facilities located in many countries; Tyco Healthcare also includes US Surgical, Auto Suture, Valleylab, Radionics, and Mallinckrodt.

CAPITALIZATION In March 2002, the company initiated a Recapitalization Plan. HMP issued $15million of Senior Subordinated Convertible Notes. The two-year notes carry a 6% interest rate for the first six months, and 8% thereafter. Holders of the convertible note have the option to convert $270,000 face value of the note into common stock at a conversion price of $0.01 per share. All of the possible 27 million shares have been issued to holders of the convertible note, (7.2 million shares were issued to Medtronic during 4Q03). The company issued $4.4 million of the original note to ComVest, $4 million to Medtronic, and the remaining $6.6 million to 26 additional parties. Covenants on the note restrict the sale of

receivables, business combinations, indebtedness and dividend payments.

The Senior Subordinated Convertible Notes did not raise funds for the company. It was an assignment of a note held by ComVest and Bank of America. The total value of the original note was $40.3 million and was discounted to $22 million in conjunction with the assignment of $15 million to the Convertible Notes. The remaining $7 million was financed through a note with LaSalle Business Credit and Standard Federal Bank National Association.

Under this loan agreement, dated March 2002, there is a $10 million senior Revolving Loan and a $2 million term loan. These loan agreements have similar restrictions as the Senior Subordinated Convertible Notes. The company must repay the revolving loan by March 17, 2005, unless it is renewed. The term loan is paid monthly and will be retired in March 2005. On October 31, 2003, the maturity date of the Convertible Notes was extended from March 16, 2004 to July 16, 2005.

When Stepic was sold in September 2002, the outstanding balance on the revolving credit facility was paid down. As of September 2003, the company had drawn $0 on the credit facility from LaSalle. The net result of the Recapitalization Plan was the reduction of debt service requirements and an increase in diluted shares.

21


Figure 10: Long-Term Debt, Equity -vs- LTD/Equity

LTD, Equity vs. LTD/Equity

05101520253035404550

9/30

/200

3

6/30

/200

3

3/31

/200

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$ M

illio

ns (L

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quity

)

0.0%20.0%40.0%60.0%80.0%

100.0%120.0%140.0%160.0%180.0%200.0%

Long Term Debt Total Equity Long Term Debt / Equity

Capitalization Covenants

Some of the covenants for the Recapitialization Plan include a minimal Tangible Net Worth, minimal EBITDA levels and a limit on capital expenditures to $1.5 million during any fiscal year. Although management indicates they are in compliance with the covenants, we can not verify compliance.

Ancillary to the Recapitalization plan, the company entered into a Securityholders Agreement in March 2002 with ComVest, Medtronic, LaSalle, Marshall B Hunt and William E Peterson, Jr., (the Investors). Under the Securityholders Agreement, the company granted rights of first refusal, corporate governance rights and certain registration rights to the investors. The company agreed to a shelf registration covering the resale of common stock issuable pursuant to the Recapitalization plan and to include Investors’ shares of common in any registration statement, at the option of the Investors.

ComVest was granted the right to designate one ComVest director to the company’s board and two additional independent directors. Certain actions of

the board require the confirmative vote of the ComVest director. These actions include change of control of the company, sale of any material part of the company, guarantee of indebtedness, declaration of dividends and amendments of the corporate bylaws. The agreement also requires the company to establish an Executive Committee of the Company’s Board of Directors consisting of the ComVest director as Chairman, one of the independent directors designated by ComVest and Mr. Hunt. The Executive Committee is required to approve certain actions.

SHARES OUTSTANDING Total shares outstanding as of 3Q03 (9/30/03) were 36.2 million shares. On 11/12/03, 7.2 million shares were issued to Medtronic upon conversion of Convertible Notes. There are options to purchase 16.05 million shares and warrants to purchase 1.698 million shares that were not included in computing diluted EPS because of the anti-dilutive effect.

22


As a result of the Recapitalization plan, there is a concentration of shareholders who could feasibly act together to gain leverage to elect all the members of the board of directors, amend the company’s bylaws and preclude fundamental corporate transactions. Such a transaction could relate to a merger or the acquisition of the company.

Percentage of Common Stock

Table 13: Percentage of Common Stock

Percentage ComVest 26.1%

Convertible Note Holders 23.0%

Medtronic Conversion Rights 30.6%

Executive Officers (Mr. Hunt, Mr. Peterson)

15.6%

Total 95.2%

LEGAL PROCEEDINGS Medical products companies are subject to legal action when a product fails or does not perform as intended. The company maintains product liability insurance against such incidents. Many of the products manufactured and sold by HMP are designed to be implanted in the body for extended periods of time. Component failure, manufacturing flaws design defects could all result in injury or death of a patient. At this time there are no impending or ongoing legal actions related to product performance.

In 1999, HMP initiated a voluntary product recall of a dialysis and central venous catheter kit due to small pinholes in the product packaging. No product complaints have been received for either packaging pinholes or infection at the implant site that could be attributed to packaging contamination. In 2001, the FDA terminated the recall.

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A Review of HMP Growth Drivers

The following tables review those annual and quarterly Growth Driver metrics.

