Table of Contents
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 June 30, 2003
OR
o | 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 - 333-56097
HUDSON RESPIRATORY CARE INC.
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) | 95-1867330 (I.R.S. Employer Identification No.) |
27711 Diaz Road, P.O. Box 9020 Temecula, California (Address of Principal Executive Offices) | 92589 (Zip Code) |
(909) 676-5611
(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 o 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 o 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 10,654,293 on August 8, 2003.
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
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PART I |
| FINANCIAL INFORMATION |
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| Item 1. |
| Unaudited Condensed Consolidated Financial Statements: |
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| Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 | 1 |
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| Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and June 30, 2002 | 3 |
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| Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and June 30, 2002 | 4 |
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| Notes to Unaudited Condensed Consolidated Financial Statements | 6 |
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| Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
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PART II |
| OTHER INFORMATION |
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| Item 1. |
| 20 | |
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Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
|
| June 30, |
| December 31, |
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CURRENT ASSETS: |
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Cash |
| $ | 2,604 |
| $ | 6,425 |
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Accounts receivable, less allowance for doubtful accounts of $1,324 and $1,331 at June 30, 2003 and December 31, 2002, respectively |
|
| 23,410 |
|
| 24,214 |
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Inventories, net |
|
| 24,142 |
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| 22,624 |
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Other current assets |
|
| 2,002 |
|
| 1,717 |
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Total current assets |
|
| 52,158 |
|
| 54,980 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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| 38,636 |
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| 39,868 |
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OTHER ASSETS: |
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Goodwill |
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| 37,643 |
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| 34,137 |
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Deferred financing and other costs, net |
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| 6,957 |
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| 7,888 |
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Other assets |
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| 1,095 |
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| 1,064 |
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Total other assets |
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| 45,695 |
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| 43,089 |
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Total assets |
| $ | 136,489 |
| $ | 137,937 |
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See notes to condensed consolidated statements
1
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS’ DEFICIT
(amounts in thousands, except per share amounts)
|
| June 30, |
| December 31, |
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CURRENT LIABILITIES: |
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Notes payable to bank |
| $ | 54,998 |
| $ | 13,783 |
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Accounts payable |
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| 9,602 |
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| 10,379 |
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Accrued liabilities |
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| 23,854 |
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| 22,392 |
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Total current liabilities |
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| 88,454 |
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| 46,554 |
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NOTES PAYABLE TO BANK, net of current portion |
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| 8,666 |
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| 55,792 |
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SENIOR SUBORDINATED NOTES PAYABLE |
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| 115,000 |
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| 115,000 |
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NOTES PAYABLE TO AFFILIATES |
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| 39,317 |
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| 39,317 |
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OTHER NON-CURRENT LIABILITIES |
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| 2,137 |
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| 1,961 |
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Total liabilities |
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| 253,574 |
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| 258,624 |
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COMMITMENTS AND CONTINGENCIES (Note 4) |
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MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 526 and 497 shares issued and outstanding at June 30, 2003 and December 31, 2002; liquidation preference -- $52,594 and $49,735 respectively |
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| 52,085 |
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| 49,189 |
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Accrued preferred stock dividend, payable in kind |
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| 1,260 |
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| 1,192 |
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| 53,345 |
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| 50,381 |
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STOCKHOLDERS’ EQUITY (DEFICIT): |
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Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at June 30, 2003 and December 31, 2002 |
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| 3,736 |
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| 3,524 |
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Common stock, $0.01 par value; 37,000 shares authorized; 10,654 issued and outstanding at June 30, 2003 and December 31, 2002 |
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| 98,258 |
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| 98,258 |
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Additional paid in capital |
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| 881 |
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| 881 |
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Cumulative translation adjustment |
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| 4,232 |
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| 2,276 |
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Accumulated deficit |
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| (277,537 | ) |
| (276,007 | ) |
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Total stockholders’ deficit |
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| (170,430 | ) |
| (171,068 | ) |
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Total liabilities, mandatorily-redeemable preferred stock and stockholders’ deficit |
| $ | 136,489 |
| $ | 137,937 |
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See notes to condensed consolidated statements
2
Table of Contents
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 |
| Six Months Ended |
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|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
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NET SALES |
| $ | 45,268 |
| $ | 41,728 |
| $ | 91,147 |
| $ | 85,020 |
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COST OF SALES |
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| 25,223 |
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| 23,735 |
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| 51,253 |
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| 48,967 |
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Gross Profit |
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| 20,045 |
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| 17,993 |
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| 39,894 |
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| 36,053 |
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OPERATING EXPENSES: |
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Selling, distribution, general & administrative |
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| 12,248 |
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| 11,601 |
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| 25,005 |
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| 23,423 |
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Research and development |
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| 720 |
