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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number - 333-56135
RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware | 95-4674065 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
599 Lexington Drive, 18th Floor New York, New York | 10022 | |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 758-2555
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ Not Applicable x
Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 9,144,293 on November 14, 2003.
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RIVER HOLDING CORP. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2003
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RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
September 30, 2003 | December 31, 2002 | |||||
CURRENT ASSETS: | ||||||
Cash | $ | 3,021 | $ | 6,425 | ||
Accounts receivable, less allowance for doubtful accounts of $1,145 and $1,331 at September 30, 2003 and December 31, 2002, respectively | 22,250 | 24,214 | ||||
Inventories, net | 25,846 | 22,624 | ||||
Other current assets | 915 | 1,459 | ||||
Total current assets | 52,032 | 54,722 | ||||
PROPERTY, PLANT AND EQUIPMENT, net | 42,126 | 45,769 | ||||
OTHER ASSETS: | ||||||
Goodwill | 39,313 | 34,137 | ||||
Deferred financing and other costs, net | 6,665 | 7,888 | ||||
Other assets | 1,077 | 987 | ||||
Total other assets | 47,055 | 43,012 | ||||
Total assets | $ | 141,213 | $ | 143,503 | ||
See notes to unaudited condensed financial statements
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RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ DEFICIT
(amounts in thousands, except per share amounts)
September 30, 2003 | December 31, 2002 | |||||||
CURRENT LIABILITIES: | ||||||||
Notes payable to bank | $ | 8,593 | $ | 13,783 | ||||
Accounts payable | 8,881 | 10,379 | ||||||
Accrued liabilities | 27,931 | 22,302 | ||||||
Total current liabilities | 45,405 | 46,464 | ||||||
NOTES PAYABLE TO BANK, net of current portion | 50,842 | 55,792 | ||||||
SENIOR SUBORDINATED NOTES PAYABLE | 115,000 | 115,000 | ||||||
NOTES PAYABLE TO AFFILIATES | 39,317 | 39,317 | ||||||
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 526 and 497 shares issued and outstanding at September 30, 2003 and December 31, 2002; liquidation preference — $52,594 and $49,735 respectively | 52,104 | 49,189 | ||||||
Accrued preferred stock dividend, payable in kind | 2,772 | 1,192 | ||||||
54,876 | 50,381 | |||||||
OTHER NON-CURRENT LIABILITIES | 2,083 | 1,961 | ||||||
Total liabilities | 307,523 | 308,915 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 4) | ||||||||
STOCKHOLDERS’ EQUITY (DEFICIT): | ||||||||
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at September 30, 2003 and December 31, 2002 | 3,845 | 3,524 | ||||||
Common stock, $0.01 par value; 37,000 shares authorized; 9,144 issued and 9,069 and 9,144 outstanding at September 30, 2003 and December 31, 2002 respectively | 97,848 | 97,848 | ||||||
Additional paid in capital | 881 | 881 | ||||||
Treasury stock, 75 and 0 shares, at cost | (75 | ) | — | |||||
Cumulative translation adjustment | 6,234 | 2,740 | ||||||
Accumulated deficit | (275,043 | ) | (270,405 | ) | ||||
Total stockholders’ deficit | (166,310 | ) | (165,412 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 141,213 | $ | 143,503 | ||||
See notes to unaudited condensed financial statements
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RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||
NET SALES | $ | 44,566 | $ | 42,144 | $ | 135,713 | $ | 127,164 | ||||||||
COST OF SALES | 25,463 | 26,693 | 77,828 | 76,790 | ||||||||||||
Gross Profit | 19,103 | 15,451 | 57,885 | 50,374 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Selling, distribution, general & administrative | 12,629 | 11,579 | 37,675 | 35,042 | ||||||||||||
Research and development | 918 | 587 | 2,278 | 1,999 | ||||||||||||
13,547 | 12,166 | 39,953 | 37,041 | |||||||||||||
Income from operations | 5,556 | 3,285 | 17,932 | 13,333 | ||||||||||||
INTEREST EXPENSE AND OTHER, net | 6,802 | 5,736 | 17,355 | 15,782 | ||||||||||||
Net income (loss) before provision for income taxes | (1,246 | ) | (2,451 | ) | 577 | (2,449 | ) | |||||||||
PROVISION FOR INCOME TAXES | 581 | 660 | 1,909 | 2,066 | ||||||||||||
Net loss | $ | (1,827 | ) | $ | (3,111 | ) | $ | (1,332 | ) | $ | (4,515 | ) | ||||
OTHER COMPREHENSIVE INCOME: | ||||||||||||||||
Foreign currency translation gain (loss) | 1,538 | (177 | ) | 3,494 | 2,014 | |||||||||||
Comprehensive income (loss) | $ | (289 | ) | $ | (3,288 | ) | $ | 2,162 | $ | (2,501 | ) | |||||
See notes to unaudited condensed financial statements
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RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine Months Ended | ||||||||
September 30, 2003 | September 30, 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,332 | ) | $ | (4,515 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities– | ||||||||
Depreciation and amortization | 9,058 | 8,663 | ||||||
Amortization of deferred financing costs | 1,395 | 1,336 | ||||||
Accrued Preferred Stock Dividends | 1,512 | — | ||||||
Provision for bad debts | 187 | 351 | ||||||
Loss (gain) on disposal of equipment | 93 | (37 | ) | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 2,774 | (2,078 | ) | |||||
Inventories | (2,513 | ) | 2,101 | |||||
Other current assets | 301 | (654 | ) | |||||
Other assets | (87 | ) | (12 | ) | ||||
Accounts payable | (1,706 | ) | (5,139 | ) | ||||
Accrued liabilities | 5,426 | 5,567 | ||||||
Other non-current liabilities | (87 | ) | 304 | |||||
Net cash provided by operating activities | 15,021 | 5,887 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (5,293 | ) | (5,277 | ) | ||||
Proceeds from sales of property, plant and equipment | 18 | 156 | ||||||
Net cash used in investing activities | (5,275 | ) | (5,121 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of notes payable to bank | (19,663 | ) | (24,004 | ) | ||||
Proceeds from bank borrowings | 7,591 | 2,450 | ||||||
Proceeds from notes payable to affiliates | — | 20,000 | ||||||
Purchase of treasury stock | (75 | ) | — | |||||
Additions of deferred financing costs | (172 | ) | (477 | ) | ||||
Payment of capital lease obligations | (39 | ) | (29 | ) | ||||
Net cash used in financing activities | (12,358 | ) | (2,060 | ) | ||||
Effect of exchange rate changes on cash | (792 | ) | (768 | ) | ||||
NET DECREASE IN CASH | (3,404 | ) | (2,062 | ) | ||||
CASH, beginning of period | 6,425 | 7,085 | ||||||
CASH, end of period | $ | 3,021 | $ | 5,023 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 8,659 | $ | 10,045 | ||||
Income taxes (primarily foreign) | $ | 1,714 | $ | 2,259 | ||||
NON-CASH FINANCING ACTIVITIES: | ||||||||
Preferred dividends accrued or paid-in-kind | $ | 3,287 | $ | 4,183 | ||||
Issuance of warrants | $ | — | $ | 750 | ||||
See notes to unaudited condensed financial statements
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RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Financial Statements. River Holding Corp. (“Holding”) is a holding company with no other operations than those of its majority owned subsidiary, Hudson Respiratory Care Inc. (“Hudson” or the “Company”). The condensed consolidated financial statements included herein have been prepared by Holding and Hudson, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2003, the results of operations for the three and nine month periods ended September 30, 2003 and September 30, 2002 and statements of cash flows for the nine month period ended September 30, 2003 and September 30, 2002 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although Holding believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with Holding’s 2002 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be achieved for a full year.
Financial Condition and Results of Operations
Management believes that Holding’s ability to achieve operating results in line with current forecasts and to comply with the terms and covenants of its financing agreements will enable Holding to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. If Holding does not generate sufficient cash flow from operations in line with its current forecasts, Holding would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. Holding currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on Holding.
Significant Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The significant estimates made in the preparation of the Company’s consolidated financial statements relate to allowance for bad debts, rebate reserve, and inventory reserve.
Reclassifications
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. Holding has adopted this standard as of September 30, 2003, and has classified its mandatorily redeemable preferred stock as a liability. For the three months ended September 30, 2003, Holding recorded $1,512,000 in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.
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In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. More specifically, SFAS 149, among other things, clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, and amends the definition of an “underlying” to conform to recently issued standards. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for certain aspects of the standard that relate to previously issued guidance, which should continue to be applied in accordance with the previously set effective dates. Also, this standard is effective for existing and new contracts entered into after June 30, 2003 as they relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of this standard did not have a material effect on Holding’s financials.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (“SFAS 148”), an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The interim transition was effective December 31, 2002 and annual disclosure requirements of SFAS 148 are effective for the Company’s fiscal year 2003. Holding does not expect SFAS 148 to have a material impact on its consolidated results of operations or financial position.
2.Inventories. Inventories consisted of the following (amounts in thousands):
September 30, 2003 | December 31, 2002 | |||||||
Raw materials | $ | 5,939 | $ | 5,266 | ||||
Work-in-process | 5,074 | 4,983 | ||||||
Finished goods | 16,623 | 13,926 | ||||||
27,636 | 24,175 | |||||||
Provision for obsolescence | (1,790 | ) | (1,551 | ) | ||||
$ | 25,846 | $ | 22,624 | |||||
3.Segment Data and Subsidiaries Guaranteeing Debt. Holding presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. Holding has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” Holding’s operating segments are the same as its reporting segments.
