.
.
.
EXHIBIT 99.1
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE
--------------------------------- ----
Report of Independent Registered Public Accounting Firm................................................. F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002............................................ F-3
Consolidated Statements of Operations and Comprehensive Operations for the years ended
December 31, 2003, 2002 and 2001................................................................. F-5
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2003,
2002 and 2001.................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
2001............................................................................................. F-7
Notes to Consolidated Financial Statements.............................................................. F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Hudson Respiratory Care Inc.:
We have audited the accompanying consolidated balance sheets of Hudson
Respiratory Care Inc. (a California corporation and a majority-owned subsidiary
of River Holding Corp.) (the "Company") and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of operations and
comprehensive operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hudson Respiratory Care Inc.
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for mandatorily redeemable preferred
stock as a result of adopting Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, effective July 1, 2003.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill as a result of adopting
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 23, 2004
F-2
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
CURRENT ASSETS:
Cash.................................................................. $ 6,682 $ 6,425
Accounts receivable, less allowance for doubtful accounts of
$1,156 and $1,331 at December 31, 2003 and 2002, respectively..... 25,107 24,214
Inventories, net...................................................... 23,829 22,624
Other current assets.................................................. 2,505 1,717
------------ ------------
Total current assets.............................................. 58,123 54,980
PROPERTY, PLANT AND EQUIPMENT, net....................................... 37,477 39,868
OTHER ASSETS:
Goodwill.............................................................. 41,410 34,137
Deferred financing and other costs, net of accumulated amortization
of $9,318 and $7,107 at December 31, 2003 and 2002, respectively.. 6,457 7,888
Other assets.......................................................... 1,243 1,064
------------ ------------
Total other assets................................................ 49,110 43,089
------------ ------------
Total assets...................................................... $ 144,710 $ 137,937
============ ============
See notes to consolidated financial statements
F-3
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
(amounts in thousands, except per share amounts)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ -------------
CURRENT LIABILITIES:
Current portion of bank notes payable..................................... $ 9,178 $ 13,783
Accounts payable.......................................................... 9,175 10,379
Accrued liabilities....................................................... 16,973 17,737
------------ -------------
Total current liabilities............................................... 35,326 41,899
INTEREST PAYABLE TO AFFILIATES............................................. 9,760 4,655
NOTES PAYABLE TO AFFILIATES................................................ 39,317 39,317
BANK NOTES PAYABLE, net of current portion................................. 54,377 55,792
SENIOR SUBORDINATED NOTES PAYABLE.......................................... 115,000 115,000
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares
authorized; 556 and 497 shares issued and outstanding at December 31,
2003 and December 31, 2002, respectively; liquidation preference,
$55,618 and $49,735 respectively...................................... 55,147 49,189
Accrued mandatorily redeemable preferred stock dividend, payable in kind.. 1,333 1,192
------------ -------------
56,480 50,381
OTHER NON-CURRENT LIABILITIES.............................................. 2,365 1,961
------------ -------------
Total liabilities....................................................... 312,625 309,005
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' DEFICIT:
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares
outstanding at December 31, 2003 and December 31, 2002,
respectively.......................................................... 3,960 3,524
Common stock, $0.01 par value; 42,000 shares authorized; 10,654 issued
and outstanding at December 31, 2003 and December 31, 2002............ 98,258 98,258
Additional paid-in capital................................................ 881 881
Cumulative translation adjustment......................................... 6,848 2,276
Accumulated deficit....................................................... (277,862) (276,007)
------------ -------------
Total stockholders' deficit............................................. (167,915) (171,068)
------------ -------------
Total liabilities and stockholders' deficit..................... $ 144,710 $ 137,937
============ =============
See notes to consolidated financial statements
F-4
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(amounts in thousands)
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------- ------------- -------------
NET SALES...................................................... $ 184,595 $ 171,959 $ 158,068
COST OF SALES.................................................. 102,610 102,511 109,010
------------- ------------- -------------
Gross Profit................................................ 81,985 69,448 49,058
OPERATING EXPENSES:
Selling..................................................... 20,964 20,370 20,337
Distribution................................................ 10,177 9,174 10,588
General and administrative.................................. 19,248 17,704 23,889
Amortization of goodwill.................................... -- -- 3,490
Impairment of goodwill...................................... -- -- 33,128
Impairment of fixed assets.................................. -- -- 4,469
Research and development.................................... 3,236 2,578 2,043