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| 815 |
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| 1,360 |
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| 1,412 |
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| 12,968 |
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| 12,416 |
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| 26,365 |
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| 24,835 |
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Income from operations |
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| 7,077 |
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| 5,577 |
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| 13,529 |
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| 11,218 |
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INTEREST EXPENSE AND OTHER, net |
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| 5,292 |
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| 5,183 |
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| 10,553 |
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| 10,046 |
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Net income before provision for income taxes |
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| 1,785 |
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| 394 |
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| 2,976 |
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| 1,172 |
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PROVISION FOR INCOME TAXES |
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| 647 |
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| 982 |
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| 1,328 |
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| 1,406 |
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Net Income (loss) |
| $ | 1,138 |
| $ | (588 | ) | $ | 1,648 |
| $ | (234 | ) |
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OTHER COMPREHENSIVE INCOME: |
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Foreign currency translation gain |
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| 1,235 |
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| 1,778 |
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| 1,956 |
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| 2,191 |
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Comprehensive income |
| $ | 2,373 |
| $ | 1,190 |
| $ | 3,604 |
| $ | 1,957 |
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See notes to condensed consolidated statements
3
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
| Six Months Ended |
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|
| June 30, |
| June 30, |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
| $ | 1,648 |
| $ | (234 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities— |
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Depreciation and amortization |
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| 4,902 |
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| 4,646 |
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Amortization of deferred financing costs |
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| 931 |
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| 888 |
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Provision for bad debts |
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| 239 |
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| 54 |
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Loss on disposal of equipment |
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| 2 |
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| 46 |
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Change in operating assets and liabilities: |
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Accounts receivable |
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| 1,295 |
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| (568 | ) |
Inventories |
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| (1,051 | ) |
| 2,094 |
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Other current assets |
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| (226 | ) |
| 375 |
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Other assets |
|
| (29 | ) |
| 83 |
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Accounts payable |
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| (947 | ) |
| (6,140 | ) |
Accrued liabilities |
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| 1,145 |
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| 23 |
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Other non-current liabilities |
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| 29 |
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| 96 |
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Net cash provided by operating activities |
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| 7,938 |
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| 1,363 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property, plant and equipment |
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| (3,533 | ) |
| (3,904 | ) |
Proceeds from sales of property, plant and equipment |
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| 18 |
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| 11 |
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Net cash used in investing activities |
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| (3,515) |
|
| (3,893 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Repayment of notes payable to bank |
|
| (14,771 | ) |
| (20,258 | ) |
Proceeds from bank borrowings |
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| 7,486 |
|
| — |
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Proceeds from notes payable to affiliates |
|
| — |
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| 20,000 |
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Additions of deferred financing costs |
|
| — |
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| (447 | ) |
Payment of capital lease obligations |
|
| (26 | ) |
| — |
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Net cash used in financing activities |
|
| (7,311 | ) |
| (705 | ) |
Effect of exchange rate changes on cash |
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| (933 | ) |
| (472 | ) |
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NET DECREASE IN CASH |
|
| (3,821 | ) |
| (3,707 | ) |
CASH, beginning of period |
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| 6,425 |
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| 7,085 |
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CASH, end of period |
| $ | 2,604 |
| $ | 3,378 |
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See notes to condensed consolidated statements
4
Table of Contents
|
| Six Months Ended |
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|
| June 30, |
| June 30, |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
| $ | 7,387 |
| $ | 8,747 |
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| ||||
Income taxes (primarily foreign) |
| $ | 1,354 |
| $ | 1,856 |
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NON-CASH FINANCING ACTIVITIES: |
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Preferred dividends accrued or paid-in-kind |
| $ | 3,141 |
| $ | 2,734 |
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Issuance of warrants |
| $ | — |
| $ | 750 |
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See notes to condensed consolidated statements
5
Table of Contents
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 June 30, 2003, the results of operations for the three and six month periods ended June 30, 2003 and June 30, 2002 and statements of cash flows for the six month periods ended June 30, 2003 and June 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 six month periods ended June 30, 2003 are not necessarily indicative of the results to be achieved for a full year.
Financial Condition and Results of Operations
As of June 30, 2003, the entire outstanding principal amount of the Company’s Credit Facility is included in current liabilities in the Company’s financial statements given the Credit Facility’s contractual maturity of June 30, 2004. The inclusion of such debt in current liabilities resulted in a working capital deficit of $(36.3) million as of June 30, 2003. Management is in discussions with various lenders concerning the refinancing of the Company’s Credit Facility. Management believes that such a refinancing will occur prior to the existing maturity of the Credit Facility which will among other objectives, extend the maturity of the Company’s bank financing.
If the Company fails to complete a refinancing of its Credit Facility, the Company would have to initiate measures to raise cash through additional debt or equity issuances, 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 obtain an extension or refinancing of the Credit Facility or 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.
6
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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. For instruments created before the issuance of SFAS 150 and still existing at the beginning of the interim period of adoption, this standard shall be implemented by reporting the cumulative effect of a change in an accounting principle. This statement does not become effective for the Company until September 30, 2003. Management is currently evaluating the impact it will have on the Company.
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 Company does not expect the adoption of this standard will have a material impact on its financial statements.