The Company is the 100% owner of certain subsidiaries that do not guarantee the Company’s senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor subsidiaries, including the Company, and non-guarantor subsidiaries (amounts in thousands):
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RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2003 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
ASSETS | |||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||
Cash | $ | — | $ | 649 | $ | 2,372 | $ | — | $ | 3,021 | |||||||||
Accounts receivable | — | 15,108 | 7,142 | — | 22,250 | ||||||||||||||
Intercompany receivables, net | — | — | 1,268 | (1,268 | ) | — | |||||||||||||
Inventories | — | 21,463 | 6,032 | (1,649 | ) | 25,846 | |||||||||||||
Other current assets | (583 | ) | 865 | 633 | — | 915 | |||||||||||||
Total current assets | (583 | ) | 38,085 | 17,447 | (2,917 | ) | 52,032 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | 4,233 | 35,933 | 1,960 | — | 42,126 | ||||||||||||||
INTANGIBLE ASSETS, net | — | — | 39,313 | — | 39,313 | ||||||||||||||
DEFERRED FINANCING COSTS, net | — | 6,665 | — | — | 6,665 | ||||||||||||||
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost | — | 28,636 | 4,000 | (32,636 | ) | — | |||||||||||||
OTHER ASSETS | (77 | ) | 1,135 | 19 | — | 1,077 | |||||||||||||
Total other assets | (77 | ) | 36,436 | 43,332 | (32,636 | ) | 47,055 | ||||||||||||
$ | 3,573 | $ | 110,454 | $ | 62,739 | $ | (35,553 | ) | $ | 141,213 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||
Notes payable to bank | $ | — | $ | 3,373 | $ | 5,220 | $ | — | $ | 8,593 | |||||||||
Accounts payable | — | 7,752 | 1,129 | — | 8,881 | ||||||||||||||
Intercompany payables, net | — | 1,268 | — | (1,268 | ) | — | |||||||||||||
Accrued liabilities | (49 | ) | 20,973 | 7,007 | — | 27,931 | |||||||||||||
Total current liabilities | (49 | ) | 33,366 | 13,356 | (1,268 | ) | 45,405 | ||||||||||||
NOTES PAYABLE TO BANKS, net of current portion | — | 42,627 | 8,215 | — | 50,842 | ||||||||||||||
SENIOR SUBORDINATED NOTES PAYABLE | — | 115,000 | — | — | 115,000 | ||||||||||||||
NOTES PAYABLE TO AFFILIATE | — | 26,951 | 12,366 | — | 39,317 | ||||||||||||||
MANDATORILY-REDEEMBABLE PREFERRED STOCK | — | 54,876 | — | — | 54,876 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 242 | 1,841 | — | 2,083 | ||||||||||||||
Total liabilities | (49 | ) | 273,062 | 35,778 | (1,268 | ) | 307,523 | ||||||||||||
STOCKHOLDERS’ DEFICIT | 3,622 | (162,608 | ) | 26,961 | (34,285 | ) | (166,310 | ) | |||||||||||
$ | 3,573 | $ | 110,454 | $ | 62,739 | $ | (35,553 | ) | $ | 141,213 | |||||||||
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RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2002 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
ASSETS | |||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||
Cash | $ | — | $ | 3,568 | $ | 2,857 | $ | — | $ | 6,425 | |||||||||
Accounts receivable | — | 17,207 | 7,007 | — | 24,214 | ||||||||||||||
Intercompany receivables, net | — | — | 1,227 | (1,227 | ) | — | |||||||||||||
Inventories | — | 19,303 | 4,204 | (883 | ) | 22,624 | |||||||||||||
Other current assets | (258 | ) | 1,162 | 555 | — | 1,459 | |||||||||||||
Total current assets | (258 | ) | 41,240 | 15,850 | (2,110 | ) | 54,722 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | 5,901 | 38,548 | 1,320 | — | 45,769 | ||||||||||||||
INTANGIBLE ASSETS, net | — | — | 34,137 | — | 34,137 | ||||||||||||||
DEFERRED FINANCING COSTS, net | — | 7,888 | — | — | 7,888 | ||||||||||||||
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost | — | 28,636 | 4,000 | (32,636 | ) | — | |||||||||||||
OTHER ASSETS | (77 | ) | 1,064 | — | — | 987 | |||||||||||||
Total other assets | (77 | ) | 37,588 | 38,137 | (32,636 | ) | 43,012 | ||||||||||||
$ | 5,566 | $ | 117,376 | $ | 55,307 | $ | (34,746 | ) | $ | 143,503 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||
Notes payable to banks – current portion | — | 9,250 | 4,533 | — | 13,783 | ||||||||||||||
Accounts payable | $ | — | $ | 8,540 | $ | 1,839 | $ | — | $ | 10,379 | |||||||||
Intercompany payables, net | — | 1,227 | — | (1,227 | ) | — | |||||||||||||
Accrued liabilities | (90 | ) | 18,026 | 4,366 | — | 22,302 | |||||||||||||
Total current liabilities | (90 | ) | 37,043 | 10,738 | (1,227 | ) | 46,464 | ||||||||||||
NOTES PAYABLE TO BANKS, net of current portion | — | 46,300 | 9,492 | — | 55,792 | ||||||||||||||
SENIOR SUBORDINATED NOTES PAYABLE | — | 115,000 | — | — | 115,000 | ||||||||||||||
NOTES PAYABLE TO AFFILIATE | — | 26,951 | 12,366 | — | 39,317 | ||||||||||||||
MANDATORILY-REDEEMBABLE PREFERRED STOCK | — | 50,381 | — | — | 50,381 | ||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 281 | 1,680 | — | 1,961 | ||||||||||||||
Total liabilities | (90 | ) | 275,956 | 34,276 | (1,227 | ) | 308,915 | ||||||||||||
STOCKHOLDERS’ DEFICIT | 5,656 | (158,580 | ) | 21,031 | (33,519 | ) | (165,412 | ) | |||||||||||
$ | 5,566 | $ | 117,376 | $ | 55,307 | $ | (34,746 | ) | $ | 143,503 | |||||||||
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RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2003 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
NET SALES | $ | — | $ | 38,316 | $ | 10,619 | $ | (4,369 | ) | $ | 44,566 | ||||||||
COST OF SALES | 556 | 24,145 | 4,855 | (4,093 | ) | 25,463 | |||||||||||||
Gross profit | (556 | ) | 14,171 | 5,764 | (276 | ) | 19,103 | ||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Selling, distribution, general and administrative | 250 | 8,932 | 3,447 | — | 12,629 | ||||||||||||||
Research and development | — | 537 | 381 | — | 918 | ||||||||||||||
250 | 9,469 | 3,828 | — | 13,547 | |||||||||||||||
Income (loss) from operations | (806 | ) | 4,702 | 1,936 | (276 | ) | 5,556 | ||||||||||||
INTEREST EXPENSE AND OTHER, net | — | 6,197 | 605 | — | 6,802 | ||||||||||||||
Income (loss) before provision for income taxes | (806 | ) | (1,495 | ) | 1,331 | (276 | ) | (1,246 | ) | ||||||||||
PROVISION FOR INCOME TAXES | — | 68 | 513 | — | 581 | ||||||||||||||
Net (loss) income | $ | (806 | ) | $ | (1,563 | ) | $ | 818 | $ | (276 | ) | $ | (1,827 | ) | |||||
Three Months Ended September 30, 2002 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
NET SALES | $ | — | $ | 37,126 | $ | 8,849 | $ | (3,831 | ) | $ | 42,144 | ||||||||
COST OF SALES | 565 | 25,058 | 4,508 | (3,438 | ) | 26,693 | |||||||||||||
Gross profit | (565 | ) | 12,068 | 4,341 | (393 | ) | 15,451 | ||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Selling, distribution, general and administrative | — | 8,984 | 2,595 | — | 11,579 | ||||||||||||||
Research and development | — | 444 | 143 | — | 587 | ||||||||||||||
— | 9,428 | 2,738 | — | 12,166 | |||||||||||||||
Income (loss) from operations | (565 | ) | 2,640 | 1,603 | (393 | ) | 3,285 | ||||||||||||
INTEREST EXPENSE AND OTHER, net | — | 5,079 | 657 | — | 5,736 | ||||||||||||||
Income (loss) before provision for income taxes | (565 | ) | (2,439 | ) | 946 | (393 | ) | (2,451 | ) | ||||||||||
PROVISION FOR INCOME TAXES | — | 44 | 616 | — | 660 | ||||||||||||||
Net (loss) income | $ | (565 | ) | $ | (2,483 | ) | $ | 330 | $ | (393 | ) | $ | (3,111 | ) | |||||
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RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2003 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
NET SALES | $ | — | $ | 118,387 | $ | 32,039 | $ | (14,713 | ) | $ | 135,713 | ||||||||
COST OF SALES | 1,668 | 74,876 | 15,231 | (13,947 | ) | 77,828 | |||||||||||||
Gross profit | (1,668 | ) | 43,511 | 16,808 | (766 | ) | 57,885 | ||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Selling, distribution, general and administrative | 291 | 27,419 | 9,965 | — | 37,675 | ||||||||||||||
Research and development | — | 1,284 | 994 | — | 2,278 | ||||||||||||||
291 | 28,703 | 10,959 | — | 39,953 | |||||||||||||||
Income (loss) from operations | (1,959 | ) | 14,808 | 5,849 | (766 | ) | 17,932 | ||||||||||||
INTEREST EXPENSE AND OTHER, net | — | 15,487 | 1,868 | — | 17,355 | ||||||||||||||
Income (loss) before provision for income taxes | (1,959 | ) | (679 | ) | 3,981 | (766 | ) | 577 | |||||||||||
PROVISION FOR INCOME TAXES | — | 295 | 1,614 | — | 1,909 | ||||||||||||||
Net (loss) income | $ | (1,959 | ) | $ | (974 | ) | $ | 2,367 | $ | (766 | ) | $ | (1,332 | ) | |||||
Nine Months Ended September 30, 2002 | |||||||||||||||||||
River | Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||||||
NET SALES | $ | — | $ | 111,632 | $ | 26,437 | $ | (10,905 | ) | $ | 127,164 | ||||||||
COST OF SALES | 1,695 | 72,708 | 13,461 | (11,074 | ) | 76,790 | |||||||||||||
Gross profit | (1,695 | ) | 38,924 | 12,976 | 169 | 50,374 | |||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Selling, distribution, general and administrative | 40 | 27,549 | 7,453 | — | 35,042 | ||||||||||||||
Research and development | — | 1,309 | 690 | — | 1,999 | ||||||||||||||
40 | 28,858 | 8,143 | — | 37,041 | |||||||||||||||
(Loss) income from operations | (1,735 | ) | 10,066 | 4,833 | 169 | 13,333 | |||||||||||||
INTEREST EXPENSE AND OTHER, net | — | 14,433 | 1,349 | — | 15,782 | ||||||||||||||
Income (loss) before provision for income taxes | (1,735 | ) | (4,367 | ) | 3,484 | 169 | (2,449 | ) | |||||||||||