Table 14: Growth Driver Metrics, Annual and Quarterly

Annual Income Statement Quarterly Income Statement 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/03 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01

Revenues 21.7 59.1 63.3 75.4 39.4 Revenues 7.5 6.6 6.1 5.8 5.3 13.9 11.9 13.6Gross Margin 57.0% 34.4% 26.2% 36.3% 49.4% Gross Margin 60.2% 59.2% 59.8% 57.7% 61.3% 36.1% 31.6% 35.0%Operating Income 3.1 2.8 Operating Income 0.1Net Income 1.66 2.05 Net Income 0.07 2.94 0.63

EPS - Diluted 0.13 0.17 EPS - Diluted 0.00EBITDA 7.2 19.5 EBITDA 0.7 0.2 0.5Free Cash Flow 5.0 0.0 # Free Cash Flow 0.5 0.1 3.7 1.2

Long Term Debt 18.3 1.4 40.6 45.0 47.1 Long Term Debt 17.4 2.9 3.2 18.3 18.8 18.2 18.4 1.4Cash 3.7 2.8 0.5 2.0 0.0 Cash 2.0 2.6 3.1 3.7 4.5 0.5 0.7 2.8Working Capital 9.5 15.3 29.9 28.8 Working Capital 8.5 9.5 11.4 7.2 7.1

DSO 108.45 72.57 90.53 83.62 77.32 DSO 48.55 49.43 47.68 50.82 115.61 62.88 72.90 72.80Inventory Turns 0.87 2.12 2.32 2.46 2.06 Inventory Turns 0.54 0.51 0.45 0.42 0.20 0.58 0.51 0.53Cash Cycle 439.45 187.59 204.10 215.84 252.13 Cash Cycle 198.50 210.83 234.69 249.61 483.67 158.82 178.53 185.74

Annual Percent Annual Change Quarterly Percent Annual Change

12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/03 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01Revenues 91.3% #DIV/0! Revenues 41.9%Gross Profit 22.3% 40.6% #DIV/0! Gross Profit 39.5% 15983.5%Operating Income 27.2% 9.5% #DIV/0! Operating Income 109.1% 84.5% 16.3% 52.2% 79.8% 78.4%Net Income 411.1% #DIV/0! Net Income 260.9% 78.8% 246.0% 91.8%

EPS - Diluted 234.2% #DIV/0! EPS - Diluted 50.0% 45.5% 221.4% 80.0% 266.7% 92.1%EBITDA 533.9% #DIV/0! EBITDA 547.7% 99.9% 48.2% 79.3% 398.1% 91.5%Free Cash Flow 89.2% #DIV/0! #DIV/0! Free Cash Flow 100.4% 463.5% 167.4% 96.2%

Long Term Debt 1258.5% #DIV/0! Long Term Debt 1258.5% 37520.0% 30216.7% 26200.0%Cash 33.9% 422.6% #DIV/0! #DIV/0! Cash 403.9% 335.2% 33.9% 290.4% 422.6%Working Capital 144.3% 4.0% #DIV/0! Working Capital 144.3% 151.9% 133.6% 133.9%

-6.6 -5.2 -8.8 -0.4 -0.6 -1.3 -0.9 -0.3 -4.1 -1.5-26.17 -5.12 -19.76 -0.42 -0.65 -2.11 -0.28 -1.52

-1.27 -0.38 -1.48 -0.01 -0.02 -0.03 -0.05 -0.02 -0.30 -0.11-3.7 -0.6 -3.5 0.0 -0.3 -0.2 -2.9 -0.5-24.2 -1.8 -16.3 -0.4 -1.9 -27.3 -0.7

-21.4 -6.6 -6.1 -21.4

-63.2% -6.7% -16.0% -52.3% -48.9% -57.3% -61.9% -7.9% -27.4% -1.4%-39.1% -39.3% -21.7% -3.5% -29.6% -24.6% -5.7% -36.4%

-41.0% -385.1% -45.5% -814.9%-74.1% -1290.4% -19.0% -97.5% -47.5% -202.8% -39.0%

-74.3% -1238.5% -23.5% -100.0% -140.0%-83.0% -148.2% -62.9% -58.3% -467.6%

-1269.5% -428.6% -87.1% -132.5% -181.8% -4953.7%

-96.7% -9.8% -4.4% -7.5% -84.1% -82.4% -96.7%-73.4% -55.7% -77.5% -45.8%

-240.0% -49.0% -25.1% -191.4% -186.3% -240.0%

CASH FLOW ANALYSIS Analyzing cash flow provides insight into how well the core operations are managed. Rather than using the Statement of Changes in Cash, commonly referred to as the cash flow statement, we have constructed a top-down cash flow that actually follows the flow of cash from revenues to expenses. We begin with revenues and adjust for changes in

accounts receivable to compute gross cash collected in the period. Then we compute total operating expenses. Separately, we determine the cash requirement or generation from the management of working capital. Then we combine the changes in working capital with operating expenses and deduct from the gross cash collected to determine the Net Cash Flow from Operations.

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Table 15: Top-Down Cash Flow

TOP-DOWN CASH FLOW 09/30/03 06/30/03 03/31/03 12/31/02 09/30/02 06/30/02

NET CASH FLOW FROM OPERATIONS (NCFO)

(14.97) 0.10 14.95 3.07 (0.41) 0.19

Chart 6: LTM Cash Flow per Share & EPS

LTM Cash Flow per Share & EPS

3.873.69

0.72

3.15

0.040.07

2.86

0.460.450.06

0.68

-$3.00

-$2.00

-$1.00

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

Mar-00Jun-00Sep-00Dec-00Mar-01Jun-01Sep-01Dec-01Mar-02Jun-02Sep-02Dec-02Mar-03Jun-03Sep-03

LTM NCFO/ShareLTM FCF/ShareLTM EPS

(2.36)(2.44)(2.37)(2.38)

An Argument for Share Price Increase: NCFO vs. EPS.