Provision for bad debts..................................... 139 845 2,826
------------- ------------- -------------
53,764 50,671 100,770
------------- ------------- -------------
Income (loss) from operations............................ 28,221 18,777 (51,712)
OTHER EXPENSES:
Interest expense............................................ 24,612 20,875 20,542
Loss (gain) on sale of assets............................... 95 (2,138) 681
Other, net.................................................. (359) (193) 882
Loss on early extinguishment of debt........................ 573 -- --
------------- ------------- -------------
24,921 18,544 22,105
------------- ------------- -------------
Income (loss) before provision for income taxes............. 3,300 233 (73,817)
PROVISION FOR INCOME TAXES..................................... 1,716 1,897 69,854
------------- ------------- -------------
Net income (loss)........................................... $ 1,584 $ (1,664) $ (143,671)
============= ============= =============
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain........................... 4,572 2,974 453
------------- ------------- -------------
Comprehensive income (loss).............................. $ 6,156 $ 1,310 $ (143,218)
============= ============= =============
See notes to consolidated financial statements
F-5
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
JUNIOR PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- -------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
-------- ------ ------ ------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2000......... 10,644 $98,158 $ (1,151) $ (119,782) $ (22,775)
Issuance of common stock........... 10 100 100
Issuance of junior preferred
stock......................... 3 $3,000 3,000
Pay-in-kind junior preferred
stock dividends............... 137 (137) --
Foreign currency translation
gain.......................... 453 453
Issued or accrued pay-in-kind
preferred stock dividends..... (4,566) (4,566)
Accretion of preferred stock
issuance costs................ (362) (362)
Net loss........................... (143,671) (143,671)
-------- ------ ------ ------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2001......... 3 $3,137 10,654 $98,258 -- (698) $ (268,518) $ (167,821)
======== ====== ====== ======= ========== =========== =========== ============
Pay-in-kind junior preferred
stock dividends............... 387 (387) --
Foreign currency translation gain.. 2,974 2,974
Issued or accrued pay-in-kind
preferred stock dividends..... (5,315) (5,315)
Accretion of preferred stock
issuance costs................ (123) (123)
Issuance of warrants............... 881 881
Net loss........................... (1,664) (1,664)
-------- ------ ------ ------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2002......... 3 $3,524 10,654 $98,258 $ 881 $ 2,276 $ (276,007) $ (171,068)
======== ====== ====== ======= ========== =========== =========== ============
Pay-in-kind junior preferred
stock dividends............... 436 (436) --
Foreign currency translation gain.. 4,572 4,572
Issued or accrued pay-in-kind
preferred stock dividends..... (2,928) (2,928)
Accretion of preferred stock
issuance costs................ (75) (75)
Net income......................... 1,584 1,584
-------- ------ ------ ------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2003......... 3 $3,960 10,654 $98,258 $ 881 $ 6,848 $ (277,862) $ (167,915)
======== ====== ====== ======= ========== =========== =========== ============
See notes to consolidated financial statements
F-6
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 1,584 (1,664) (143,671)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization.................................... 10,113 9,370 12,223
Amortization of deferred financing costs and other............... 1,663 1,786 1,676
Accrued mandatorily redeemable preferred stock dividends, payable
in-kind......................................................... 3,096 -- --
Interest payable to affiliates................................... 5,105 3,060 1,595
Loss (gain) on disposal of property and equipment................ 95 (2,138) 681
Loss on early extinguishment of debt............................. 573 -- --
Change in deferred tax asset..................................... -- -- 68,881
Provision for bad debts.......................................... 139 845 2,826
Provision for inventory obsolescence............................. 479 566 1,923
Impairment of goodwill........................................... -- -- 33,128
Impairment of fixed assets....................................... -- -- 4,469
Changes in operating assets and liabilities:
Accounts receivable.............................................. 327 (4,844) 6,916
Inventories...................................................... (839) 2,957 15,381
Other current assets............................................. (672) (398) 257
Other assets..................................................... (174) 96 503
Accounts payable................................................. (1,572) (5,165) (4,614)
Accrued liabilities.............................................. (1,394) 1,398 2,080
Other non-current liabilities.................................... 88 392 1,310
------------ ------------ ------------
Net cash provided by operating activities..................... 18,611 6,261 5,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................ (7,518) (7,546) (9,029)
Proceeds from sales of property, plant and equipment.................. 22 7,167 12
------------ ------------ ------------
Net cash used in investing activities......................... (7,496) (379) (9,017)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank notes payable....................................... (21,790) (30,877) (21,209)
Proceeds from bank borrowings......................................... 13,154 3,750 20,136
Payment of capital lease obligations.................................. (52) (41) --
Repayment of notes payable to affiliates.............................. -- -- (8,000)
Proceeds from notes payable to affiliates............................. -- 22,100 14,951
Net proceeds from sale of common and junior preferred stock, net of
transaction costs................................................... -- -- 3,100
Bank overdrafts....................................................... -- -- (1,245)
Additions of deferred financing costs................................. (780) (477) (403)
------------ ------------ ------------