PROVISION FOR INCOME TAXES | — | 124 | 1,942 | — | 2,066 | ||||||||||||||
Net (loss) income | $ | (1,735 | ) | $ | (4,491 | ) | $ | 1,542 | $ | 169 | $ | (4,515 | ) | ||||||
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RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2003 | ||||||||||||||||
River | Guarantor | Non- Guarantor | Total | |||||||||||||
Net cash provided by operating activities | $ | 75 | $ | 11,206 | $ | 3,740 | $ | 15,021 | ||||||||
Net cash used in provided by investing activities | — | (4,293 | ) | (982 | ) | (5,275 | ) | |||||||||
Net cash used in financing activities | (75 | ) | (9,761 | ) | (2,522 | ) | (12,358 | ) | ||||||||
Effect of exchange rate changes on cash | — | (71 | ) | (721 | ) | (792 | ) | |||||||||
NET DECREASE IN CASH | — | (2,919 | ) | (485 | ) | (3,404 | ) | |||||||||
CASH, beginning of year | — | 3,568 | 2,857 | 6,425 | ||||||||||||
CASH, end of year | $ | — | $ | 649 | $ | 2,372 | $ | 3,021 | ||||||||
For the Nine Months Ended September 30, 2002 | |||||||||||||||
River | Guarantor | Non- Guarantor | Total | ||||||||||||
Net cash provided by (used in) operating activities | $ | — | $ | 7,346 | $ | (1,459 | ) | $ | 5,887 | ||||||
Net cash used in investing activities | — | (4,614 | ) | (507 | ) | (5,121 | ) | ||||||||
Net cash (used in) provided by financing activities | — | (5,556 | ) | 3,496 | (2,060 | ) | |||||||||
Effect of exchange rate changes on cash | — | 102 | (870 | ) | (768 | ) | |||||||||
NET DECREASE IN CASH | — | (2,722 | ) | 660 | (2,062 | ) | |||||||||
CASH, beginning of year | — | 4,713 | 2,372 | 7,085 | |||||||||||
CASH, end of year | $ | — | $ | 1,991 | $ | 3,032 | $ | 5,023 | |||||||
Holding’s percentage of sales by geographic region for the three and nine month period ended September 30, 2003 and September 30, 2002 is as follows:
Three Months Ended | ||||||
September 30, 2003 | September 30, 2002 | |||||
United States | 70.7 | % | 73.8 | % | ||
Europe | 16.2 | 13.9 | ||||
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) | 7.7 | 7.2 | ||||
Canada | 1.2 | 1.1 | ||||
Other international | 4.2 | 4.0 | ||||
100.0 | % | 100.0 | % | |||
Nine Months Ended | ||||||
September 30, 2003 | September 30, 2002 | |||||
United States | 71.7 | % | 74.1 | % | ||
Europe | 16.4 | 14.3 | ||||
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) | 7.3 | 6.3 | ||||
Canada | 1.4 | 1.4 | ||||
Other international | 3.2 | 3.9 | ||||
100.0 | % | 100.0 | % | |||
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4.Commitments and Contingencies. Holding is not a party to any material lawsuits or other proceedings. While the result of Holding’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of Holding.
Self Insurance. Holding self-insures the majority of its medical benefit programs. Reserves for medical claim losses (including retiree benefits) totaling approximately $1,242,000 and $1,160,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. Holding maintains excess coverage on an aggregate claim basis. Additionally, Holding is self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $784,000 and $353,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.
Accrued Severance Costs. In 2001, the decision was made to close the Argyle manufacturing facility and relocate that facility’s operations to Tecate, Mexico in April 2003. As of December 31, 2002, 147 employees had been notified that their positions would be eliminated with an estimated severance cost of $2,160,360. The following summarizes the activity of accrued severance costs (amounts in thousands, except for employees):
Employees Affected | Accrued Severance | ||||||
As of December 31, 2000 | — | $ | — | ||||
Position eliminations announced | 83 | 694 | |||||
Positions eliminated and severance paid | — | — | |||||
Balance remaining at December 31, 2001 | 83 | 694 | |||||
Position eliminations announced | 64 | 1,466 | |||||
Positions eliminated and severance paid | (46 | ) | (331 | ) | |||
Balance remaining at December 31, 2002 | 101 | 1,829 | |||||
Position eliminations announced | — | — | |||||
Positions eliminated and severance paid | (99 | ) | (1,542 | ) | |||
Balance remaining at September 30, 2003 | 2 | $ | 287 | ||||
Guarantees. During its normal course of business, Holding has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include, (i) intellectual property indemnities to Holding’s customers and licensees in connection with the use, sales and/or license of Holding products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of Holding and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, Holding has made contractual commitments to several employees providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments Holding could be obligated to make. Holding has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying unaudited condensed consolidated balance sheets.
5.Credit Facility. Total borrowings as of September 30, 2003 were $7.0 million and $39.0 million under the Revolving Loan Facility and Acquisition Facility. As of September 30, 2003 $6.7 million was available for borrowing under the Revolving Loan Facility and none is available for borrowing under the Acquisition Facility. As of September 30, 2003 the fair value of the Term Loan facility and Revolving Loan Facility approximated the face value.
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On October 7, 2003, Holding refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Maturity for both facilities is October 1, 2007. As a result of this refinancing approximately $42.6 million in notes to bank shown as current at June 30, 2003 is now shown as long term at September 30, 2003. See footnote 7 for additional information.
At September 30, 2003, Holding was in compliance with all provisions of its debt securities.
6.Mandatorily-Redeemable Preferred Stock. As of September 30, 2003, Holding has issued 525,938 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior PIK Preferred Stock due 2010 (the “Holding Preferred Stock”). Dividends on the Holding Preferred Stock accrue from the date of issuance and are payable semi-annually in arrears on April 15 and October 15 of each year (each a “Dividend Payment Date”) at a rate per annum of 11 ½% of the liquidation preference per share. The liquidation preference of each share of Holding Preferred Stock is $100 (the “Liquidation Preference”). Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2005, dividends may be paid, at Holding’s option, by the issuance of additional shares of Holding Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends. Holding’s credit facility currently prohibits Holding from paying any cash dividends on the Holding Preferred Stock. After April 15, 2003, the Holding Preferred Stock is redeemable at Holding’s option in whole or in part, at a premium of the Liquidation Preference plus accumulated and unpaid dividends, if any, to the date of redemption. Holding is required to redeem the Holding Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends.
At September 30, 2003 the redemption amount was $55.4 million. The maximum amount Holding will pay at the mandatory redemption date will be $115.0 million.
7.Treasury Stock. On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.
8.Subsequent Events. On October 7, 2003, Holding refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Both credit facilities mature on October 1, 2007. Holding expects to record a loss on the extinguishment of its existing credit facility of $0.6 million in the quarter ending December 31, 2003.
The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving Facility A consist of a $5.6 million five year reducing real estate loan, a $2.4 million three year reducing equipment loan, a $6.0 million reducing 2.5 year general facility and a $5.0 million letter of credit sub-facility. On October 7, 2003, total borrowings under Revolving Facility A equaled $18.2 million with available borrowing capacity of $10.5 million.
The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of Holding and all of the shares held by Holding’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor’s subsidiaries.
The Revolving B Facility consists of a $30.0 million non-reducing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving B facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings.
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Required reductions in the Senior Secured Revolving Facility are equal to (amounts in thousands):
Year ending December 31 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||
$ | 613 | $ | 3,680 | $ | 3,680 | $ | 2,080 | $ | 38,100 |
Interest rates under the Revolving Facility A are based, at the option of Holding, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not Holding obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:
Margin | ||||
Period and Loan Type | Base Rate | Eurodollar | ||
Revolving Facility A | ||||
Working Capital | (0.5)%-.5% | 2.0%-3.0% | ||
Real Estate Revolver | 0.5%-1.5% | 3.25%-4.0% | ||
Equipment Revolver | 0.0%-1.0% | 2.5%-3.5% | ||
General Revolver | 1.5% | NA | ||
Revolving Facility B | 11% Fixed |
The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test.