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):
|
| June 30, |
| December 31, |
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| ||||
Raw materials |
| $ | 5,902 |
| $ | 5,266 |
|
Work-in-process |
|
| 5,295 |
|
| 4,983 |
|
Finished goods |
|
| 14,935 |
|
| 13,926 |
|
|
|
|
| ||||
|
|
| 26,132 |
|
| 24,175 |
|
Provision for obsolescence |
|
| (1,990 | ) |
| (1,551 | ) |
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|
|
| ||||
|
| $ | 24,142 |
| $ | 22,624 |
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|
|
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
7
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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, including the Company, and non-guarantor subsidiaries (amounts in thousands):
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
|
| June 30, 2003 |
| ||||||||||
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| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
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|
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|
| ||||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 787 |
| $ | 1,817 |
| $ | — |
| $ | 2,604 |
|
Accounts receivable |
|
| 15,417 |
|
| 7,993 |
|
| — |
|
| 23,410 |
|
Intercompany receivables, net |
|
| 348 |
|
| — |
|
| (348 | ) |
| — |
|
Inventories |
|
| 19,734 |
|
| 5,781 |
|
| (1,373 | ) |
| 24,142 |
|
Other current assets |
|
| 1,307 |
|
| 695 |
|
| — |
|
| 2,002 |
|
|
|
|
|
|
| ||||||||
Total current assets |
|
| 37,593 |
|
| 16,286 |
|
| (1,721 | ) |
| 52,158 |
|
PROPERTY, PLANT AND EQUIPMENT, NET |
|
| 36,616 |
|
| 2,020 |
|
| — |
|
| 38,636 |
|
INTANGIBLE ASSETS, net |
|
| — |
|
| 37,643 |
|
| — |
|
| 37,643 |
|
DEFERRED FINANCING COSTS, net |
|
| 6,957 |
|
| — |
|
| — |
|
| 6,957 |
|
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost |
|
| 28,636 |
|
| 4,000 |
|
| (32,636 | ) |
| — |
|
OTHER ASSETS |
|
| 1,075 |
|
| 20 |
|
| — |
|
| 1,095 |
|
|
|
|
|
|
| ||||||||
Total other assets |
|
| 36,668 |
|
| 41,663 |
|
| (32,636 | ) |
| 45,695 |
|
|
|
|
|
|
| ||||||||
|
| $ | 110,877 |
| $ | 59,969 |
| $ | (34,357 | ) | $ | 136,489 |
|
|
|
|
|
|
|
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to bank |
| $ | 50,000 |
| $ | 4,998 |
| $ | — |
| $ | 54,998 |
|
Accounts payable |
|
| 8,088 |
|
| 1,514 |
|
| — |
|
| 9,602 |
|
Intercompany payables, net |
|
| — |
|
| 348 |
|
| (348 | ) |
| — |
|
Accrued liabilities |
|
| 18,244 |
|
| 5,610 |
|
| — |
|
| 23,854 |
|
|
|
|
|
|
| ||||||||
Total current liabilities |
|
| 76,332 |
|
| 12,470 |
|
| (348 | ) |
| 88,454 |
|
NOTES PAYABLE TO BANK, net of current portion |
|
| — |
|
| 8,666 |
|
| — |
|
| 8,666 |
|
SENIOR SUBORDINATED NOTES PAYABLE |
|
| 115,000 |
|
| — |
|
| — |
|
| 115,000 |
|
NOTES PAYABLE TO AFFILIATES |
|
| 26,951 |
|
| 12,366 |
|
| — |
|
| 39,317 |
|
OTHER NON-CURRENT LIABLITIES |
|
| 255 |
|
| 1,882 |
|
| — |
|
| 2,137 |
|
|
|
|
|
|
| ||||||||
Total liabilities |
|
| 218,538 |
|
| 35,384 |
|
| (348 | ) |
| 253,574 |
|
Mandatorily-redeemable preferred stock |
|
| 53,345 |
|
| — |
|
| — |
|
| 53,345 |
|
STOCKHOLDERS’ EQUITY (DEFICIT) |
|
| (161,006 | ) |
| 24,585 |
|
| (34,009 | ) |
| (170,430 | ) |
|
|
|
|
|
| ||||||||
|
| $ | 110,877 |
| $ | 59,969 |
| $ | (34,357 | ) | $ | 136,489 |
|
|
|
|
|
|
|
8
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
|
| December 31, 2002 |
| ||||||||||
|
|
| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
|
|
|
|
|
| ||||||||
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, MANDATORILY-REDEEMABLE PREFERRED STOCK 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 |
|
OTHER NON-CURRENT LIABLITIES |
|
| 281 |
|
| 1,680 |
|
| — |
|
| 1,961 |
|
|
|
|
|
|
| ||||||||
Total liabilities |
|
| 225,575 |
|
| 34,276 |
|
| (1,227) |
|
| 258,624 |
|
Mandatorily-redeemable preferred stock |
|
| 50,381 |
|
| — |
|
| — |
|
| 50,381 |
|
STOCKHOLDERS’ EQUITY (DEFICIT) |
|
| (158,580 | ) |
| 21,031 |
|
| (33,519 | ) |
| (171,068 | ) |
|
|
|
|
|
| ||||||||
|
| $ | 117,376 |
| $ | 55,307 |
| $ | (34,746 | ) | $ | 137,937 |
|
|
|
|
|
|
|
9
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
| Three Months Ended June 30, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
|
|
|
|
|
| ||||||||
NET SALES |
| $ | 39,751 |
| $ | 11,411 |
| $ | (5,894 | ) | $ | 45,268 |
|
COST OF SALES |
|
| 25,191 |
|
| 5,484 |
|
| (5,452 | ) |
| 25,223 |
|
|
|
|
|
|
| ||||||||
Gross Profit |
|
| 14,560 |
|
| 5,927 |
|
| (442 | ) |