Since the NCFO has been volatile in the recent quarters for the reasons discussed below, it is helpful to look at the latest twelve month (LTM) data. The graph above displays how LTM NCFO has become positive for the past three quarters. NCFO has also been consistently been above EPS during FY03. LTM Free Cash Flow (FCF) has also become positive and is greater than EPS. NCFO and FCF can lead the trend in earnings. Positive NCFO indicates that the quality of earnings is not suspect. When NCFO is higher than earnings, most recently it is 7 times greater than EPS, often times share prices go up because they tend to follow cash per share more than earnings per share.

It is quite impressive to see generally positive NCFO data during the past eight quarters. The 9/30/03 and 3/31/03 quarters display the effect of the large change in LTD. Absent this non-recurring event, the NCFO has been quite stable in the past year. Gross operating expenses were greater than gross collections in 3 of the past 6 quarters. Whenever this occurred, working capital was managed to improve cash available to management. This displays an attention to manage the business for cash generation despite distractions from the divestiture of the distribution business.

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The trend of Free Cash Flow/Assets, LTM is a good determinant of the trend in the stock price. The Free Cash Flow/Assets (FCF/A) ratio measures the free cash flow return on investments. When FCF/A improves, management is receiving an incrementally higher cash flow return for every dollar invested.


This fundamental performance attracts the attention of investors. The recent improvement in FCF/A bodes well for a continuing uptrend in the stock price.

Chart 7: Stock Price vs. Free Cash Flow/Assets

Stock Price vs. Free Cash Flow/Assets

$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00

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Quarter End Stock PriceFree Cash Flow/Assets, LTMFree Cash Flow/Assets, Quarterly

LIQUIDITY AND LEVERAGE Debt to equity and debt to tangible assets display the leverage HMP has taken on in the Recapitalization Plan and the lack of book equity growth with operating losses. Interest coverage ratios have improved dramatically in the past year. In 3Q02 the company could not make interest payments with net income, although cash flow management indicates a more solvent situation. In more recent quarters, the company covered interest payments with earnings.

NCFO interest coverage appears poor because of the abnormally low NCFO in 3Q03 discussed above.

Fluctuations in the debt/assets and debt/equity ratios in the past year are the result of Recapitalization Plan. The convertible notes originally had a term that ended in March 2004. Based on this term, $15 million of the debt was classified as payable within one year for 1Q03 and 2Q03. With the extended term of July 2006, the $15 million was reclassified as long term for 3Q03.

Table 16: Leverage

9/30/03 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02

Common Equity / Assets 40.1% 39.3% 40.7% 41.2% 41.9% 27.0%

Total Debt / Total Equity 131.3% 136.1% 132.0% 129.7% 117.3% 193.7%

Total LT Liab / Tangible Assets 119.5% 20.2% 23.5% 121.5% 99.9% 60.9%

Short Term Debt / Total Debt 8.1% 85.1% 83.3% 7.8% 7.4% 34.1%

Times Interest Earned 1.14 0.32 -0.03 -5.29 -0.22 0.63

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Chart 8: Leverage, Quarterly

Leverage, Quarterly

0%

50%

100%

150%

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250%

Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03

Total Debt / Total Equity Total LT Liab / Total Equity Total LT Liab / Tangible Assets

Working capital operating metrics have shown improvement in the past year. Days Sales Outstanding and Days Inventory in COGS have steadily declined since 3Q02. This effective asset management causes inventory turns to increase. As

revenues have been collected through a decline in receivables, the company has brought payables down also, a healthy sign of conservative working capital management.

Table 17: Liquidity Performance Metrics

09/30/03 06/30/03 03/31/03 12/31/02 09/30/02 06/30/02

Days Sales Outstanding (Avg Rec) 48.6 49.4 47.7 50.8 115.6 62.9

Days Inv Outstanding in COGS (Avg Inv)

166.4 176.8 199.3 215.3 454.8 155.9

Days Payables (Avg Pay) 16.4 15.4 12.3 16.5 86.8 60.0

Inventory Turns (Avg Inv) 0.54 0.51 0.45 0.42 0.20 0.58

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Chart 9: Quarter DSO, DPO, DIO, Cash Cycle

Quarterly DSO, DPO, DIO, Cash Cycle

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Liquidity metrics are stable. Current assets/total assets declined after the Stepic divestiture in 3Q02. Receivables have become a larger part of current assets even as receivables management is improving.

Inventories have remained a stable contributor to current assets as current assets to total assets declined. This is consistent with improving inventory turns as revenues have grown.

Table 18: Liquidity Metrics

09/30/03 06/30/03 03/31/03 12/31/02 09/30/02 06/30/02 Cash / Total Assets 5.54% 7.06% 8.55% 9.98% 10.86% 0.97%

Current Assets / Total Assets 34.9% 34.5% 33.1% 34.6% 39.9% 51.9%

Cash / Current Assets 15.9% 20.5% 25.8% 28.8% 27.2% 1.9%

Receivables / Current Assets 34.3% 30.7% 28.6% 23.5% 21.4% 37.0%

Inventory / Current Assets 45.8% 42.7% 43.9% 43.5% 37.3% 53.6%

Chart 10: Liquidity Metrics, Quarterly

Liquidity Metrics, Quarterly

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Chart 11: Liquidity Metrics, Annual

Liquidity Metrics, Annual

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1996 1997 1998 1999 2000 2001 2002

Cash / Total Assets Cash / Current AssetsCurrent Assets / Total Assets Receivables / Current AssetsInventory / Current Assets

CONCLUSION We believe the company has effectively turned itself around with the Recapitalization Plan, the partnership with Medtronic, the introduction of new products and the focus on direct sales. The favorable quarterly performance displays the results of combining a direct sales force with innovative new products. The exclusive arrangement with Medtronic will continue to propel profitable growth.