Net cash (used in) provided by financing activities........... (9,468) (5,545) 7,330
Effect of exchange rate changes on cash.................................. (1,390) (997) (322)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH.......................................... 257 (660) 3,555
CASH, beginning of year.................................................. 6,425 7,085 3,530
------------ ------------ ------------
CASH, end of year........................................................ $ 6,682 $ 6,425 $ 7,085
============ ============ ============
See notes to consolidated financial statements
F-7
YEAR ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................... $ 15,305 $ 16,503 $ 18,856
============ ============ ============
Income taxes (primarily foreign)................................... $ 1,315 $ 2,582 $ 2,315
============ ============ ============
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind........................... $ 3,365 $ 5,702 $ 4,703
============ ============ ============
Capital lease obligations incurred for purchase of equipment.......... $ -- $ 47 $ 295
============ ============ ============
Issuance of warrants in connection with debt.......................... $ -- $ 881 $ --
============ ============ ============
See notes to consolidated financial statements
F-8
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Hudson Respiratory Care Inc. ("Hudson" or the "Company"), a California
corporation founded in 1945, is a manufacturer and marketer of disposable
medical products utilized in the respiratory care and anesthesia segments of the
domestic and international health care markets. The Company is a majority-owned
subsidiary of River Holding Corp., a Delaware corporation ("Holding"). Holding
has no operations of its own, other than its investment in the Company. The
Company's respiratory care and anesthesia product lines include such products as
oxygen masks, humidification systems, small volume nebulizers, incentive
breathing exercisers, endotracheal tubes, cannulae and tubing. In the United
States, the Company markets its products to a variety of health care providers,
including hospitals and alternate site service providers, such as outpatient
surgery centers, long-term care facilities, physician offices and home health
care agencies. Internationally, the Company sells its products to distributors
that market to hospitals and other health care providers. The Company's products
are sold to distributors and alternate site service providers throughout the
United States and internationally.
REPORTING REQUIREMENTS
The Company is privately owned and has no class of securities registered
under the Securities Act of 1934 or any publicly traded equity securities. The
Company complies with Securities and Exchange Commission ("SEC") filing
requirements on a voluntary basis as required in the indenture for its senior
subordinated notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Hudson and its wholly owned subsidiaries. Intercompany account balances and
transactions have been eliminated in consolidation. Hudson and its wholly owned
subsidiaries are collectively referred to herein as the "Company".
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of
approximately $1.2 million and $1.3 million at December 31, 2003 and 2002,
respectively, for those accounts from which payment is not expected to be
received, although services were provided and revenue was earned. Management
performs periodic analyses to evaluate the net realizable value of accounts
receivable. Specifically, management considers historical realization data,
accounts receivable aging trends, other operating trends and relevant business
conditions.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consisted of the following (amounts in thousands):
AS OF
--------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Raw materials................................. 5,563 5,266
Work-in-process............................... 5,253 4,983
Finished goods................................ 14,286 13,926
------------ ------------
25,102 24,175
Provision for obsolescence.................... (1,273) (1,551)
------------ ------------
$ 23,829 $ 22,624
============ ============
F-9
Raw materials principally consist of bulk resins. Work-in-process and
finished goods include raw materials, labor and overhead costs. Certain finished
goods are purchased for resale and are not manufactured. The Company considers
deterioration, obsolescence and historical trends in evaluating net realizable
value of inventory.
INTERNAL SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs incurred to develop internal-use computer
software in accordance with Statement of Position ("SOP") 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." Such
costs are amortized on a straight-line basis over the economic useful lives of
the software, which range from three to five years. The Company applies the
provisions of SOP 98-1 in assessing any potential impairment of its capitalized
software costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major replacements are
capitalized while maintenance costs and repairs are expensed in the year
incurred. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets or term of the related
lease, if shorter. Estimated useful lives range from three to seven years for
furniture and fixtures; three to seven years for machinery, equipment and
purchased software; and 31.5 years for buildings. Total depreciation expense
related to property, plant and equipment including depreciation for heaters was
$10.1 million, $9.4 million and $12.2 million for the years ended December 31,
2003, 2002 and 2001, respectively.
Included in property, plant and equipment are heaters used at customer
locations typically on a no-charge lease basis. The heaters support the sale of
disposable products used in conjunction with the heaters and are depreciated
over a three to five year life. The net book value of heaters was $6.7 million
and $6.9 million as of December 31, 2003 and 2002, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews for impairment of long-lived assets whenever events or
changes in circumstances indicate that an asset's book value exceeds the
undiscounted expected future cash flows to be derived from that asset. Whenever
undiscounted expected future cash flows are less than the book value, the asset
will be reduced to fair value and an impairment loss will be recognized.