As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on September 30, 2003 the holders of a majority of the outstanding Senior Subordinated Convertible Promissory Notes and Unsecured Senior Promissory Notes, shown as “Notes Payable to Affiliates” on the balance sheet, agreed to amend the notes to extend the maturity to March 31, 2008.
As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on October 2, 2003, the holders of a majority of the outstanding Senior Preferred Stock, Junior Preferred Stock and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which the Registrant may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding 11 ½% Senior PIK Preferred Stock due 2010 of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.
9.Subsidiary Financials. Because Holding is a holding company with no operations other than those of the Company, the unaudited condensed financial statements of the Company have been included.
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
September 30, 2003 | December 31, 2002 | |||||
CURRENT ASSETS: | ||||||
Cash | $ | 3,021 | $ | 6,425 | ||
Accounts receivable, less allowance for doubtful accounts of $1,145 and $1,331 at September 30, 2003 and December 31, 2002, respectively | 22,250 | 24,214 | ||||
Inventories, net | 25,846 | 22,624 | ||||
Other current assets | 1,498 | 1,717 | ||||
Total current assets | 52,615 | 54,980 | ||||
PROPERTY, PLANT AND EQUIPMENT, net | 37,893 | 39,868 | ||||
OTHER ASSETS: | ||||||
Goodwill | 39,313 | 34,137 | ||||
Deferred financing and other costs, net | 6,665 | 7,888 | ||||
Other assets | 1,154 | 1,064 | ||||
Total other assets | 47,132 | 43,089 | ||||
Total assets | $ | 137,640 | $ | 137,937 | ||
See notes to condensed consolidated statements
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
(amounts in thousands, except per share amounts)
September 30, 2003 | December 31, 2002 | |||||||
CURRENT LIABILITIES: | ||||||||
Notes payable to bank | $ | 8,593 | $ | 13,783 | ||||
Accounts payable | 8,881 | 10,379 | ||||||
Accrued liabilities | 27,980 | 22,392 | ||||||
Total current liabilities | 45,454 | 46,554 | ||||||
NOTES PAYABLE TO BANK, net of current portion | 50,842 | 55,792 | ||||||
SENIOR SUBORDINATED NOTES PAYABLE | 115,000 | 115,000 | ||||||
NOTES PAYABLE TO AFFILIATES | 39,317 | 39,317 | ||||||
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 526 and 497 shares issued and outstanding at September 30, 2003 and December 31, 2002; liquidation preference — $52,594 and $49,735 respectively | 52,104 | 49,189 | ||||||
Accrued preferred stock dividend, payable in kind | 2,772 | 1,192 | ||||||
54,876 | 50,381 | |||||||
OTHER NON-CURRENT LIABILITIES | 2,083 | 1,961 | ||||||
Total liabilities | 307,572 | 309,005 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 4) | ||||||||
STOCKHOLDERS’ EQUITY (DEFICIT): | ||||||||
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at September 30, 2003 and December 31, 2002 | 3,845 | 3,524 | ||||||
Common stock, $0.01 par value; 37,000 shares authorized; 10,654 issued and outstanding at September 30, 2003 and December 31, 2002 | 98,258 | 98,258 | ||||||
Additional paid in capital | 881 | 881 | ||||||
Cumulative translation adjustment | 5,770 | 2,276 | ||||||
Accumulated deficit | (278,686 | ) | (276,007 | ) | ||||
Total stockholders’ deficit | (169,932 | ) | (171,068 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 137,640 | $ | 137,937 | ||||
See notes to condensed consolidated statements
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||
NET SALES | $ | 44,566 | $ | 42,144 | $ | 135,713 | $ | 127,164 | |||||||
COST OF SALES | 24,907 | 26,128 | 76,160 | 75,095 | |||||||||||
Gross Profit | 19,659 | 16,016 | 59,553 | 52,069 | |||||||||||
OPERATING EXPENSES: | |||||||||||||||
Selling, distribution, general & administrative | 12,379 | 11,579 | 37,384 | 35,002 | |||||||||||
Research and development | 918 | 587 | 2,278 | 1,999 | |||||||||||
13,297 | 12,166 | 39,662 | 37,001 | ||||||||||||
Income from operations | 6,362 | 3,850 | 19,891 | 15,068 | |||||||||||
INTEREST EXPENSE AND OTHER, net | 6,802 | 5,736 | 17,355 | 15,782 | |||||||||||
Net income (loss) before provision for income taxes | (440 | ) | (1,886 | ) | 2,536 | (714 | ) | ||||||||
PROVISION FOR INCOME TAXES | 581 | 660 | 1,909 | 2,066 | |||||||||||
Net Income (loss) | $ | (1,021 | ) | $ | (2,546 | ) | $ | 627 | $ | (2,780 | ) | ||||
OTHER COMPREHENSIVE INCOME: | |||||||||||||||
Foreign currency translation gain (loss) | 1,538 | (177 | ) | 3,494 | 2,014 | ||||||||||
Comprehensive income (loss) | $ | 517 | $ | (2,723 | ) | $ | 4,121 | $ | (766 | ) | |||||
See notes to condensed consolidated statements
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine Months Ended | ||||||||
September 30, 2003 | September 30, 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 627 | $ | (2,780 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities– | ||||||||
Depreciation and amortization | 7,390 | 6,968 | ||||||
Amortization of deferred financing costs | 1,395 | 1,336 | ||||||
Accrued Preferred Stock Dividends | 1,512 | — | ||||||
Provision for bad debts | 187 | 351 | ||||||
Loss (gain) on disposal of equipment | 93 | (37 | ) | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 2,774 | (2,078 | ) | |||||
Inventories | (2,513 | ) | 2,101 | |||||
Other current assets | 301 | (654 | ) | |||||
Other assets | (87 | ) | (12 | ) | ||||
Accounts payable | (1,706 | ) | (5,139 | ) | ||||
Accrued liabilities | 5,060 | 5,527 | ||||||
Other non-current liabilities | (87 | ) | 304 | |||||
Net cash provided by operating activities | 14,946 | 5,887 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (5,293 | ) | (5,277 | ) | ||||
Proceeds from sales of property, plant and equipment | 18 | 156 | ||||||
Net cash used in investing activities | (5,275 | ) | (5,121 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of notes payable to bank | (19,663 | ) | (24,004 | ) | ||||
Proceeds from bank borrowings | 7,591 | 2,450 | ||||||
Proceeds from notes payable to affiliates | — | 20,000 | ||||||
Additions of deferred financing costs | (172 | ) | (477 | ) | ||||
Payment of capital lease obligations | (39 | ) | (29 | ) | ||||
Net cash used in financing activities | (12,283 | ) | (2,060 | ) | ||||
Effect of exchange rate changes on cash | (792 | ) | (768 | ) | ||||
NET DECREASE IN CASH | (3,404 | ) | (2,062 | ) | ||||
CASH, beginning of period | 6,425 | 7,085 | ||||||
CASH, end of period | $ | 3,021 | $ | 5,023 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 8,659 | $ | 10,045 | ||||
Income taxes (primarily foreign) | $ | 1,714 | $ | 2,259 | ||||
NON-CASH FINANCING ACTIVITIES: | ||||||||
Preferred dividends accrued or paid-in-kind | $ | 3,287 | $ | 4,183 | ||||
Issuance of warrants | $ | — | $ | 750 | ||||
See notes to condensed consolidated statement
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Financial Statements. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2003, the results of operations for the three and nine month periods ended September 30, 2003 and September 30, 2002 and statements of cash flows for the nine month periods ended September 30, 2003 and September 30, 2002 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company’s 2002 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be achieved for a full year.
Financial Condition and Results of Operations
Management believes that the Company’s ability to achieve operating results in line with current forecasts and to comply with the terms and covenants of its financing agreements will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. The Company currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.
Significant Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The significant estimates made in the preparation of the Company’s consolidated financial statements relate to allowance for bad debts, rebate reserve, and inventory reserve.
Reclassifications
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
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Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. The Company has adopted this standard as of September 30, 2003, and has classified its mandatorily redeemable preferred stock as a liability. For the three months ended September 30, 2003, the Company recorded $1,512,000 in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. More specifically, SFAS 149, among other things, clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, and amends the definition of an “underlying” to conform to recently issued standards. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for certain aspects of the standard that relate to previously issued guidance, which should continue to be applied in accordance with the previously set effective dates. Also, this standard is effective for existing and new contracts entered into after June 30, 2003 as they relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of this standard did not have a material effect on the Company’s financials.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (“SFAS 148”), an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The interim transition was effective December 31, 2002 and annual disclosure requirements of SFAS 148 are effective for the Company’s fiscal year 2003. The Company does not expect SFAS 148 to have a material impact on its consolidated results of operations or financial position.
2.Inventories. Inventories consisted of the following (amounts in thousands):
September 30, 2003 | December 31, 2002 | |||||||
Raw materials | $ | 5,939 | $ | 5,266 | ||||
Work-in-process | 5,074 | 4,983 | ||||||
Finished goods | 16,623 | 13,926 | ||||||
27,636 | 24,175 | |||||||
Provision for obsolescence | (1,790 | ) | (1,551 | ) | ||||
$ | 25,846 | $ | 22,624 | |||||
3.Segment Data and Subsidiaries Guaranteeing Debt. The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The Company has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s operating segments are the same as its reporting segments.