| 20,045 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, distribution, general and administrative |
|
| 8,743 |
|
| 3,505 |
|
| — |
|
| 12,248 |
|
Research and development |
|
| 389 |
|
| 331 |
|
| — |
|
| 720 |
|
|
|
|
|
|
| ||||||||
|
|
| 9,132 |
|
| 3,836 |
|
| — |
|
| 12,968 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 5,428 |
|
| 2,091 |
|
| (442 | ) |
| 7,077 |
|
INTEREST EXPENSE AND OTHER, net: |
|
| 4,685 |
|
| 607 |
|
| — |
|
| 5,292 |
|
|
|
|
|
|
| ||||||||
Income (loss) before provision for income taxes |
|
| 743 |
|
| 1,484 |
|
| (442 | ) |
| 1,785 |
|
PROVISION FOR INCOME TAXES |
|
| 62 |
|
| 585 |
|
| — |
|
| 647 |
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | 681 |
| $ | 899 |
| $ | (442 | ) | $ | 1,138 |
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2002 |
| ||||||||||
|
|
| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
|
|
|
|
|
| ||||||||
NET SALES |
| $ | 36,336 |
| $ | 9,034 |
| $ | (3,642 | ) | $ | 41,728 |
|
COST OF SALES |
|
| 23,632 |
|
| 4,231 |
|
| (4,128 | ) |
| 23,735 |
|
|
|
|
|
|
| ||||||||
Gross Profit |
|
| 12,704 |
|
| 4,803 |
|
| 486 |
|
| 17,993 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, distribution, general and administrative |
|
| 9,063 |
|
| 2,538 |
|
| — |
|
| 11,601 |
|
Research and development |
|
| 530 |
|
| 285 |
|
| — |
|
| 815 |
|
|
|
|
|
|
| ||||||||
|
|
| 9,593 |
|
| 2,823 |
|
| — |
|
| 12,416 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 3,111 |
|
| 1,980 |
|
| 486 |
|
| 5,577 |
|
INTEREST EXPENSE AND OTHER, net: |
|
| 4,820 |
|
| 380 |
|
| (17 | ) |
| 5,183 |
|
|
|
|
|
|
| ||||||||
(Loss) income before provision for income taxes |
|
| (1,709 | ) |
| 1,600 |
|
| 503 |
|
| 394 |
|
PROVISION FOR INCOME TAXES |
|
| 80 |
|
| 902 |
|
| — |
|
| 982 |
|
|
|
|
|
|
| ||||||||
Net (loss) income |
| $ | (1,789 | ) | $ | 698 |
| $ | 503 |
| $ | (588 | ) |
|
|
|
|
|
|
10
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
|
| Six Months Ended June 30, 2003 |
| ||||||||||
|
|
| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
|
|
|
|
|
| ||||||||
NET SALES |
| $ | 80,071 |
| $ | 21,420 |
| $ | (10,344 | ) | $ | 91,147 |
|
COST OF SALES |
|
| 50,731 |
|
| 10,376 |
|
| (9,854 | ) |
| 51,253 |
|
|
|
|
|
|
| ||||||||
Gross Profit |
|
| 29,340 |
|
| 11,044 |
|
| (490 | ) |
| 39,894 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, distribution, general and administrative |
|
| 18,487 |
|
| 6,518 |
|
| — |
|
| 25,005 |
|
Research and development |
|
| 747 |
|
| 613 |
|
| — |
|
| 1,360 |
|
|
|
|
|
|
| ||||||||
|
|
| 19,234 |
|
| 7,131 |
|
| — |
|
| 26,365 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 10,106 |
|
| 3,913 |
|
| (490 | ) |
| 13,529 |
|
INTEREST EXPENSE AND OTHER, net: |
|
| 9,290 |
|
| 1,263 |
|
| — |
|
| 10,553 |
|
|
|
|
|
|
| ||||||||
Income (loss) before provision for income taxes |
|
| 816 |
|
| 2,650 |
|
| (490 | ) |
| 2,976 |
|
PROVISION FOR INCOME TAXES |
|
| 227 |
|
| 1,101 |
|
| — |
|
| 1,328 |
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | 589 |
| $ | 1,549 |
| $ | (490 | ) | $ | 1,648 |
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2002 |
| ||||||||||
|
|
| |||||||||||
|
| Guarantor |
| Non- |
| Eliminations |
| Total |
| ||||
|
|
|
|
|
| ||||||||
NET SALES |
| $ | 74,506 |
| $ | 17,588 |
| $ | (7,074 | ) | $ | 85,020 |
|
COST OF SALES |
|
| 47,650 |
|
| 8,953 |
|
| (7,636 | ) |
| 48,967 |
|
|
|
|
|
|
| ||||||||
Gross Profit |
|
| 26,856 |
|
| 8,635 |
|
| 562 |
|
| 36,053 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, distribution, general and administrative |
|
| 18,565 |
|
| 4,858 |
|
| — |
|
| 23,423 |
|
Research and development |
|
| 865 |
|
| 547 |
|
| — |
|
| 1,412 |
|
|
|
|
|
|
| ||||||||
|
|
| 19,430 |
|
| 5,405 |
|
| — |
|
| 24,835 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 7,426 |
|
| 3,230 |
|
| 562 |
|
| 11,218 |
|
INTEREST EXPENSE AND OTHER, net: |
|
| 9,354 |
|
| 692 |
|
| — |
|
| 10,046 |
|
|
|
|
|
|
| ||||||||
(Loss) income before provision for income taxes |
|
| (1,928 | ) |
| 2,538 |
|
| 562 |
|
| 1,172 |
|
PROVISION FOR INCOME TAXES |
|
| 80 |
|
| 1,326 |
|
| — |
|
| 1,406 |
|
|
|
|
|
|
| ||||||||
Net (loss) income |
| $ | (2,008 | ) | $ | 1,212 |
| $ | 562 |
| $ | (234 | ) |
|
|
|
|
|
|
11
Table of Contents
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
| Six Months Ended June 30, 2003 |
| |||||||
|
|
| ||||||||
|
| Guarantor |
| Non- |
| Total |
| |||
|
|
|
|
| ||||||
Net cash provided by operating activities |