We believe the stock will be priced in the $2.00 to $2.40 range within the next 12 months. The stock will receive attention with the introduction of new products. We expect several new products during each of the next few years.

We expect cash flow in the next few years will be used to reduce the level of debt. Any reduction in the debt load will have a positive impact on earnings and cash flow. Although this may be two years from

now, it is a potential positive catalyst that will support stock prices higher than our current forecast.

The company is attempting to leverage its marketing presence with the addition of more products. This may occur as the result of licensing technology, acquiring technology, or a merger/acquisition of another company. Any leveraging of the existing marketing force will cause our target price calculations to be conservative. Depending on the nature of a potential transaction, we believe that the current capitalization structure may be improved. Specifically, the debt due in 2006 is likely to be restructured.

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Events to monitor in the next year are new product introductions and corporate actions to gain additional products or technology. One new product we expect is an antiseptic coated catheter which will provide longer lasting protection against infection. In light of the anticipated market response to positive news, we believe the stock could easily trade above our price targets within the next year.


GG/Cohen Independent Research Group, Inc. Tel: 415 454 6985 Fax: 415 455 0295 Email: [email protected] www.cohenindependentresearchgroup.com

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mailto:[email protected]


MANAGEMENT HMP’s management team is outstanding. The team’s experience and past record speak for themselves.

HMP Management Team and Board of Directors

Horizon Medical Products, Inc. (“HMP” or the “Company”) was founded by Mr. Marshall B. Hunt and Mr. William (“Bill”) E. Peterson, Jr. in February of 1990. Today, the Company is comprised of the following dynamic leaders who collectively possess over 150 years of experience.

Name Position Years Experience

Mr. Marshall B. Hunt Chairman and Chief Executive Officer 24

Mr. Robert (“Bob”) Wenzel President and Chief Operating Officer 25

Mr. Bruce Maloy Vice President of Administration 15

Mr. Robert R. Singer Vice President of Sales 16

Mr. Michael J. Fowler Vice President of Manufacturing 17

Mr. Anthony David Smith Vice President of Engineering & Development 6

Mr. Brad Maruca Director of Marketing 7

Ms. Lauren Hart Oncology Business Manager 9 Mr. Kyle Coddington HAI and Dialysis Product Manager 6 Mr. Scott R. Moeller Director of Quality Assurance 12

Ms. Elaine G. Swygert Controller 12 Mr. Marshall B. Hunt – Chairman and Chief Executive Officer

In 1990, Mr. Hunt co-founded HMP to exploit opportunities in the vascular access markets. Since its inception, he has served as the Chief Executive Officer of the Company, assuming the additional responsibilities of Chairman in 1997. In this capacity, Mr. Hunt is responsible for directing the strategic activities of the business; including forming and communicating the vision of HMP to its employees and driving the Company’s market focus.

Prior to his involvement in HMP, Mr. Hunt founded Cardiac Medical, Inc. (“CMI”) in 1987. Under his tutelage, CMI became one of the world’s largest

distributors of cardiac pacemakers with sales exceeding $40.0 million in 1996. CMI, which added Mr. Peterson (identified below) as a principal in 1990, sold its distribution rights back to its manufacturer (Sulzer Intermedics, Inc.) in 1997. In this regard, Mr. Hunt no longer has any affiliation with CMI, devoting 100% of his time to HMP. Mr. Hunt has more than 24 years of extensive medical sales and management experience, resulting from a diverse array of professional experiences. From 1979 through 1981, he held both sales and management positions with American Hospital Supply Corporation, one of the world’s largest suppliers of hospital products. In 1981, he established Hunt Medical Systems, Inc. (“HMS”), a

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sales and marketing firm located in Atlanta, Georgia. At that time, HMS was a distributor of pacemaker products in Georgia and Tennessee. During this capacity, Mr. Hunt gained extensive experience in the operating room attending and assisting in over 1,000 operations. He also gained invaluable experience in clinical investigations and in market knowledge and direction. That involvement led to the formation of CMI in 1987 as described above.

Mr. Hunt graduated in 1979 from Florida State University where he received his Bachelor of Science with a dual major in Marketing and Finance. An Eagle Scout as a young man, Mr. Hunt is also a graduate of the Owner/President Management Program at the Harvard Business School. Mr. Hunt also serves on the Board of Directors of the Young President’s Organization.

Mr. Robert (“Bob”) Wenzel – President and Chief Operating Officer

In May 2002, HMP hired Robert J. (Bob) Wenzel as its Chief Operating Officer. Mr. Wenzel brings over 25 years of experience in general management, sales management, finance and turnaround expertise, having recently served as Chief Operating Officer of VirtualFund, Inc., where he assisted that company in growing annual revenues from $10 million to $120 million. As COO of HMP, Mr. Wenzel is responsible for all aspects of HMP's day-to-day operations.