The Company is the 100% owner of certain subsidiaries that do not guarantee the Company’s senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor subsidiaries, including the Company, and non-guarantor subsidiaries (amounts in thousands):
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2003 | |||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | ||||||||||||
ASSETS | |||||||||||||||
CURRENT ASSETS: | |||||||||||||||
Cash | $ | 649 | $ | 2,372 | $ | — | $ | 3,021 | |||||||
Accounts receivable | 15,108 | 7,142 | — | 22,250 | |||||||||||
Intercompany receivables, net | — | 1,268 | (1,268 | ) | — | ||||||||||
Inventories | 21,463 | 6,032 | (1,649 | ) | 25,846 | ||||||||||
Other current assets | 865 | 633 | — | 1,498 | |||||||||||
Total current assets | 38,085 | 17,447 | (2,917 | ) | 52,615 | ||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 35,933 | 1,960 | — | 37,893 | |||||||||||
INTANGIBLE ASSETS, net | — | 39,313 | — | 39,313 | |||||||||||
DEFERRED FINANCING COSTS, net | 6,665 | — | — | 6,665 | |||||||||||
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost | 28,636 | 4,000 | (32,636 | ) | — | ||||||||||
OTHER ASSETS | 1,135 | 19 | — | 1,154 | |||||||||||
Total other assets | 36,436 | 43,332 | (32,636 | ) | 47,132 | ||||||||||
$ | 110,454 | $ | 62,739 | $ | (35,553 | ) | $ | 137,640 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||
Notes payable to bank | $ | 3,373 | $ | 5,220 | $ | — | $ | 8,593 | |||||||
Accounts payable | 7,752 | 1,129 | — | 8,881 | |||||||||||
Intercompany payables, net | 1,268 | — | (1,268 | ) | — | ||||||||||
Accrued liabilities | 20,973 | 7,007 | — | 27,980 | |||||||||||
Total current liabilities | 33,366 | 13,356 | (1,268 | ) | 45,454 | ||||||||||
NOTES PAYABLE TO BANK, net of current portion | 42,627 | 8,215 | — | 50,842 | |||||||||||
SENIOR SUBORDINATED NOTES PAYABLE | 115,000 | — | — | 115,000 | |||||||||||
NOTES PAYABLE TO AFFILIATES | 26,951 | 12,366 | — | 39,317 | |||||||||||
MANDATORILY-REDEEMABLE PREFERRED STOCK | 54,876 | — | — | 54,876 | |||||||||||
OTHER NON-CURRENT LIABILITIES | 242 | 1,841 | — | 2,083 | |||||||||||
Total liabilities | 273,062 | 35,778 | (1,268 | ) | 307,572 | ||||||||||
STOCKHOLDERS’ EQUITY (DEFICIT) | (162,608 | ) | 26,961 | (34,285 | ) | (169,932 | ) | ||||||||
$ | 110,454 | $ | 62,739 | $ | (35,553 | ) | $ | 137,640 | |||||||
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2002 | |||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | ||||||||||||
ASSETS | |||||||||||||||
CURRENT ASSETS: | |||||||||||||||
Cash | $ | 3,568 | $ | 2,857 | $ | — | $ | 6,425 | |||||||
Accounts receivable | 17,207 | 7,007 | — | 24,214 | |||||||||||
Intercompany receivables, net | — | 1,227 | (1,227 | ) | — | ||||||||||
Inventories | 19,303 | 4,204 | (883 | ) | 22,624 | ||||||||||
Other current assets | 1,162 | 555 | — | 1,717 | |||||||||||
Total current assets | 41,240 | 15,850 | (2,110 | ) | 54,980 | ||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 38,548 | 1,320 | — | 39,868 | |||||||||||
INTANGIBLE ASSETS, net | — | 34,137 | — | 34,137 | |||||||||||
DEFERRED FINANCING COSTS, net | 7,888 | — | — | 7,888 | |||||||||||
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost | 28,636 | 4,000 | (32,636 | ) | — | ||||||||||
OTHER ASSETS | 1,064 | — | — | 1,064 | |||||||||||
Total other assets | 37,588 | 38,137 | (32,636 | ) | 43,089 | ||||||||||
$ | 117,376 | $ | 55,307 | $ | (34,746 | ) | $ | 137,937 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||
Notes payable to bank | $ | 9,250 | $ | 4,533 | $ | — | $ | 13,783 | |||||||
Accounts payable | 8,540 | 1,839 | — | 10,379 | |||||||||||
Intercompany payables, net | 1,227 | — | (1,227 | ) | — | ||||||||||
Accrued liabilities | 18,026 | 4,366 | — | 22,392 | |||||||||||
Total current liabilities | 37,043 | 10,738 | (1,227 | ) | 46,554 | ||||||||||
NOTES PAYABLE TO BANK, net of current portion | 46,300 | 9,492 | — | 55,792 | |||||||||||
SENIOR SUBORDINATED NOTES PAYABLE | 115,000 | — | — | 115,000 | |||||||||||
NOTES PAYABLE TO AFFILIATES | 26,951 | 12,366 | — | 39,317 | |||||||||||
MANDATORILY-REDEEMABLE PREFERRED STOCK | 50,381 | — | — | 50,381 | |||||||||||
OTHER NON-CURRENT LIABILITIES | 281 | 1,680 | — | 1,961 | |||||||||||
Total liabilities | 275,956 | 34,276 | (1,227 | ) | 309,005 | ||||||||||
STOCKHOLDERS’ EQUITY (DEFICIT) | (158,580 | ) | 21,031 | (33,519 | ) | (171,068 | ) | ||||||||
$ | 117,376 | $ | 55,307 | $ | (34,746 | ) | $ | 137,937 | |||||||
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2003 | |||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | ||||||||||||
NET SALES | $ | 38,316 | $ | 10,619 | $ | (4,369 | ) | $ | 44,566 | ||||||
COST OF SALES | 24,145 | 4,855 | (4,093 | ) | 24,907 | ||||||||||
Gross Profit | 14,171 | 5,764 | (276 | ) | 19,659 | ||||||||||
OPERATING EXPENSES: | |||||||||||||||
Selling, distribution, general and administrative | 8,932 | 3,447 | — | 12,379 | |||||||||||
Research and development | 537 | 381 | — | 918 | |||||||||||
9,469 | 3,828 | — | 13,297 | ||||||||||||
Income from operations | 4,702 | 1,936 | (276 | ) | 6,362 | ||||||||||
INTEREST EXPENSE AND OTHER, net: | 6,197 | 605 | — | 6,802 | |||||||||||
Income (loss) before provision for income taxes | (1,495 | ) | 1,331 | (276 | ) | (440 | ) | ||||||||
PROVISION FOR INCOME TAXES | 68 | 513 | — | 581 | |||||||||||
Net income (loss) | $ | (1,563 | ) | $ | 818 | $ | (276 | ) | $ | (1,021 | ) | ||||
Three Months Ended September 30, 2002 | |||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | ||||||||||||
NET SALES | $ | 37,126 | $ | 8,849 | $ | (3,831 | ) | $ | 42,144 | ||||||
COST OF SALES | 25,058 | 4,508 | (3,438 | ) | 26,128 | ||||||||||
Gross Profit | 12,068 | 4,341 | (393 | ) | 16,016 | ||||||||||
OPERATING EXPENSES: | |||||||||||||||
Selling, distribution, general and administrative | 8,984 | 2,595 | — | 11,579 | |||||||||||
Research and development | 444 | 143 | — | 587 | |||||||||||
9,428 | 2,738 | — | 12,166 | ||||||||||||
Income from operations | 2,640 | 1,603 | (393 | ) | 3,850 | ||||||||||
INTEREST EXPENSE AND OTHER, net: | 5,079 | 657 | 5,736 | ||||||||||||
(Loss) income before provision for income taxes | (2,439 | ) | 946 | (393 | ) | (1,886 | ) | ||||||||
PROVISION FOR INCOME TAXES | 44 | 616 | — | 660 | |||||||||||
Net (loss) income | $ | (2,483 | ) | $ | 330 | $ | (393 | ) | $ | (2,546 | ) | ||||
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2003 | ||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | |||||||||||
NET SALES | $ | 118,387 | $ | 32,039 | $ | (14,713 | ) | $ | 135,713 | |||||
COST OF SALES | 74,876 | 15,231 | (13,947 | ) | 76,160 | |||||||||
Gross Profit | 43,511 | 16,808 | (766 | ) | 59,553 | |||||||||
OPERATING EXPENSES: | ||||||||||||||
Selling, distribution, general and administrative | 27,419 | 9,965 | — | 37,384 | ||||||||||
Research and development | 1,284 | 994 | — | 2,278 | ||||||||||
28,703 | 10,959 | — | 39,662 | |||||||||||
Income from operations | 14,808 | 5,849 | (766 | ) | 19,891 | |||||||||
INTEREST EXPENSE AND OTHER, net: | 15,487 | 1,868 | — | 17,355 | ||||||||||
Income (loss) before provision for income taxes | (679 | ) | 3,981 | (766 | ) | 2,536 | ||||||||
PROVISION FOR INCOME TAXES | 295 | 1,614 | — | 1,909 | ||||||||||
Net income (loss) | $ | (974 | ) | $ | 2,367 | $ | (766 | ) | $ | 627 | ||||
Nine Months Ended September 30, 2002 | |||||||||||||||
Guarantor | Non- Guarantor | Eliminations | Total | ||||||||||||
NET SALES | $ | 111,632 | $ | 26,437 | $ | (10,905 | ) | $ | 127,164 | ||||||
COST OF SALES | 72,708 | 13,461 | (11,074 | ) | 75,095 | ||||||||||
Gross Profit | 38,924 | 12,976 | 169 | 52,069 | |||||||||||
OPERATING EXPENSES: | |||||||||||||||
Selling, distribution, general and administrative | 27,549 | 7,453 | — | 35,002 | |||||||||||
Research and development | 1,309 | 690 | — | 1,999 | |||||||||||
28,858 | 8,143 | — | 37,001 | ||||||||||||
Income from operations | 10,066 | 4,833 | 169 | 15,068 | |||||||||||
INTEREST EXPENSE AND OTHER, net: | 14,433 | 1,349 | — | 15,782 | |||||||||||
(Loss) income before provision for income taxes | (4,367 | ) | 3,484 | 169 | (714 | ) | |||||||||
PROVISION FOR INCOME TAXES | 124 | 1,942 | — | 2,066 | |||||||||||
Net (loss) income | $ | (4,491 | ) | $ | 1,542 | $ | 169 | $ | (2,780 | ) | |||||
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2003 | ||||||||||||
Guarantor | Non- Guarantor | Total | ||||||||||
Net cash provided by operating activities | $ | 11,206 | $ | 3,740 | $ | 14,946 | ||||||
Net cash used in investing activities | (4,293 | ) | (982 | ) | (5,275 | ) | ||||||
Net cash used in financing activities | (9,761 | ) | (2,522 | ) | (12,283 | ) | ||||||
Effect of exchange rate changes on cash | (71 | ) | (721 | ) | (792 | ) | ||||||
NET DECREASE IN CASH | (2,919 | ) | (485 | ) | (3,404 | ) | ||||||
CASH, beginning of period | 3,568 | 2,857 | 6,425 | |||||||||
CASH, end of period | $ | 649 | $ | 2,372 | $ | 3,021 | ||||||
Nine Months Ended September 30, 2002 | ||||||||||||
Guarantor | Non- Guarantor | Total | ||||||||||
Net cash provided by (used in) operating activities | $ | 7,346 | $ | (1,459 | ) | $ | 5,887 | |||||
Net cash used in investing activities | (4,614 | ) | (507 | ) | (5,121 | ) | ||||||
Net cash (used in) provided by financing activities | (5,556 | ) | 3,496 | (2,060 | ) | |||||||