| $ | 5,448 |
| $ | 2,490 |
| $ | 7,938 |
|
Net cash used in investing activities |
|
| (2,602 | ) |
| (913 | ) |
| (3,515 | ) |
Net cash used in financing activities |
|
| (5,576 | ) |
| (1,735 | ) |
| (7,311 | ) |
Effect of exchange rate changes on cash |
|
| (51 | ) |
| (882 | ) |
| (933 | ) |
|
|
|
|
| ||||||
NET DECREASE IN CASH |
|
| (2,781 | ) |
| (1,040 | ) |
| (3,821 | ) |
CASH, beginning of period |
|
| 3,568 |
|
| 2,857 |
|
| 6,425 |
|
|
|
|
|
| ||||||
CASH, end of period |
| $ | 787 |
| $ | 1,817 |
| $ | 2,604 |
|
|
|
|
|
|
|
| Six Months Ended June 30, 2002 |
| |||||||
|
|
| ||||||||
|
| Guarantor |
| Non- |
| Total |
| |||
|
|
|
|
| ||||||
Net cash provided by (used in) operating activities |
| $ | 5,559 |
| $ | (4,196 | ) | $ | 1,363 |
|
Net cash used in investing activities |
|
| (3,620 | ) |
| (273 | ) |
| (3,893 | ) |
Net cash (used in) provided by financing activities |
|
| (5,697 | ) |
| 4,992 |
|
| (705 | ) |
Effect of exchange rate changes on cash |
|
| 65 |
|
| (537 | ) |
| (472 | ) |
|
|
|
|
| ||||||
NET DECREASE IN CASH |
|
| (3,693 | ) |
| (14 | ) |
| (3,707 | ) |
CASH, beginning of period |
|
| 4,713 |
|
| 2,372 |
|
| 7,085 |
|
|
|
|
|
| ||||||
CASH, end of period |
| $ | 1,020 |
| $ | 2,358 |
| $ | 3,378 |
|
|
|
|
|
|
The Company’s percentage of sales by geographic region for the three and six month period ended June 30, 2003 and June 30, 2002 is as follows:
|
| Three Months Ended |
| ||
|
|
| |||
|
| June 30, |
| June 30, |
|
|
|
|
| ||
United States |
| 71.3 | % | 74.5 | % |
Europe |
| 17.7 |
| 15.2 |
|
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) |
| 6.8 |
| 6.0 |
|
Canada |
| 1.6 |
| 1.6 |
|
Other international |
| 2.5 |
| 2.7 |
|
|
|
|
| ||
|
| 100.0 | % | 100.0 | % |
|
|
|
|
|
| Six Months Ended |
| ||
|
|
| |||
|
| June 30, |
| June 30, |
|
|
|
|
| ||
United States |
| 72.3 | % | 75.4 | % |
Europe |
| 16.5 |
| 15.0 |
|
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) |
| 7.1 |
| 5.7 |
|
Canada |
| 1.4 |
| 1.6 |
|
Other international |
| 2.7 |
| 2.3 |
|
|
|
|
| ||
|
| 100.0 | % | 100.0 | % |
|
|
|
|
4. 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.
12
Table of Contents
Self Insurance. The Company self-insures the majority of its medical benefit programs. Reserves for medical claim losses (including retiree benefits) totaling approximately $1,234,000 and $1,160,000 at June 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 $754,000 and $353,000 at June 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 by 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 |
| Accrued |
| |
|
|
|
| |||
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 |
| (96 | ) |
| (1,208 | ) |
|
|
|
| |||
Balance remaining at June 30, 2003 |
| 5 |
| $ | 621 |
|
|
|
|
|
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 providors pertaining to claims based on the negligence or willful misconduct of the Company, (iv) indemnities involving the accuracy of representations and warranties in certain contracts and (v) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. 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 June 30, 2003 were $8.0 million and $40.0 million under the Revolving Loan Facility and Acquisition Facility, respectively, and $2.0 million under the Term Loan Facility. As of June 30, 2003 $5.7 million was available for borrowing under the Revolving Loan Facility and none is available for borrowing under the Acquisition Facility. No additional borrowing is available under the Term Loan Facility. As of June 30, 2003 the fair value of the Term Loan facility and Revolving Loan Facility approximated the face value. See Note 1.
At June 30, 2003, the Company was in compliance with all provisions of its debt securities.
13
Table of Contents
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of Hudson Respiratory Care Inc.’s (the “Company” or “Hudson RCI”) consolidated historical results of operations and financial condition should be read in conjunction with the consolidated condensed financial statements of the Company and the notes thereto included elsewhere in this Form 10-Q and the 2002 Form 10-K.
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 |
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
14
Table of Contents
pricing of its products and the prices offered by the Company’s competitors, rate of overhead absorption due to variability in production levels and variability in the number of shipping days in a given quarter.