Prior to his stint as COO of VirtualFund, Mr. Wenzel was the President of LaserMaster Corporation, leading that organization through a massive turnaround effort transitioning that company from a systems integrator to an engine manufacturer. He was also the General Manager of the Compeer Division of the CPT Corporation where he created and developed a new division to leverage that company's sales channels. Mr. Wenzel has BS in business from the University of Minnesota.

We believe Bob Wenzel has the experience and operating skills to oversee and drive marketing, product introduction. We believe he will drive operational efficiencies in the coming years.

Mr. Bruce Maloy – Vice President of Administration

Mr. Maloy joined HMP in 1990 as its first employee. His dedication to the Company resulted in numerous promotions, enabling him to progress from a series of sales and marketing positions within HMP and eventually becoming the Director of Marketing. In April 1996, Mr. Maloy was named Vice President of Administration and assumed responsibilities for all administrative functions and human resource activities. During his tenure at HMP, Mr. Maloy has overseen the development of HMP’s international sales presence that currently covers more than 50 global countries. He was also instrumental in coordinating the relocation of the general and administrative functions of Neostar® from King of Prussia, Pennsylvania to Manchester, Georgia.

Prior to joining HMP, he held management positions with several Fortune 500 companies, including Key Account Manager of Noxell Corporation (1987 – 1989) and Sales Manager of Ryder, Inc. (1989 – 1990). Mr. Maloy has incorporated many of the training techniques used by these Fortune 500 companies into HMP’s current training programs. In 1987, Mr. Maloy earned his Bachelor of Science in Public Relations from the University of Florida in Gainesville, Florida. Since that time, he has actively participated in the Senior Executive Network, Human Resource Center Executive Committee and is certified in the Executive Management Program at Florida State University.

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Mr. Robert R. Singer – Vice President of Sales

Mr. Singer joined the Company in 1990 as its third employee. Prior to assuming his current role as the Vice President of Sales in 1999, he served in every facet of the Company’s sales force, from Sales Representative to National Sales Manager. Through these experiences, Mr. Singer acquired the skills and relationships that ascribed him as one of the leading sales management executives in each of HMP’s highly technical and demanding markets. As a sales representative, Mr. Singer was a member of HMP’s President’s Club that annually honored the top sales people within the Company. He also served as a District and Regional sales manager and achieved record sales growth for the Mid-Atlantic region in 1995.

Mr. Singer’s prior sales experience was obtained through Mixon-Baker Financial, an Atlanta based financial planning firm, where he was a sales representative from 1987 to 1990. Mr. Singer earned his Bachelor of Arts in Communication from Mercer University in 1987.

Mr. Michael J. Fowler – Vice President of Manufacturing

Mr. Fowler has served as HMP’s Vice President of Manufacturing since March 1999. In this capacity, Mr. Fowler is responsible for all manufacturing activities at HMP’s Manchester, GA facility. Beginning his career with Rockwell International Missile Systems Division as a Production Engineer, Mr. Fowler was primarily responsible for labor standards and cost improvement projects on government contracts. In 1989, he moved to the medical device industry, where he spent more than three years with Baxter Healthcare as a plant Senior Industrial Engineer. In this role, his responsibilities ranged from ergonomics analysis, production support, plant layouts, cost improvement projects,

and plant consolidation projects. In more recent times, he spent more than seven years with C.R. Bard’s Medical Division as a Senior Manufacturing Engineer, responsible for plant validations, layouts, maintenance, and all other plant engineering support. Mr. Fowler received a Bachelor degree in Industrial Engineering from Georgia Tech in 1985.

Mr. Anthony David Smith – Vice President of Engineering & New Product Development

Mr. David Smith joined HMP in June 1997 and currently holds the position of Vice President of Engineering & Development. In this capacity he is mainly responsible for conducting new product development and design control projects as well as maintaining ISO, CE, and FDA compliance certifications and audits. Mr. Smith is also responsible for the maintenance of certain required quality (levels through design and management) of the preventative maintenance department, calibration, and the process monitoring control programs.

Prior to his role as Engineering Manager, Mr. Smith also served as Production Manager until November 1998. As Production Manager, Mr. Smith managed the operation of the manufacturing floor and staff. Mr. Smith received a Bachelor of Science in Mechanical Engineering from Florida State University in May 1997.

Mr. Brad Maruca – Director of Marketing

Mr. Brad Maruca joined HMP in June 1996 and currently serves as the Director of Marketing. In this capacity, Mr. Maruca is responsible for spearheading the introduction of new products into the marketplace as well as developing and implementing the Company’s sales strategy for new products. Once a sales strategy has been developed, Mr. Maruca is then responsible for pioneering the

34


strategy to ensure market acceptance of a new products. Mr. Maruca has also played a key role in identifying new technologies and negotiating and proctoring their acquisition through the coordination of patent information and legal counsel, regulatory needs, engineering input and approval as well as manufacturing and capacity requirements.

Mr. Maruca began his career with HMP in June1996 and has since held various positions with the Company through the years. He started out as the Southeast Florida sales representative and was soon growing sales from $5900 per month to $58,000 per month when he won the Representative of the Year award in 1999. He later went on to become the Interim Regional Sales Manager where he maintained his own personal territory as well as managing four sales representatives within the same region. Mr. Maruca later succeeded to the position of Business Manager responsible for forecasting future sales, and identifying and coordinating O.E.M opportunities to increase manufacturing capacity. Mr. Maruca received a Bachelor of Science in Biology with minors in Chemistry, Psychology, and Botany from Florida State University in December 1995.