GOODWILL
The Company adopted Statement of Financial Accounting Standards ("SFAS")
142, "Goodwill and Other Intangible Assets," as of January 1, 2002 and
discontinued amortization of goodwill and other intangible assets except those
with finite lives. Prior to January 1, 2002, goodwill and other intangible
assets were amortized under a straight-line method over their estimated useful
lives. The following table presents the effects on previously reported net
income (loss) if the Company had adopted the non-amortization provisions of SFAS
142 as of the beginning of each period (amounts in thousands):
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001
-------------- ------------- -------------
Reported net income (loss)....... $ 1,584 $ (1,664) $ (143,671)
Add back: goodwill amortization.. -- -- 3,490
-------------- ------------- -------------
Adjusted net income (loss)....... $ 1,584 $ (1,664) $ (140,181)
============== ============= =============
SFAS 142 provides that goodwill and other intangible assets with
indefinite lives is no longer amortized but shall be tested for impairment
annually, or more frequently if circumstances indicate the possibility of
impairment. If the carrying value of goodwill or an intangible asset exceeds its
fair value, an impairment loss shall be recognized. The Company's goodwill
impairment test is conducted at a "reporting unit" level and compares each
reporting unit's fair value to its carrying value. The Company has defined its
reporting units as: guarantor, primarily United States, and non-guarantor,
primarily international. The non-guarantor subsidiaries consist principally of
F-10
Hudson AB and subsidiaries (whose operations are principally international). The
measurement of fair value for each region is based on an evaluation of future
discounted cash flows and is further tested using a multiple of earnings
approach. The Company's tests in 2003 and 2002 indicated that no impairment
existed, and accordingly, no loss was recognized. At December 31, 2003, the
Company completed its annual impairment test, which yielded similar results with
no goodwill impairment indicated at any of Hudson's reporting units.
In the fourth quarter of 2001, as a result of significant losses from
operations, the Company reassessed future cash flows and operating results and
recorded a goodwill impairment charge of approximately $33.1 million.
The change in the goodwill amount for 2003 and 2002 was solely
attributable to changes in foreign currency exchange rates.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' deficit except
those resulting from investments by, and distributions to, stockholders.
Accordingly, the Company's comprehensive income includes net income (loss) and
foreign currency adjustments that arise from the translation of the Company's
foreign financial statements into U.S. dollars. The cumulative translation
adjustment is included in the accompanying consolidated statements of
stockholders' deficit.
REVENUE RECOGNITION
The Company recognizes revenue net of reserves when product is shipped and
title passes to the customer as the earnings process is substantially complete
at that time. The Company establishes reserves for sales returns for shipping
errors or damaged goods, rebates and other allowances based on historical
experience. The Company sells its products to its distributors based on a listed
price. Distributors charge the service providers, or the distributor's end
customers, a contract price (which is determined by their group purchasing
organization affiliation or individual contract price) plus a service margin. As
is customary within the industry, the Company rebates the difference between the
list price and the specific contract price to the distributor. The Company
records revenue and receivables net of rebatable amounts, based on historical
experience. In the event no rebate is payable, the rebate amount is reversed and
recognized as revenue.
ADVERTISING COSTS
All advertising costs incurred by the Company are expensed in the period
in which they were incurred.
INCOME TAXES
The Company applies the asset and liability method in recording income
taxes, under which deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using currently enacted tax rates and laws.
Additionally, deferred tax assets are evaluated for recoverability and a
valuation allowance is established to appropriately reduce such assets to that
amount which will more likely than not be realized.
FOREIGN CURRENCY TRANSLATION
The Company uses the local currency of its foreign operating subsidiaries
as the functional currency for such subsidiaries. Accordingly, all assets and
liabilities at the Company's subsidiaries located outside the United States are
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Income and expense items are translated at the weighted-average
exchange rate prevailing during the period. The resulting translation gains and
losses are recorded as other comprehensive income (loss) in cumulative
translation adjustment in the accompanying consolidated financial statements.
F-11
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to customers in the United States
and Europe. Historically, the Company has not experienced significant losses
related to trade receivables from concentrations of individual customers or from
groups of customers in any geographic area. The Company has three customers that
collectively accounted for 39.4%, 39.3% and 30.5% of 2003, 2002 and 2001 net
sales, respectively, and 33.0%, 31.8% and 35.6% of net receivables at December
31, 2003, 2002 and 2001, respectively. To the extent the Company loses one of
its significant customers, the impact on the Company could be material.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash investments with high quality financial
institutions and limits the amount of credit exposure to any one institution.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt is determined based on quoted market
prices for issues listed on exchanges. The carrying amounts of cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of their short maturity.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company has adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." No stock-based employee compensation expense is recognized
in net income for any of the years presented. Had compensation expense for the
Company's stock-based compensation awards been recognized based on the fair
value recognition provisions of SFAS 123, the Company's net income would have
been adjusted to the pro forma amounts indicated below. See "Note 8 Deferred
Compensation and Benefit Plans."
YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
----------- ---------- ----------
Net income (loss), as reported............. $ 1,584 $ (1,664) $ (143,671)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all
awards................................. (369) (40) --
----------- ---------- ----------
Pro forma net income (loss)................ $ 1,215 $ (1,704) $ (143,671)
=========== ========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS 145 updates and clarifies existing accounting pronouncements
related to gains and losses from extinguishment of debt and requires that
certain lease modifications be accounted for in the same manner as
sale-leaseback transactions. The Company has adopted the provisions of SFAS 145
as of January 1, 2003. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
F-12
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS 146 also
establishes that the liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS 146 for exit and disposal
activities effective January 1, 2003, as required. Such adoption did not have a
material impact to the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 is an interpretation of
SFAS No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. FIN 45 also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This interpretation
also incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," which is being
superseded. The Company adopted the disclosure provisions of FIN 45 during the
fourth quarter of 2002 and the recognition provisions effective January 1, 2003,
as required. Such adoption did not have a material impact on the Company's
consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation Transition and Disclosure," an amendment of SFAS 123 "Accounting
for Stock-Based Compensation." 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 Company has complied with the expanded financial statement
disclosure requirements in its consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying to conform it to language used in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. The adoption of SFAS 149 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51. FIN 46 requires that a company consolidate variable interest
entities if that company is subject to a majority of the risk of loss from the
entity's activities or the company receives a majority of the entity's residual
returns. FIN 46 also requires certain disclosure about variable interest
entities in which the company has a significant interest, regardless of whether
consolidation is required. The Company adopted the provisions of FIN 46
effective February 1, 2003, as required, and such adoption did not have a
material impact on the Company's consolidated financial statements since the
Company currently has no variable interest entities. In December 2003, the FASB
issued FIN 46R with respect to variable interest entities created before January
31, 2003, which among other things, revised the implementation date to the first
fiscal year or interim period ending after March 15, 2004 with the exception of
Special Purpose Entities (SPE's). The consolidation requirements apply to all
SPE's in the first fiscal year or interim period ending December 15, 2003. The
Company adopted the provisions of FIN 46R effective January 1, 2004 and such
adoption did not have a material impact on the Company's consolidated financial
statements since the Company has no SPE's.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with
F-13
Characteristics of both Liabilities and Equity." 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
adopted this standard on July 1, 2003, and has classified its mandatorily
redeemable preferred stock as a liability. From July 1, 2003 to December 31,
2003, the Company recorded $3.1 million in interest expense for the increase in
the present value of the mandatorily redeemable preferred stock.
In November 2003, FASB issued FASB Staff Position No. 150-3 ("FSS 150-3"),
which deferred the effective dates for applying certain provisions of SFAS 150
related to mandatorily redeemable financial instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for public
and non-public companies. For public entities, SFAS 150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
non-controlling interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS 150, but would be
classified as liabilities by the parent, the classification and measurement
provisions of SFAS 150 are deferred indefinitely. The measurement provisions of
SFAS 150 are also deferred indefinitely for other mandatorily redeemable
non-controlling interests that were issued before November 4, 2003. For those
instruments, the measurement guidance for redeemable shares and non-controlling
interests in other literature shall apply during the deferral period.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform with
the presentation in the current period.
3. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment (amounts in
thousands):
AS OF
----------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------- ------------
Land............................................... $ 444 $ 444
Buildings.......................................... 11,057 10,400
Leasehold improvements............................. 3,177 2,931
Machinery, equipment and purchased software........ 98,327 95,747
Furniture and fixtures............................. 2,764 2,602
------------- ------------
115,769 112,124
Less -- Accumulated depreciation and amortization.. 80,605 74,186
------------- ------------
35,164 37,938
Construction in process............................ 2,313 1,930
------------- ------------
Property, Plant and equipment, net................. $ 37,477 $ 39,868
============= ============
F-14
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (amounts in thousands):
AS OF
----------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------- ------------
Payroll and related.............................. $ 7,895 $ 5,917
Interest......................................... 2,269 2,498
Closure of manufacturing facility................ 176 1,829
Vacation......................................... 1,841 1,642
Taxes............................................ 158 423
Profit sharing plan.............................. 1,102 1,120
Medical self-insurance........................... 1,068 1,160
GPO fees......................................... 650 1,473
Insurance........................................ 389 316
Freight.......................................... 591 579
Other............................................ 834 780
------------- ------------
$ 16,973 $ 17,737
============= ============
4. LONG-TERM DEBT
The Company's long-term debt obligations consist of the following (amounts
in thousands):
AS OF
------------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------- -------------
Bank notes payable
Revolving A Facility........................ $ 20,232 $ --
Term B Facility............................. 30,000 --
HRCI AB Facility............................ 13,323 14,025
Revolving credit facility................... -- 49,300
Term credit facility........................ -- 6,250
Interest payable to affiliates................... 9,760 4,655
Notes payable to affiliates...................... 39,317 39,317
Senior subordinated notes payable................ 115,000 115,000
Mandatorily redeemable preferred stock........... 56,480 50,381
------------- -------------
284,112 278,928
Less current portion............................. 9,178 13,783
------------- -------------
Long-term debt................................... $ 274,934 $ 265,145
============= =============
BANK NOTES PAYABLE
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 Term B Facility. Both credit facilities mature on October 1, 2007. The
Company recorded 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 A Facility consist of a $5.6 million five year amortizing
real estate loan, a $2.4 million three year amortizing equipment loan, a $6.0
million amortizing 2.5 year general facility and a $5.0 million letter of credit
sub facility.
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 the guarantor
subsidiaries.
The Term B Facility consists of a $30.0 million non-amortizing 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 Term B Facility is guaranteed jointly and severally by Holding, by the
guarantors subsidiaries and by a pledge of the stock of HRC Holdings ("HRC"), a
wholly owned subsidiary.
F-15
Required reductions in the Revolving Facility are equal to (amounts in
thousands):
Year ending December 31 2004 2005 2006 2007
------ ------ ------ -------
$3,680 $3,680 $2,080 $40,792
Interest rates under the Revolving A Facility 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 A FACILITY
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
TERM B FACILITY 11% Fixed
The following summarizes interest rate data on the Revolving Facility at
December 31, 2003:
Revolving A Facility rate................... 4.55%
Term B Facility rate........................ 11.0%
The following summarizes interest rate data on the credit facility at
December 31, 2002:
Revolving credit facility rate............. 5.938%
Term credit facility rate.................. 5.938 to 6.625%
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 of December 31, 2003, the Company was in compliance with
all terms and conditions of the Revolving Facility.
On October 9, 2003, the Company's European subsidiary, Hudson AB,
refinanced its existing bank credit facility with a new $19.2 million bank
credit facility (the "HRCI AB Facility"). Outstanding under this facility
totaled $13.3 million as of December 31, 2003. The HRCI AB Facility, which is
denominated in Swedish krona, consists of a $9.6 million amortizing term
facility, a bank overdraft facility of $6.9 million and revolving credit which
provides for additional borrowings up to the total credit limit of $19.2
million, provided, however, that $6.9 million must always fall due within the
agreement period of one year. Borrowings may be made in Swedish krona or other
foreign currencies as requested by Hudson AB. The HRCI AB Facility bears
interest at a margin of the applicable base (determined by the bank) rate plus
1.65% (4.40 % at December 31, 2003). The HRCI AB Facility is valid for one year
periods (initial expiration of September 30, 2004) and renews automatically,
provided that either
F-16
party can terminate with six months prior notice. The HRCI AB Facility is
guaranteed by the non-guarantor subsidiaries, see "Note 9 Geographic, Major
Customer and Segment Information." The HRCI AB Facility requires Hudson AB to
provide periodic reporting of financial results, including annual statements, as
well as to maintain certain covenants, including a minimum equity-to-assets
ratio and minimum interest coverage ratio. As of December 31, 2003, Hudson AB
was in compliance with all terms and conditions of the HRCI AB Facility.
At December 31, 2003 and 2002, borrowings under the HRCI AB Facility
equaled $13.3 million and $14.0 million, respectively.
The interest rate on the HRCI AB Facility as of December 31, 2003 and 2002
was 4.40% and 6.66%, respectively.