Effect of exchange rate changes on cash | 102 | (870 | ) | (768 | ) | |||||||
NET DECREASE IN CASH | (2,722 | ) | 660 | (2,062 | ) | |||||||
CASH, beginning of period | 4,713 | 2,372 | 7,085 | |||||||||
CASH, end of period | $ | 1,991 | $ | 3,032 | $ | 5,023 | ||||||
The Company’s percentage of sales by geographic region for the three and nine month period ended September 30, 2003 and September 30, 2002 is as follows:
Three Months Ended | ||||||
September 30, 2003 | September 30, 2002 | |||||
United States | 70.7 | % | 73.8 | % | ||
Europe | 16.2 | 13.9 | ||||
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) | 7.7 | 7.2 | ||||
Canada | 1.2 | 1.1 | ||||
Other international | 4.2 | 4.0 | ||||
100.0 | % | 100.0 | % | |||
Nine Months Ended | ||||||
September 30, 2003 | September 30, 2002 | |||||
United States | 71.7 | % | 74.1 | % | ||
Europe | 16.4 | 14.3 | ||||
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) | 7.3 | 6.3 | ||||
Canada | 1.4 | 1.4 | ||||
Other international | 3.2 | 3.9 | ||||
100.0 | % | 100.0 | % | |||
5.Commitments and Contingencies. The Company is not a party to any material lawsuits or other proceedings. While the result of the Company’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company.
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Self Insurance. The Company self-insures the majority of its medical benefit programs. Reserves for medical claim losses (including retiree benefits) totaling approximately $1,242,000 and $1,160,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company maintains excess coverage on an aggregate claim basis. Additionally, the Company is self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $784,000 and $353,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.
Accrued Severance Costs. In 2001, the decision was made to close the Argyle manufacturing facility and relocate that facility’s operations to Tecate, Mexico in April 2003. As of December 31, 2002, 147 employees had been notified that their positions would be eliminated with an estimated severance cost of $2,160,360. The following summarizes the activity of accrued severance costs (amounts in thousands, except for employees):
Employees Affected | Accrued Severance | ||||||
As of December 31, 2000 | — | $ | — | ||||
Position eliminations announced | 83 | 694 | |||||
Positions eliminated and severance paid | — | — | |||||
Balance remaining at December 31, 2001 | 83 | 694 | |||||
Position eliminations announced | 64 | 1,466 | |||||
Positions eliminated and severance paid | (46 | ) | (331 | ) | |||
Balance remaining at December 31, 2002 | 101 | 1,829 | |||||
Position eliminations announced | — | — | |||||
Positions eliminated and severance paid | (99 | ) | (1,542 | ) | |||
Balance remaining at September 30, 2003 | 2 | $ | 287 | ||||
Guarantees. During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include, (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sales and/or license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to several employees providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying unaudited condensed consolidated balance sheets.
5.Credit Facility. Total borrowings as of September 30, 2003, were $7.0 million and $39.0 million under the Revolving Loan Facility and Acquisition Facility. As of September 30, 2003 $6.7 million was available for borrowing under the Revolving Loan Facility and none is available for borrowing under the Acquisition Facility. As of September 30, 2003 the fair value of the Term Loan facility and Revolving Loan Facility approximated the face value.
On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Maturity for both facilities is October 1, 2007. As a result of this refinancing approximately $42.6 million in notes to bank shown as current at June 30, 2003 is now shown as long term at September 30, 2003. See footnote 7 for additional information.
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At September 30, 2003, the Company was in compliance with all provisions of its debt securities.
6.Mandatorily-Redeemable Preferred Stock. As of September 30, 2003, the Company has issued to its parent River Holding Corp (“Holding”), 525,938 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior PIK Preferred Stock due 2010 (the “Company Preferred Stock”). Dividends on the Company Preferred Stock accrue from the date of issuance and are payable semi-annually in arrears on April 15 and October 15 of each year (each a “Dividend Payment Date”), at a rate per annum of 11 ½% of the liquidation preference per share. The liquidation preference of each share of Company Preferred Stock is $100 (the “Liquidation Preference”). Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2005, dividends may be paid, at the Company’s option, by the issuance of additional shares of Company Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends. The Company’s credit facility currently prohibits the Company from paying any cash dividends on the Company Preferred Stock. After April 15, 2003, the Company Preferred Stock is redeemable at the Company’s option in whole or in part, at a premium of the Liquidation Preference plus accumulated and unpaid dividends, if any, to the date of redemption. The Company is required to redeem the Company Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends.
At September 30, 2003 the redemption amount was $55.4 million. The maximum amount the Company will pay at the mandatory redemption date will be $115.0 million.
7.Subsequent Events. On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Both credit facilities mature on October 1, 2007. The Company expects to record a loss on the extinguishment of its existing credit facility of $0.6 million in the quarter ending December 31, 2003.
The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving Facility A consist of a $5.6 million five year reducing real estate loan, a $2.4 million three year reducing equipment loan, a $6.0 million reducing 2.5 year general facility and a $5.0 million letter of credit sub-facility. On October 7, 2003, total borrowings under Revolving Facility A equaled $18.2 million with available borrowing capacity of $10.5 million.
The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor’s subsidiaries.
The Revolving B Facility consists of a $30.0 million non-reducing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving B facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings.
Required reductions in the Senior Secured Revolving Facility are equal to (amounts in thousands):
Year ending December 31 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||
$ | 613 | $ | 3,680 | $ | 3,680 | $ | 2,080 | $ | 38,100 |
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Interest rates under the Revolving Facility A are based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not the Company obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:
Margin | ||||
Period and Loan Type | Base Rate | Eurodollar | ||
Revolving Facility A | ||||
Working Capital | (0.5)%-.5% | 2.0%-3.0% | ||
Real Estate Revolver | 0.5%-1.5% | 3.25%-4.0% | ||
Equipment Revolver | 0.0%-1.0% | 2.5%-3.5% | ||
General Revolver | 1.5% | NA | ||
Revolving Facility B | 11% Fixed |
The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test.
As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on September 30, 2003 the holders of a majority of the outstanding Senior Subordinated Convertible Promissory Notes and Unsecured Senior Promissory Notes, shown as “Notes Payable to Affiliates” on the balance sheet, agreed to amend the notes to extend the maturity to March 31, 2008.
As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on October 2, 2003, the holders of a majority of the outstanding Senior Preferred Stock, Junior Preferred Stock and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which the Registrant may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding 11 ½% Senior PIK Preferred Stock due 2010 of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Because River Holding Corp. (“Holding”) is a holding company with no operations other than those of Hudson Respiratory Care Inc. (the “Company” or “Hudson”), the following discussion throughout this section relates primarily to the Company. The following discussion of Holding and the Company’s consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of Holding and the Company and the notes thereto included elsewhere in this Form 10-Q and the 2002 Form 10-K.
Holding’s acquisition of a majority of the Company’s stock was accounted for as a purchase. As a result of Holding’s acquisition of the Company, Holding recorded property, plant and equipment at fair value. Additional depreciation expense related to the allocation of purchase price at fair value to depreciable assets of $1.7 million was recorded in the first nine months of 2003 and 2002 respectively. The remaining value of the step-up in basis to fair value was approximately $4.2 million at September 30, 2003.
On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.
There are no other material differences between Holding consolidated and the Company.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements involving risks and uncertainties that are detailed from time to time in the Company’s Securities and Exchange Commission filings.