Ms. Lauren Hart –Oncology Business Manager

Ms. Hart joined HMP in 1993 on a paraprofessional internship while earning her degree in Marketing and International Business from Florida State University. Following graduation, she became HMP’s Customer Relations Manager, responsible for implementing policies for customer and distributor orders worldwide. In 1995, Ms. Hart assumed the additional responsibility for HMP’s collegiate recruiting program. After successful completion of HMP’s transition to the Manchester, Georgia facility, Ms. Hart was promoted to Product Manger for Vascular Ports. In this capacity, Ms. Hart was responsible for all technical field support

and marketing aspects of the Triumph-1®, Infuse-A-Port®, and LifePort® products. In 2000, Ms. Hart was again promoted, to National Oncology Business Manager where she is responsible for all aspects of HMP’s oncology related business.

Mr. Kyle Coddington - HAI and Dialysis Product Manger

Mr. Coddington joined HMP in 2002 as Dialysis Product Manager. Mr. Coddington gained considerable product management training and experience while at Kendall Healthcare, a division of Tyco International. Prior to his promotion into product management, Mr. Coddington had a successful career as a territory manager in St. Petersburg, Florida where he received accolades as top producing territory manager in the region and ‘Curity Club (equivalent to President’s Club)’ in 2001 after only one year in the territory. Mr Coddington continues to be a significant contributor to the long-term success of HMP by managing the IsoMed® HAI pump from Medtronic and the new LifeJet™ F-16 dialysis catheter and related products. Mr. Coddington graduated from Florida State University’s business school in 1997 with a Bachelor of Science.

Mr. Scott R. Moeller – Director of Quality Assurance

Mr. Moeller joined the Company in November 1999 as the Director of Quality Assurance. In this capacity, Mr. Moeller is responsible for all quality activities related to HMP’s diverse line of medical devices. Prior to joining HMP, Mr. Moeller served as the Product Assurance Manager for Aastrom Biosciences from 1997 to 1999. Here he assisted with the company’s EN46001 and CE Marking compliance procedures. From 1996 to 1997, Mr. Moeller was the Quality Assurance Manager for one of C.R. Bard’s facilities, where he was responsible for all quality design, development, and

35


manufacturing activities. Additionally, Mr. Moeller has held a diverse array of operations positions at four different Abbott Laboratories facilities.

Mr. Moeller received his Masters of Business Administration in Industrial Management from the University of Dallas, where he graduated in 1995 summa cum laude. In addition, Mr. Moeller received his Bachelor of Science in Industrial Engineering from Ohio State University in 1990. He is also a Licensed Professional Engineer, a Certified Quality Manager, and a Certified Reliability Engineer (through the American Society of Quality).

Ms. Elaine G. Swygert – Controller

Ms. Swygert joined Horizon in February 1999 as Financial Planning Manager and was promoted to Controller in 2000. Ms. Swygert has overall responsibility for directing financial and accounting functions of the Company, including overseeing all functions performed by the external auditors.

Prior to joining Horizon, Elaine was co-owner and manager of Four Point LP Gas Company, with responsibilities for all facets of this family owned business, Ms. Swygert’s experience also includes Financial Reporting Manager for Sales Technologies, Assistant Controller for Imtech, and 3 years with Coopers & Lybrand (now PriceWaterhouseCoopers) where her last position was Senior Accountant. Elaine received her MBA in Finance from the University of Georgia, and her undergraduate degree in accounting from University of Georgia. Ms Swygert is a CPA in the state of Georgia.

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BALANCE SHEET: HORIZON MEDICAL (HMP) Annual Quarterly Assets 12/31/02 12/31/01 09/30/03 06/30/03 03/31/03 12/31/02Cash & Marketable Securities 3.71 2.77 2.0 2.6 3.1 3.7 Receivables 3.03 10.05 4.3 3.8 3.4 3.0 Inventories 5.60 15.83 5.7 5.4 5.3 5.6 Other Current Assets 0.51 1.57 0.5 0.8 0.2 0.5 Total Current Assets 12.87 30.23 12.5 12.5 12.0 12.9

Net Property/Plant/Equipment 2.19 2.72 2.1 2.1 2.2 2.2 Intangibles 22.01 38.23 21.3 21.6 21.9 22.0 Other Non-Current Assets 0.00 0.00 0.0 0.0 0.0 0.0 Other Assets 0.10 0.16 0.0 0.1 0.1 0.1 Total Assets 37.19 71.34 35.9 36.4 36.1 37.2

Liabilities & Shareholders Equity Accounts Payable 0.80 9.09 1.3 1.4 0.9 0.8 Notes Payable 0.00 0.00 0.0 0.0 0.0 0.0 Current Long-Term Debt 1.55 40.58 1.5 16.5 16.2 1.5 Current Capital Leases 0.00 0.00 0.0 0.0 0.0 0.0 Accrued Expenses 1.05 1.91 1.1 0.5 0.4 1.0 Other Current Liabilities 0.00 0.00 0.0 0.6 0.7 0.0 Total Current Liabilities 3.41 51.59 4.0 19.1 18.1 3.4

Total Long-Term Debt 18.34 1.35 17.4 2.9 3.2 18.3 Other Long-Term Liabilities 0.10 0.12 0.1 0.1 0.1 0.1 Total Long Term Liabilities 18.44 1.47 17.5 3.0 3.3 18.4 Total Liabilities 21.86 53.06 21.5 22.1 21.4 21.9