The following summarizes future principal amounts payable on all of the
Company's debt as of December 31, 2003 (amounts in thousands):
2004.................................... $ 9,178
2005.................................... 6,429
2006.................................... 2,080
2007.................................... 40,792
2008.................................... 164,077
Thereafter.............................. 61,556
-------------
$ 284,112
=============
NOTES PAYABLE TO AFFILIATES
As of December 31, 2003, the Company and HRC had an aggregate of $39.3
million in notes payable to the majority stockholder of the Company's parent,
current stockholders of the Company and certain members of management. The
following table summarizes these notes (amounts in thousands):
WARRANTS
ISSUED
IN
CONNECTION
MATURITY INTEREST NOTE WITH NOTE
ISSUE DATE DATE RATE AMOUNT (SHARES)
- ------------- ---------- -------- ----------- -----------
April 2001 March 2008 10.0% $ 6,451 --
August 2001 March 2008 10.0 8,500 --
May 2002 March 2008 12.0 12,000 12,000
----------- -----------
Issued by Hudson 26,951 12,000
----------- -----------
July 1999 March 2008 12.0 2,266 --
May 2002 March 2008 12.0 8,000 8,000
December 2002 March 2008 12.0 2,100 2,100
----------- -----------
Issued by HRC 12,366 10,100
----------- -----------
Total $ 39,317 22,100
=========== ===========
All warrants (see Note 10, Additional Paid-In Capital), including those
issued in connection with HRC notes, are for the common stock of Hudson. The
notes issued in April and August of 2001 have a conversion provision allowing
the holder, at their demand, to exchange the notes for Company common stock at
$10.00 per share.
The notes issued by the Hudson and HRC are unsecured and rank pari passu
to the senior subordinated notes.
F-17
Accrued interest payable to affiliates totaled $9.8 million and $4.7
million at December 31, 2003 and 2002, respectively. Interest on the notes is
not payable until the maturity date.
As of December 31, 2003 the fair value of the notes to affiliates
approximates their face value.
SENIOR SUBORDINATED NOTES PAYABLE
The Company has $115.0 million of senior subordinated notes (the "Notes").
The Notes are fully transferable and are general unsecured obligations of the
Company, subordinated in right of payment to all existing and future senior
debt, as defined, of the Company. The Notes bear interest at a rate equal to
9-1/8% per annum from the date of issuance of the Notes. Interest is payable
semiannually on April 15 and October 15 of each year, commencing October 15,
1998. The Notes mature on April 15, 2008 and will be redeemable at the option of
the Company, in whole or in part, on or after April 15, 2003 at a redemption
price of 100.0% to 104.6% of face value, depending on the date of the
redemption. The Notes are guaranteed jointly and severally by Hudson and its
Mexican subsidiaries.
The fair value of the Company's senior subordinated notes at December 31,
2003 and 2002 was approximately $103.5 million and $61.0 million, respectively.
The fair value is estimated based on the quoted market prices for issues listed
on exchanges and is not intended to, and does not, represent the underlying fair
value of the Company.
MANDATORILY REDEEMABLE PREFERRED STOCK
As of December 31, 2003, the Company has issued to Holding, its parent,
556,176 shares (including shares issued as payment in-kind dividends) of its 11
- -1/2% senior PIK preferred stock due 2010 (the "Company Preferred Stock").
Dividends on the 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 11-1/2% of the liquidation
preference per share. The liquidation preference of each share of Company
Preferred Stock is $100 (the "Liquidation Preference") plus unpaid dividends.
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
Revolving 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. The
Company Preferred Stock ranks junior in right of payment to all debt obligations
of the Company and its subsidiaries.
At December 31, 2003, the redemption amount was $56.9 million, of which
$55.6 million relates to issued shares and $1.3 million to accrued but not
issued shares. The maximum amount the Company will pay on April 15, 2010, the
mandatory redemption date, will be $115.0 million and will be accreted at a rate
per annum of 11-1/2% with dividends being paid in kind and not in cash.
5. COMMITMENTS AND CONTINGENCIES
The Company has capital and operating leases for certain facilities,
automobiles and office equipment under non-cancelable leases, with the majority
of the automobile leases having a term of one year with annual renewal
provisions. Rental expense for the years ended December 31, 2003, 2002 and 2001
amounted to $4.2 million, $3.1 million and $4.7 million, respectively.
The following is a schedule, by year, of the future minimum payments under
capital and operating leases, together with the present value of the net minimum
payments as of December 31, 2003 (amounts in thousands). Capital lease amounts
are included in other non-current liabilities on the accompanying consolidated
balance sheets:
F-18
CAPITAL OPERATING
LEASES LEASES
----------- -----------
Year ending December 31,
2004...................................... $ 71 $ 2,993
2005...................................... 71 2,370
2006...................................... 12 1,123
2007...................................... 10 1,119
2008...................................... -- 1,095
Thereafter................................ -- 1,297
----------- -----------
Total minimum lease payments.................... 164 $ 9,997
===========
Less amount representing interest............... 27
-----------
Total present value of minimum payment.......... 137
Less current portion of such obligations........ 52
-----------
Long-term obligations with interest rate of 11.0% $ 85
===========
Assets recorded under capital leases are as follows as of December 31 (amounts
in thousands):
2003 2002
Machinery and equipment....................... $ 267 $ 267
Less accumulated depreciation................. 102 64
-------------- -------------
Net assets recorded under capital leases.... $ 165 $ 203
============== =============
SELF-INSURANCE
The Company self-insures the majority of its medical benefit programs and
workers' compensation whereby the Company directly assumes the liability for
employee medical and dental claims presented, subject to per-claim and aggregate
maximums. Reserves for medical claim losses (including retiree benefits)
totaling approximately $1.1 million and $1.2 million at December 31, 2003 and
2002, respectively, were established based upon estimated obligations and are
included in accrued liabilities in the accompanying consolidated balance sheets.