General
The Company manufactures and markets products for use in respiratory care and anesthesia. The products for each market are similar and often overlap, as do the distribution channels. The Company groups its products into four clinical categories: (i) oxygen therapy; (ii) aerosol therapy; (iii) humidification; and (iv) airway management. The following table provides examples of the products sold in each category:
Category | Examples of Products | |
Oxygen Therapy | Oxygen masks, cannula, oxygen catheters, oxygen tubing, prefilled and refillable humidifiers, oxygen regulators, cylinder carts and bases, oxygen analyzers/monitors, oxygen sensors, and adaptors and connectors | |
Aerosol Therapy | Aerosol masks, prefilled and refillable large volume nebulizers, aerosol tubing, unit dose solutions, small volume nebulizers, peak flow meters and spacers/changes | |
Humidification | ConchaTherm heated humidifiers and accessories, Humid-Heat and accessories, AquaTherm and ThermaGard nebulizer heaters, Concha water, Concha Pak, Aqua+ and Humid-Vent HME’s and filters for critical care, anesthesia and pulmonary function | |
Airway Management | Oral airways, SHERIDAN® endotracheal tubes, incentive breathing exercisers, disposable and reuseable resuscitation bags, hyperinflation bags, breathing bags, air cushion masks, anesthesia circuits, heated-wire and conventional ventilator circuits, gas sampling lines and filters, catheter mounts and infant Continuous Positive Airway Pressure (“CPAP”) sets |
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Although the Company’s sales efforts differ depending on the clinical use of its products, management focuses on geographical segments for strategic decision making.
The Company’s results of operations may fluctuate significantly from quarter to quarter as a result of a number of factors, including, among others, the buying patterns of the Company’s distributors, group purchasing organizations (“GPOs”) and other purchasers of the Company’s products, forecasts regarding the severity of the annual cold and flu season, announcements of new product introductions by the Company or its competitors, changes in the Company’s pricing of its products and the prices offered by the Company’s competitors, rate of overhead absorption due to variability in production levels, variability in the number of shipping days in a given quarter and changes in the relative values of the principal currencies in which the Company conducts its business compared to the U.S. Dollar.
Results of Operations
The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company’s net sales.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(amounts in thousands) | (amounts in thousands) | |||||||||||||||
Net sales | $ | 44,566 | $ | 42,144 | $ | 135,713 | $ | 127,164 | ||||||||
Cost of sales | 24,907 | 26,128 | 76,160 | 75,095 | ||||||||||||
Gross profit | 19,659 | 16,016 | 59,553 | 52,069 | ||||||||||||
Selling expenses | 5,568 | 4,970 | 15,971 | 15,368 | ||||||||||||
Distribution expenses | 2,623 | 2,482 | 7,628 | 6,890 | ||||||||||||
General and administrative expenses | 4,188 | 4,127 | 13,785 | 12,744 | ||||||||||||
Research and development expenses | 918 | 587 | 2,278 | 1,999 | ||||||||||||
Total operating expenses | 13,297 | 12,166 | 39,662 | 37,001 | ||||||||||||
Income from operations | 6,362 | 3,850 | 19,891 | 15,068 | ||||||||||||
Interest expense and other, net | 6,802 | 5,736 | 17,355 | 15,782 | ||||||||||||
Net income (loss) before provision for income taxes | (440 | ) | (1,886 | ) | 2,536 | (714 | ) | |||||||||
Provision for income taxes | 581 | 660 | 1,909 | 2,066 | ||||||||||||
Net income (loss) | $ | (1,021 | ) | $ | (2,546 | ) | $ | 627 | $ | (2,780 | ) | |||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 55.9 | 62.0 | 56.1 | 59.1 | ||||||||||||
Gross profit | 44.1 | 38.0 | 43.9 | 40.9 | ||||||||||||
Selling expenses | 12.5 | 11.8 | 11.8 | 12.1 | ||||||||||||
Distribution expenses | 5.9 | 5.9 | 5.6 | 5.4 | ||||||||||||
General and administrative expenses | 9.4 | 9.8 | 10.2 | 10.0 | ||||||||||||
Research and development expenses | 2.1 | 1.4 | 1.7 | 1.6 | ||||||||||||
Total operating expenses | 29.8 | 28.9 | 29.2 | 29.1 | ||||||||||||
Income from operations | 14.3 | 9.1 | 14.7 | 11.8 | ||||||||||||
Interest expense and other, net | 15.3 | 13.6 | 12.8 | 12.4 | ||||||||||||
Net income (loss) before provision for income taxes | (1.0 | ) | (4.5 | ) | 1.9 | (0.6 | ) | |||||||||
Provision for income taxes | 1.3 | 1.6 | 1.4 | 1.6 | ||||||||||||
Net income (loss) | (2.3 | )% | (6.0 | )% | 0.5 | % | (2.2 | )% | ||||||||
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Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002
Net sales, on a consolidated basis, were $44.6 million in the third quarter of 2003 as compared to $42.1 million in the third quarter of 2002, representing an increase of $2.5 million or 5.9%. Sales into Europe increased by $1.3 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar as compared to other countries’ currencies in which the Company distributes its products (an increase to reported sales of $0.9 million) and an increase in units shipped (an increase of $0.4 million). Sales into the Pacific Rim increased by $0.4 million or 13.4%, primarily attributable to an increase in sales volume in Humidification products. Sales into the domestic hospital market increased by $0.4 million or 1.8%, primarily attributable to sales volume increases in Oxygen Therapy and Humidification product groups. Sales into other markets represented an increase of $0.4 million from the third quarter of 2002.
The Company’s gross profit for the third quarter of 2003 was $19.7 million, an increase of $3.7 million or 23.1% from the third quarter of 2002. As a percentage of sales, the gross profit was 44.1% and 38.0% for the third quarter of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) improved margin in Europe (1.4 margin points) due to sales mix; (ii) greater volume of higher margin products (1.5 margin points) in the domestic hospital market primarily in Oxygen Therapy and Airway Management product groups; (iii) favorable mix on products sold to the Company’s OEM customers (0.5 margin points); (iv) the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products (1.3 margin points); (v) reduction in transition expenses associated with the move of the Argyle, New York facility to Tecate, Mexico substantially completed during the second quarter of 2003 (0.9 margin points); and improved absorption of manufacturing costs in 2003 due to higher levels of production (0.7 margin points). Offset by other factors (negative 0.2 margin points).
Selling expenses were $5.6 million for the third quarter of 2003 as compared to $5.0 million in the third quarter of 2002, representing an increase of $0.6 million or 12.0%. The increase was primarily attributable to unfavorable changes in exchange rates of $0.3 million and increases in European selling expenses of $0.3 million. As a percentage of net sales, selling expenses were 12.5% in the third quarter of 2003 as compared to 11.8% in the third quarter of 2002.
Distribution expenses were $2.6 million for the third quarter of 2003 as compared to $2.5 million in the third quarter of 2002, representing an increase of $0.1 million or 4.0%. The increase was attributable to unfavorable changes in exchange rates of $0.1 million. As a percentage of sales, distribution expense was 5.9% in the third quarter of 2003 and 2002.
General and administrative expenses were $4.2 million in the third quarter of 2003 as compared to $4.1 million in the third quarter of 2002, representing an increase of $0.1 million or 2.4%. This increase was primarily the result of unfavorable changes in exchange rates of $0.1 million. As a percentage of net sales, general and administrative expenses were 9.4% in the third quarter of 2003 as compared to 9.8% in the third quarter of 2002.
Interest and other expense was $6.8 million for the third quarter of 2003 as compared to $5.7 million in the third quarter of 2002, representing an increase of $1.1 million or 19.3%. The increase was due to the treatment of preferred stock dividends as interest expense of $1.5 million during 2003 (See footnote 1 on the Company’s adoption of SFAS 150), partially offset by $0.4 million decrease in interest expense from decreased borrowings under the Company’s bank facilities. During the last quarter of 2003, the company expects to write-off the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003.
Income tax provision was $0.6 million for the third quarter of 2003 as compared to $0.7 million in the third quarter of 2002 and related primarily to foreign income taxes.
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Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
Net sales, on a consolidated basis, were $135.7 million in the first nine months of 2003 as compared to $127.2 million in the first nine months of 2002, representing an increase of $8.5 million or 6.7%. Sales into Europe increased by $4.1 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar as compared to other countries’ currencies in which the Company distributes its products (an increase to reported sales of $3.8 million) and higher volume of units shipped (an increase of $0.3 million). Sales into the domestic hospital market increased by $2.7 million or 4.0%, attributable to sales volume increases in Oxygen Therapy, Humidification and Airway Management product groups. Sales into the Pacific Rim increased by $1.8 million or 22.4%, attributable to increased sales volume in Humidification and Oxygen Therapy products. Sales to the alternate site market increased by $0.3M or 1.4%, primarily attributable to sales volume in Aerosol Therapy, Humidification and Airway Management product groups. Sales to the Company’s OEM customers increased by $0.3 million or 4.8%, attributable to changes in sales mix. These gains were partially offset by a decline in sales into Latin America of $0.6 million or 18.4%. Sales into other markets were relatively unchanged representing a decrease of $0.1 million from the prior year.
The Company’s gross profit for the first nine months of 2003 was $59.6 million, an increase of $7.5 million or 14.4% from the first nine months of 2002. As a percentage of sales, the gross profit was 43.9% and 40.9% for the first nine months of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) greater volume of higher margin products (1.5 margin points) in the domestic hospital market primarily in Oxygen Therapy and Airway Management product groups; (ii) greater volume (0.4 margin points) in the Pacific Rim market primarily in the Humidification product group; (iii) improved absorption of manufacturing costs due to higher production during 2003 (1.0 margin points); and (iv) the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products (1.1 margin points). These increases in margin were partially offset by: (i) incremental costs associated with the move of the Argyle, New York facility to Tecate, Mexico in 2003 (0.4 margin points); and (ii) other factors (.6 margin points).