Preferred Stock 0.00 0.00 0.0 0.0 0.0 0.0 Net Common Stock 0.03 0.01 0.0 0.0 0.0 0.0 Capital Surplus 74.83 52.08 74.9 74.9 74.9 74.8 Retained Earnings -59.37 -33.20 -60.4 -60.4 -60.0 -59.4 Other Equity Adjustments -0.16 -0.61 -0.1 -0.2 -0.2 -0.2 Common Equity 15.33 18.28 14.4 14.3 14.7 15.3 Treasury Stock 0.00 0.00 0.0 0.0 0.0 0.0 Shareholders' Equity 15.33 18.28 14.4 14.3 14.7 15.3

Total Liabilities and Equity 37.19 71.34 35.9 36.4 36.1 37.2

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CASH FLOW: HORIZON MEDICAL (HMP) Annual Quarterly

Dec-02 Dec-01 Sep-03 Jun-03 Mar-03Net Income ($mil) 0.08Depreciation ($mil) 2.25 3.63 0.50 0.68 0.37Cash from Discontinued Oper ($mil) 0.00 0.00 0.00 0.00 0.00Net Other Adjustments ($mil) 20.15 0.46 0.00 0.00 0.00Net Ch in Oper Assets and Liabilities 7.38 0.27Net Cash from Oper Activities $mil 6.35 0.01

Property/Plant/Equipment ($mil)Subsidiaries ($mil) 12.30 2.25 0.00 0.25Investments ($mil) 0.00 0.00 0.00 0.00 0.00Cash Inflow from Invest Activites $mil 0.31 0.47 0.24Net Cash by Invest Activities $mil 12.29 2.44

Issuance of Equity Shares ($mil) 0.02 0.00 0.02 0.00 0.00Issuance of Debt Securities ($mil) 0.03Bank and Other Borrowings ($mil) 0.00 0.00 0.00 0.00Dividends and Distributions ($mil) 0.00 0.00 0.00 0.00 0.00Other Cash from Finan Activities $mil 0.00 0.00 0.00Net Cash by Finan Activities ($mil) 0.03

Exchange Rate Effect ($mil) 0.00 0.00 0.00 0.00 0.00Net Change in Cash ($mil) 0.96 2.23

Beginning Cash ($mil) 2.74 0.53 2.57 3.09 3.71Ending Cash ($mil) 3.71 2.77 1.99 2.57 3.09

(26.17) (5.12) (0.42) (0.65)

(0.30) (0.56) (0.66)(4.07) (0.40) (0.00)

(0.32) (0.28) (0.10) (0.14) (0.12)(0.25)

(0.03) (0.28)(0.13) (0.15) (0.15)

(5.65) (5.77) (0.49) (0.45)(0.60)

(1.62) (0.17)(7.25) (6.56) (0.46) (0.45)

(0.58) (0.52) (0.61)

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MODEL: HORIZON MEDICAL (HMP)

Annual Income Statement

INCOME STATEMENTHORIZON MEDICAL Annual DataHMP Estimated Reported

12/31/04 12/31/03 12/31/02 12/31/01

Net Sales 36.11 28.50 21.71 59.06COGS 14.28 11.43 9.34 38.74Depreciation ($mil) 0.00 0.00 0.00 0.00Gross Profit 21.83 17.07 12.37 20.32 S,G&A 18.25 15.44 16.11 20.91Research & Development ($mil) 0.00 0.00 0.00 0.00EBITDA 3.59 1.62 Interest Expense (-) 2.32 2.37 2.84 4.59Operating Income 1.27

Non-Operating Income (Expense) (+) 0.00 0.06Pretax Income 1.27 Provision for Income Taxes (-) 0.00 0.00 0.00 0.00Minority Interest (-) 0.00 0.00 0.00 0.00Investment Gains/Losses (+) 0.00 0.00 0.00 0.00Other Income (+) 0.00 0.00 0.00 0.00 Income from Continuing Operations 1.27 Extras & Discontinued Operations (+) 0.00 0.00 0.00 Net Income 1.27

Earnings Per Share 0.03Diluted Net EPS 0.03Diluted EPS (Before Non-recurring item 0.03

Common Dividend 0.00 0.00 0.00 0.00Dividend per Share 0.00 0.00 0.00 0.00

Average Shares 43.55 37.42 20.68 13.37Average Shares (diluted) 43.55 37.42 20.68 13.37

-3.74 -0.59

(0.75) (6.58) (5.18)

(0.03) (0.01)(0.78) (6.60) (5.12)

(0.78) (6.60) (5.12)

(19.56)

(0.78) (26.16) (5.12)

(0.02) (1.26) (0.38)(0.02) (1.26) (0.38)(0.02) (0.32) (0.38)

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Quarterly Income Statement

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Growth Drivers

Chart 12: Forecasted Growth, Annual

Forecasted Growth, Annual

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

200%

300%

400%

2001 2002 2003 2004

Revenues Gross Pft EBITDA Net Inc

Chart 13: Forecasted Margins, Annual

Forecasted Margins, Annual

-140%-120%-100%-80%-60%-40%-20%

0%20%40%60%80%

2000 2001 2002 2003 2004

Gross Mgn Op Inc Mgn EBITDA Mgn Net Inc Mgn

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Chart 14: Forecast of Expenses, Annual