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 June 30, |
| Six Months Ended June 30, |
| ||||||||
|
|
|
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
|
| ||||||||
|
| (amounts in thousands) |
| (amounts in thousands ) |
| ||||||||
Net sales |
| $ | 45,268 |
| $ | 41,728 |
| $ | 91,147 |
| $ | 85,020 |
|
Cost of sales |
|
| 25,223 |
|
| 23,735 |
|
| 51,253 |
|
| 48,967 |
|
|
|
|
|
|
| ||||||||
Gross profit |
|
| 20,045 |
|
| 17,993 |
|
| 39,894 |
|
| 36,053 |
|
|
|
|
|
|
| ||||||||
Selling expenses |
|
| 5,237 |
|
| 5,377 |
|
| 10,403 |
|
| 10,398 |
|
Distribution expenses |
|
| 2,649 |
|
| 2,095 |
|
| 5,005 |
|
| 4,408 |
|
General and administrative expenses |
|
| 4,362 |
|
| 4,129 |
|
| 9,597 |
|
| 8,617 |
|
Research and development expenses |
|
| 720 |
|
| 815 |
|
| 1,360 |
|
| 1,412 |
|
|
|
|
|
|
| ||||||||
Total operating expenses |
|
| 12,968 |
|
| 12,416 |
|
| 26,365 |
|
| 24,835 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 7,077 |
|
| 5,577 |
|
| 13,529 |
|
| 11,218 |
|
Interest expense and other, net |
|
| 5,292 |
|
| 5,183 |
|
| 10,553 |
|
| 10,046 |
|
|
|
|
|
|
| ||||||||
Net income before provision for income taxes |
|
| 1,785 |
|
| 394 |
|
| 2,976 |
|
| 1,172 |
|
Provision for income taxes |
|
| 647 |
|
| 982 |
|
| 1,328 |
|
| 1,406 |
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | 1,138 |
| $ | (588 | ) | $ | 1,648 |
| $ | (234 | ) |
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
|
|
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
|
| ||||||||
Net sales |
|
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Cost of sales |
|
| 55.7 |
|
| 56.9 |
|
| 56.2 |
|
| 57.6 |
|
|
|
|
|
|
| ||||||||
Gross profit |
|
| 44.3 |
|
| 43.1 |
|
| 43.8 |
|
| 42.4 |
|
|
|
|
|
|
| ||||||||
Selling expenses |
|
| 11.6 |
|
| 12.9 |
|
| 11.4 |
|
| 12.2 |
|
Distribution expenses |
|
| 5.9 |
|
| 5.0 |
|
| 5.5 |
|
| 5.2 |
|
General and administrative expenses |
|
| 9.6 |
|
| 9.9 |
|
| 10.5 |
|
| 10.1 |
|
Research and development expenses |
|
| 1.6 |
|
| 2.0 |
|
| 1.5 |
|
| 1.7 |
|
|
|
|
|
|
| ||||||||
Total operating expenses |
|
| 28.6 |
|
| 29.8 |
|
| 28.9 |
|
| 29.2 |
|
|
|
|
|
|
| ||||||||
Income from operations |
|
| 15.6 |
|
| 13.4 |
|
| 14.8 |
|
| 13.2 |
|
Interest expense and other, net |
|
| 11.8 |
|
| 12.7 |
|
| 11.6 |
|
| 11.8 |
|
|
|
|
|
|
| ||||||||
Net income before provision for income taxes |
|
| 3.9 |
|
| 0.9 |
|
| 3.3 |
|
| 1.4 |
|
Provision for income taxes |
|
| 1.4 |
|
| 2.4 |
|
| 1.5 |
|
| 1.7 |
|
|
|
|
|
|
| ||||||||
Net income (loss) |
|
| 2.5 | % |
| (1.4 | )% |
| 1.8 | % |
| (0.3 | )% |
|
|
|
|
|
|
15
Table of Contents
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Net sales, on a consolidated basis, were $45.3 million in the second quarter of 2003 as compared to $41.7 million in the second quarter of 2002, representing an increase of $3.6 million or 8.6%. Sales into Europe increased by $2.0 million representing 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 $1.4 million) and an increase in units shipped (an increase of $0.6 million). Sales into the domestic hospital market increased by $1.5 million or 6.6%, primarily attributable to sales volume increases in Oxygen Therapy and Airway Management product groups. Sales into the Pacific Rim increased by $0.4 million or 16.5%, primarily attributable to an increase in sales volume of Humidification products. Sales to the Company’s OEM customers increased by $0.2 million or 9.0%, primarily attributable to increased pricing. These gains were partially offset by a decline in sales into Latin America of $0.6 million or 54.7%, primarily attributable to declines in Airway Management sales volumes. Sales into other markets were relatively unchanged representing an increase of $0.1 million from the second quarter of 2002.
The Company’s gross profit for the second quarter of 2003 was $20.1 million, an increase of $2.1 million or 11.7% from the second quarter of 2002. As a percentage of sales, the gross profit was 44.3% and 43.1% for the second quarter of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) greater volume (0.5 margin points) of higher margin products (0.6 margin points) in the domestic hospital market and (ii) 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 (0.8 margin points); and (iv) other factors (0.3 margin points). These increases in margin were partially offset by incremental costs associated with the move of the Argyle, New York facility to Tecate, Mexico in 2003 (0.3 margin points) and other factors (0.7 margin points).