Selling expenses were $16.0 million for the first nine months of 2003 as compared to $15.4 million in the first nine months of 2002, representing an increase of $0.6 million or 3.9%. The increase was due to unfavorable changes in exchange rates of $0.8 million and compensation expense of $0.4 million due to increases in staffing, offset by spending declines of $0.6 million primarily due to lower fees associated with Group Purchasing Organizations in the domestic hospital market. As a percentage of net sales, selling expenses were 11.8% in the first nine months of 2003 as compared to 12.1% in the first nine months of 2002.
Distribution expenses were $7.6 million for the first nine months of 2003 as compared to $6.9 million in the first nine months of 2002, representing an increase of $0.7 million or 10.1%. The increase was primarily attributable to unfavorable changes in exchange rates of $0.4 million, increased intracompany freight charges of $0.6 million and increased European distribution expenses of $0.3 million. The increases were partially offset by decreased labor and overtime of $0.6 million in the Domestic operations. As a percentage of sales, distribution expense was 5.6% in the first nine months of 2003 and 5.4% in the first nine months of 2002.
General and administrative expenses were $13.8 million in the first nine months of 2003 as compared to $12.7 million in the first nine months of 2002, representing an increase of $1.1 million or 8.7%. This increase was primarily the result of unfavorable changes in exchange rates of $0.5 million and increased expenses due to higher compensation and fringe benefit expenses offset in part by the elimination of consulting and third party expenses associated with the debt restructuring in May 2002, together resulting in a net increase of $0.6 million. As a percentage of net sales, general and administrative expenses were 10.2% in the first nine months of 2003 as compared to 10.0% in the first nine months of 2002.
Interest and other expense was $17.4 million for the first nine months of 2003 as compared to $15.8 million in the first nine months of 2002, representing an increase of $1.6 million or 10.1%. The increase was primarily due to the treatment of preferred stock dividends as interest expense of $1.5 million during 2003 (See footnote 1 on the Company’s adoption of SFAS 150) and the increase in interest expense associated with increased debt to affiliates of $1.3 million offset by lower interest expense (down $1.2 million) associated with decreased bank borrowings. During the last quarter of 2003, the company expects to write-off the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003.
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Income tax provision was $1.9 million for the first nine months of 2003 as compared to $2.1 million in the first nine months of 2002 and related primarily to foreign income taxes.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash flow from operations and borrowings under its working capital bank facility. Cash provided by operations totaled $15.0 million and $5.9 million for the first nine months of 2003 and 2002, respectively. The increase for the first nine months of 2003 as compared to the first nine months of 2002 is primarily attributable to increased operating income, a decrease in accounts receivable, an increase in accrued liabilities, offset in part by an increase in inventory. The Company had working capital of $7.1 million and $8.4 million as of the end of September 30, 2003 and December 31, 2002, respectively. Inventories were $25.8 million and $22.6 million as of the end of September 30, 2003 and December 31, 2002, respectively. Accounts receivable, net of allowances, were $22.3 million and $24.2 million at September 30, 2003 and December 31, 2002, respectively.
During the nine months ended September 30, 2003 and 2002, net cash used in investing activities was $5.3 million and $5.1 million, respectively. Cash was used primarily for the purchase of manufacturing equipment and new heater production.
During the nine months ended September 30, 2003 and September 30, 2002, net cash used by financing was $12.3 million and $2.1 million, respectively, reflecting repayment on the Company’s borrowings in the first nine months of 2003 and 2002.
As of September 30, 2003, the Company had outstanding $213.7 million of indebtedness, consisting of $115.0 million of Senior Subordinated Notes, borrowings of $46.0 million under the Company’s Credit Facility, $39.3 million in notes payable to affiliates and $13.4 million in outstanding borrowings under the bank facility of Hudson RCI AB, the Company’s European subsidiary. On October 7, 2003 the Company completed a new $60 million Senior Secured Facility. The new Senior Secured Revolving Facility replaces the Credit Facility that would have expired in 2004.
The Company has issued to Holding 525,938 shares (including shares issued as payment in kind dividends) of Company Preferred Stock with an aggregate liquidation preference of $52.6 million. At the election of the Company, dividends may be paid in kind until April 15, 2005 and thereafter must be paid in cash. The Senior Secured Credit Facility currently prohibits the Company from paying cash dividends on this Preferred Stock.
The Company has issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”) to Holding, for total cash consideration to the Company of $3.0 million. Each share of the Junior Preferred Stock may be redeemed, from time to time, in whole or in part, at the option of the Company at a redemption price of 100% of the Liquidation Preference of the Junior Preferred Stock or $1,000 per share plus accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock.
At September 30, 2003, the Company was in compliance with all provisions of its debt securities and preferred stock.
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The following is a summary of the Company’s consolidated contractual obligations as of September 30, 2003. The long term debt is based on the new contractual terms of the Senior Secured Revolving Facility and the affiliate notes are based on the amended maturity date:
(amounts in thousands) | Payments Due by Period | ||||||||||||||
Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||
Long-term debt | $ | 213,752 | $ | 8,593 | $ | 11,900 | $ | 35,947 | $ | 157,312 | |||||
Mandatorily redeemable preferred securities | 54,876 | — | — | — | 54,876 | ||||||||||
Leases and other commitments | 10,637 | 2,724 | 4,402 | 1,119 | 2,392 | ||||||||||
Total contractual obligations | $ | 279,265 | $ | 11,317 | $ | 16,302 | $ | 37,066 | $ | 214,580 | |||||
The Company believes that cash generated from anticipated improved operating performance, together with the refinancing of its Credit Facility will provide sufficient liquidity to fund its operations and meet its obligations for the next twelve months. If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. The Company has no commitments for additional debt or equity and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.
For additional information regarding the Company’s debt securities and preferred stock, reference is made to Item 7 of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2002.
As Holding is a holding company, its primary source of liquidity is dividends or other distributions from the Company. Holding’s only asset is its investment in Hudson Respiratory Care, Inc. The ability of the Company to pay cash dividends or make distributions to Holding when required, is restricted or prohibited under the terms of the debt instruments, including the Credit Facility. Since the Credit Agreement currently prohibits the Company from paying cash dividends to Holding, Holding may not be able to pay cash dividends to the holders of Holding Preferred Stock commencing in April 2004. In the event Holding is unable to pay cash dividends to the holders of Holding Preferred Stock for two consecutive periods, the sole remedy of the holders is the ability to elect two members to Holding’s Board of Directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in Holding’s market risk exposure from that reported in Holding’s 10-K for the fiscal year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Holding’s Chief Executive Officer and Chief Financial Officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(c)), during the period covered by this report, that such disclosure controls and procedures were effective as of the end of the period covered by this report. No changes in the Company’s internal control over financial reporting occurred during the period covered by this report that have materially affected, or is reasonably likely to material affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
None.
The Certificate of Determination for Holding Preferred Stock was amended on October 2, 2003, to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year. The amendment allows Holding to pay dividends in kind on the Holding Preferred Stock to and including April 15, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
None.
ITEM | 6. EXHIBITS AND REPORTS ON FORM 8-K |
(a)Exhibits
3.1 | Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date. | |
10.1 | Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and Wells Fargo Foothill, Inc. (“Wells Fargo”), as the Arranger and Administrative Agent. | |
10.2 | Stock Pledge Agreement, dated as of October 7, 2003, between Holding and Wells Fargo, as the arranger and administrative agent. | |
10.3 | Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and Wells Fargo, as the arranger and administrative agent. | |
10.4 | Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and Wells Fargo, as the arranger and administrative agent. | |
10.5 | Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent. | |
10.6 | Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent. | |
10.13 | General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent. | |
10.16 | Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and Wells Fargo, as arranger and administrative agent. | |
10.17 | Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and Wells Fargo, as arranger and administrative agent. | |
10.22 | Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of Wells Fargo. |
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10.23 | Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and MW Post Advisory Group, LLC (“MW Post”), as Administrative Agent. | |
10.24 | Stock Pledge Agreement, dated as of October 7, 2003, between Holding and MW Post, as the administrative agent. | |
10.25 | Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and MW Post, as the administrative agent. | |
10.26 | Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and MW Post, as the administrative agent. | |
10.33 | Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent. | |
10.34 | Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent. | |
10.35 | General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent. | |
10.36 | Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and MW Post, as administrative agent. | |
10.37 | Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and MW Post, as administrative agent. | |
10.38 | Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of MW Post. | |
10.39 | Form of Unsecured Senior Promissory Note. | |
10.40 | Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by Hudson RCI in an aggregate principal amount of $12,000,000. | |
10.41 | Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by HRC Holding Inc. in an aggregate principal amount of $10,100,000. | |
10.42 | Form of Agreement to Amend as series of Senior Subordinated Convertible Promissory Notes in an aggregate principal amount of $9,951,250. | |
10.43 | Form of Agreement to Amend certain promissory notes held by FSEP IV. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | Reports on Form 8-K |
None.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RIVER HOLDING CORP., | ||||
a Delaware corporation | ||||
November 14, 2003 | by: | /s/ Patrick G. Yount | ||
Patrick G. Yount | ||||
Chief Financial Officer | ||||
(Duly Authorized Officer and Principal Financial Officer) |