Forecast of Expenses, Annual

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2000 2001 2002 2003 2004

COGS Exp SGA Exp Net Interest

Cash Metrics

Chart 15: LTM EPS & Cash Flow/EPS

LTM EPS & Cash Flow / EPS

4.236.67

-16.36

-7.99

-23.25

9.099.01

0.19

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Sep-03Mar-03Sep-02Mar-02

CF/

E

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

EPS

($)

LTM NCFO / LTM Earnings LTM FCF / LTM Earnings LTM Earnings

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GLOSSARY

Word Definition

Apheresis Re-infusion of a patient’s own blood from which certain cellular (eg, red blood cells, platelets, white blood cells, stem cells) or fluid elements (eg, plasma) have been removed

Artery A blood vessel that carries blood away from the heart; arteries are relatively thick- walled, muscular, and pulsating

Cancer A general term applied to a malignant growth (a mass of abnormal cells that continues to grow); there are many different types of cancer and each must be treated differently—no one drug regimen is effective for all types of cancer.

Catheter A tubular instrument designed to allow passage of fluid out of or into a body cavity

Central nervous system The brain and the spinal cord together

Central venous catheter A catheter passed through a peripheral or central vein and ending in the thoracic vena cava or right atrium; the peripheral end may connect to a chamber under the skin (port) used for injections given over periods of months

Chemotherapy Technically, treatment of any disease with chemical substances/drugs; commonly used to refer specifically to treatment for cancer

Colorectal cancer Cancer affecting either the colon or rectum; cancer confined to the colon is colon cancer; cancer confined to the rectum is rectal cancer

Dialysis A form of filtration to separate crystalloid substances from colloid substances or smaller molecules from larger molecules by the use of a semipermeable membrane between the solution (eg, blood) and water. The smaller substance passes through the membrane into the water on the other side

Dwell time The duration of time an indwelling catheter remains in the body

Fibrin An elastic filamentous protein in blood that is involved in coagulation of the blood; a major component of thrombi

Hemodialysis Dialysis of soluble substances and water from the blood; cellular elements and colloids are separated from soluble substances, regulated by the pore size of the semipermeable membrane

Heparin An anticoagulant substance—a substance that prevents coagulation—that is a normal component of various tissues, particularly liver and lung, and mast cells.

Hepatic Of or pertaining to the liver

Hepatic artery The primary artery bringing blood from the heart to the liver.

Hepatic arterial infusion (HAI)

Infusion of drugs directly into the liver via the hepatic artery

Indwelling catheter A catheter left in place in the bladder

Inferior vena cava The large vein that carries blood from the lower limbs and abdominal organs into the heart through the right atrium

Infusion The introduction of a fluid other than blood into a vein

Intervention In medicine, any action (eg, treatment of side effects) that must be taken to manage a patient during therapy; often done by nurses

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Word Definition

Intrathecal Into or within the space underneath the middle membrane covering of the central nervous system or between the outer and middle membranes membrane. The tough outer membrane is called the dura mater; the delicate middle membrane is called the arachnoid membrane; the spaces are called the subarachnoid space and the subdural space

Metastatic cancer Cancer that has spread from its original site to other parts of the body; metastatic cancer consists of the same cell types as the original cancer and is called by the same name breast cancer that has spread to the lungs is metastatic breast cancer (not lung cancer); lung cancer that has spread to the liver is metastatic lung cancer, not liver cancer; etc.

Nephrology The branch of medical science concerned with the kidneys

Occlusions The act of closing or the state of being closed or blocked

Oncology The study or science dealing with understanding and treating cancers

Peripheral Relating to or situated at the outer part or surface (periphery) of the body; opposite of central

Peritoneum The sac that lines the abdominal cavity and covers most of the abdominal organs

Peritoneal Of or pertaining to the peritoneum

Pheresis A procedure in which blood is removed from a donor, separated, and a portion retained, with the remainder returned to the donor. Specific types of pheresis include leukopheresis (removal of leukocytes, or white blood cells) and plasmapheresis (removal of plasma)

Port A device designed to accept multiple needle insertions that is implanted under the skin to provide quick and easy access via a catheter to parts of the body that must be treated

Primary cancer The cancer at the site where it began; the original tumor mass

Refractory Resistant to treatment; intractable.

Septum A thin wall dividing 2 cavities or masses of softer tissue

Spinal Of or pertaining to the spine

Stem cell A precursor cell; a cell whose progeny may develop into one of several different types or lineages of cells, depending upon its microenvironment

Superior vena cava The major vein in the chest that carries blood from the upper part of the body into the heart

Systemic Of or pertaining to the body as a whole; systemic therapy as used here means introduction into the bloodstream so that the whole body will be exposed to the medication

Thrombus Clot in the cardiovascular system formed from constituents in blood. Plural: thrombi

Urokinase Initially approved to dissolve blood clots in lungs and heart arteries and the only drug FDA-approved for catheter clearance; derived from cultures of human kidney cells from newborns who have died of natural causes. Side effects of the medication include fever; low blood pressure (hypotension); bleeding or oozing from cuts, wounds, gums, or around the site of injection—therefore, products that reduce urokinase use are desirable

44


Word Definition

Vascular Of or pertaining to the blood vessels (veins, arteries, capillaries, sinuses)

Vein A blood vessel that carries blood back to the heart

Venous Relating to a vein or veins

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Percent of Buy Recommendations: 100%

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