Selling expenses were $5.2 million for the second quarter of 2003 as compared to $5.4 million in the second quarter of 2002. The decrease was primarily attributable to spending declines of $0.4 million due to lower fees associated with Group Purchasing Organizations in the domestic hospital market, offset by unfavorable changes in exchange rates of $0.2 million. As a percentage of net sales, selling expenses were 11.6% in the second quarter of 2003 as compared to 12.9% in the second quarter of 2002.
Distribution expenses were $2.7 million for the second quarter of 2003 as compared to $2.1 million in the second quarter of 2002. The increase was primarily attributable to intracompany freight charges of $0.5 million, transportation supplies of $0.2 million and unfavorable changes in exchange rates of $0.1 million, offset by decreased labor and overtime of $0.2 million. As a percentage of sales, distribution expense was 5.9% in the second quarter of 2003 and 5.0% in the second quarter of 2002.
General and administrative expenses were $4.4 million in the second quarter of 2003 as compared to $4.1 million in the second quarter of 2002, representing an increase of $0.3 million or 7.3%. This increase was primarily the result unfavorable changes in exchange rates of $0.3 million and increases in 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. As a percentage of net sales, general and administrative expenses were 9.6% in the second quarter of 2003 as compared to 9.9% in the second quarter of 2002.
Income tax provision was $0.7 million for the second quarter of 2003 as compared to $1.0 million in the second quarter of 2002 and relate primarily to foreign income taxes.
16
Table of Contents
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net sales, on a consolidated basis, were $91.2 million in the first six months of 2003 as compared to $85.0 million in the first six months of 2002, representing a increase of $6.2 million or 7.3%. Sales into Europe increased by $2.7 million representing 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 $2.8 million) offset in part by a decrease in units shipped (a decrease of $0.1 million). Sales into the domestic hospital market increased by $2.3 million or 5.0%, equally attributable to sales volume increases in Oxygen Therapy, Humidification and Airway Management product groups. Sales into the Pacific Rim increased by $1.4 million or 27.8%, primarily attributable to increased sales volume in Oxygen Therapy and Humidification products. Sales to the Company’s OEM customers increased by $0.4 million or 8.8%, primarily attributable to an increase in sales volume of Airway Management products. These gains were partially offset by a decline in sales into Latin America of $0.7 million or 34.0%, primarily attributable to a decline in Humidification sales volumes. Sales into other markets were relatively unchanged representing an increase of $0.1 million from the prior year.
The Company’s gross profit for the first six months of 2003 was $39.9 million, an increase of $3.8 million or 10.5% from the first six months of 2002. As a percentage of sales, the gross profit was 43.8% and 42.4% for the first six months of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) greater volume (0.6 margin points) of higher margin products (0.3 margin points) primarily in the domestic hospital market; (ii) greater volume (0.3 margin points) of higher margin products (0.1 margin point) primarily in the Humidification product group in the Pacific Rim market; (iii) favorable pricing of products sold to the Company’s OEM customers (0.2 margin points); (iv) cost reduction programs implemented during 2002 and recognized during 2003 (0.2 margin points); and (v) 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 (0.7 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 (0.6 margin points); (ii) higher manufacturing costs in 2003 as a result of lower production levels than in the first six months of 2002 due to decreased inventories (0.3 margin points); and (iii) decreased sales volumes in Europe during the first six months of 2003 (0.1 margin point).
Selling expenses were $10.4 million for the first six months of 2003 and 2002. Although selling expenses in total are a relatively unchanged, spending has declined by $0.6 million primarily due to lower fees associated with Group Purchasing Organizations in the domestic hospital market, offset by unfavorable changes in exchange rates of $0.6 million. As a percentage of net sales, selling expenses were 11.4% in the first six months of 2003 as compared to 12.2% in the first six months of 2002.
Distribution expenses were $5.0 million for the first six months of 2003 as compared to $4.4 million in the first six months of 2002. The increase was primarily attributable to unfavorable changes in exchange rates of $0.3 million and increased intracompany freight charges of $0.7 million, offset by decreased labor and overtime of $0.4 million. As a percentage of sales, distribution expense was 5.5% in the first six months of 2003 and 5.2% in the first six months of 2002.
General and administrative expenses were $9.6 million in the first six months of 2003 as compared to $8.6 million in the first six months of 2002, representing an increase of $1.0 million or 11.6%. This increase was primarily the result of increases in 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. General and administrative expense also increased due to unfavorable changes in exchange rates of $0.4 million. As a percentage of net sales, general and administrative expenses were 10.5% in the first six months of 2003 as compared to 10.1% in the first six months of 2002.
Interest expense and other was $10.6 million for the first six months of 2003 as compared to $10.1 million in the first six months of 2002. The increase was primarily due to higher levels of debt payable to affiliates, and amortization of warrants issued in connection with the debt restructuring in May 2002.
Liquidity and Capital Resources
17
Table of Contents
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 $7.9 million and $1.4 million for the first six months of 2003 and 2002, respectively. The increase for the first six months of 2003 as compared to the first six months of 2002 is primarily attributable to increased operating income, a decrease in accounts receivable and an increase in accrued liabilities. The Company had an operating working capital deficit of $(36.3) million and working capital of $8.4 million as of the end of June 30, 2003 and December 31, 2002, respectively. The working capital deficit is due to the inclusion of the entire Credit Facility as a current liability due to its current maturity of June 30, 2004. The Company is in discussions with various lenders to accomplish among other objectives, an extension of current maturities. The Company believes it will have the refinancing completed before the Credit Facilty matures. Inventories were $24.1 million and $22.6 million as of the end of June 30, 2003 and December 31, 2002, respectively. Over time, the Company expects its level of inventories to increase, as the Company’s sales increase. Accounts receivable, net of allowances, were $23.4 million and $24.2 million at June 30, 2003 and December 31, 2002, respectively.
During the six months ended June 30, 2003 and 2002, net cash used in investing activities was $3.5 million and $3.9 million, respectively. Cash was used primarily for the purchase of manufacturing equipment and new heater production.
During the six months ended June 30, 2003 and June 30, 2002, net cash used by financing was $7.3 million and $0.7 million, respectively, reflecting repayment on the Company’s borrowings in the first six months of 2003 and 2002.
As of June 30, 2003, the Company had outstanding $218.0 million of indebtedness, consisting of $115.0 million of Senior Subordinated Notes, borrowings of $50.0 million under the Company’s Credit Facility, $39.3 million in notes payable to affiliates and $13.7 million in outstanding borrowings under the bank facility of Hudson RCI AB, the Company’s European subsidiary.
The Credit Facility currently consists of a $40.0 million Term Loan Facility (of which $2.0 million is currently outstanding) and a $55.0 million Revolving Loan Facility of which up to $40.0 million (all of which has been borrowed and is outstanding) may be used for permitted acquisitions (“Acquisition Facility”) and up to $15.0 million (the “Working Capital Portion”) may be used for general corporate purposes (other than acquisitions). The Working Capital Portion has a letter of credit sub-limit of $7.5 million. The Term Loan Facility and Acquisition Facility mature on September 30, 2003 and June 30, 2004, respectively and will require quarterly principal installments totaling $5.0 million in 2003 and $37.0 million in 2004. The Revolving Loan Facility matures on June 30, 2004. As of August 1, 2003, total usage of the Working Capital Portion was $9.3 million (including letters of credit) and $5.7 million was available for borrowings.
The Company has issued to Holding 525,938 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior PIK Preferred Stock due 2010 with an aggregate liquidation preference of $52.6 million, which has terms and provisions materially similar to those of the 11 ½% Senior Exchangeable PIK Preferred Stock due 2010 issued by Holding. At the election of the Company, dividends may be paid in kind until April 15, 2004 and thereafter must be paid in cash. The 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 June 30, 2003, the Company was in compliance with all provisions of its debt securities and preferred stock.
The following is a summary of the Company’s consolidated contractual obligations as of June 30, 2003:
(amounts in thousands) |
| Payments Due by Period |
|
|
|
18
Table of Contents
|
| Total |
| Less Than |
| 1-3 |
| 4-5 |
| After 5 |
| |||||
|
|
|
|
|
|
| ||||||||||
Long-term debt |
| $ | 217,981 |
| $ | 54,998 |
| $ | 44,315 |
| $ | 0 |
| $ | 118,668 |
|
Mandatorily redeemable preferred securities |
|
| 53,345 |
|
| — |
|
| — |
|
| — |
|
| 53,345 |
|
Leases and other commitments |
|
| 11,309 |
|
| 2,945 |
|
| 4,854 |
|
| 2,213 |
|
| 1,297 |
|
|
|
|
|
|
|
| ||||||||||
Total contractual obligations |
| $ | 282,635 |
| $ | 57,943 |
| $ | 49,169 |
| $ | 2,213 |
| $ | 173,310 |
|
|
|
|
|
|
|
|
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 or if the Company fails to complete a refinancing of the Credit Facility, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. Although the Company is currently in discussions with various lenders regarding a refinancing of the Credit Facility, it 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 to obtain an extension of or refinance the current Credit Facility 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.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
There have been no material changes in the Company’s market risk exposure from that reported in the Company’s 10-K for the fiscal year ended December 31, 2002.
ITEM 4. | CONTROLS AND PROCEDURES |
The Company’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)), that such disclosure controls and procedures were effective as of the end of the period covered by this report. No change 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.
19
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
None.
ITEM 2. | CHANGES IN SECURITIES |
The Certificate of Determination for the Registrant’s 11½% Senior Exchangeable PIK Preferred Stock Due 2010 (the “Senior Preferred Stock”) was amended to extend the time period in which the Registrant may pay dividends in kind on the Senior Preferred Stock by one year. The amendment allows the Registrant to pay dividends in kind on the Senior Preferred Stock to and including April 15, 2004.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
On May 15, 2003, the holders of a majority of the outstanding Senior Preferred Stock, Junior Preferred Stock and Common Stock, each class voting seperately, by written consent of the shareholders approved (i) an amendment to the Certificate of Determination for the Senior Preferred Stock to extend the time period in which the Registrant may pay dividends in kind on the Senior Preferred Stock by one year and (ii) an amendment to the Amended and Restated Articles of Incorporation of the Registrant to increase the number of authorized shares of Preferred Stock to 3,000,000 and the authorized share of Common Stock to 37,000,000 shares.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) Exhibits
3.3 Certificate of Amendment of Amended and Restated Articles of Incorporation of Hudson RCI.
3.4 Certificate of Amendment of Amended and Restated Articles of Determination of Hudson RCI.
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 Act 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.
20
Table of Contents
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.
|
| HUDSON RESPIRATORY CARE INC., | |
|
| by: |
|
|
|
| |
|
|
| Patrick G. Yount |