The Company maintains excess coverage on an aggregate claim basis. Effective
November 1, 2001, the Company became self-insured for workers' compensation.
Reserves for workers' compensation claim losses totaling approximately $0.8
million and $0.4 million at December 31, 2003 and 2002, respectively, were
established based upon estimated obligations and are included in accrued
liabilities in the accompanying consolidated balance sheets. Holding maintains
excess coverage on an individual and aggregate claim basis. A third-party
administrator processes all employee medical claims and requires the Company to
collateralize a portion of its potential payment liability through the use of
standby letters of credit. The standby letters of credit are issued for one-year
periods with automatic annual extensions until such time the third-party
administrator determines all outstanding claims for the policy period have been
paid. As of December 31, 2003, the Company had issued two such standby letters
of credit totaling approximately $1.2 million.
LEGAL
The Company is not party to any material lawsuits or other proceedings.
While the results of the Company's other existing lawsuits and proceedings
cannot be predicted with certainty, management does not expect that the ultimate
liabilities arising from settlement or loss, if any, will have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
GUARANTEES
The Company has issued a standby letter of credit totaling $0.1 million in
support of an operating lease obligation. The letter of credit expires on
September 24, 2004.
F-19
From time to time, the Company enters into certain types of contracts that
contingently require the Company to indemnify parties against third-party
claims. These contracts primarily relate to (i) certain real estate leases,
under which the Company may be required to indemnify property owners for
environmental or other liabilities and other claims arising from the Company's
use of the applicable premises; and (ii) certain agreements with the Company's
officers, directors and employees, under which the Company may be required to
indemnify such persons for liabilities arising out of their employment
relationships.
The terms of such obligations vary by contract, and in most instances, a
specific or maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, no liabilities have been recorded for these
obligations on the Company's consolidated balance sheets for the periods
presented.
6. JUNIOR PREFERRED STOCK
In August 2001, the Company issued 3,000 shares of 12% junior convertible
cumulative preferred stock (the "Junior Preferred Stock") to Holding for cash
consideration 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
the 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. Each share of Junior
Preferred Stock is convertible, without any additional consideration by the
holder thereof and at the option of the holder thereof, at any time after the
date of issuance such shares into such number of fully paid and nonassessable
shares of Company Common Stock as determined by dividing $1,000 by the
conversion price in effect at the time of conversion. In addition, each holder
of Junior Preferred Stock shall also receive in respect of each share converted
all accrued and unpaid dividends on such share payable at the election of the
holder, either (i) in a number of shares of Company Common Stock obtained by
dividing the amount of accrued and unpaid dividends on each share of Junior
Preferred Stock by the conversion price in effect at the time of the conversion
or (ii) in cash in the amount of such accrued and unpaid dividends on such share
of Junior Preferred Stock. The initial conversion price at which the shares of
common stock shall be deliverable upon conversion shall be $10.00 per share and
shall be subject to adjustments for stock splits, stock or other dividends,
combinations of stocks, mergers and reorganizations.
7. INCOME TAXES
The Company is included in the consolidated income tax returns of its
parent. The Company provides for income taxes on a stand-alone basis in
accordance with the asset and liability method pursuant to an informal
tax-sharing agreement.
The Company's income (loss) before income tax provision was subject to
taxes in the following jurisdictions for the following periods (amounts in
thousands):
AS OF
------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------- --------------
United States.................. $ (818) $ (4,291) $ (63,809)
Foreign........................ 4,118 4,524 (10,008)
------------ ------------- --------------
$ 3,300 $ 233 $ (73,817)
============ ============= ==============
F-20
The components of the deferred tax asset are (amounts in thousands):
AS OF
-------------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ -------------
Basis differences arising from Section 338(h)(10)
election............................................. $ 53,480 $ 60,674
Net operating loss carryforwards........................ 53,538 47,308
Other................................................... 580 633
------------ -------------
107,598 108,615
Less valuation allowance................................ 107,598 108,615
------------ -------------
$ -- $ --
============ =============
As of December 31, 2003 and 2002, the Company had net deferred tax assets
before any valuation allowance of $107.6 million and $108.6 million,
respectively. This asset relates primarily to basis differences in goodwill and
net operating loss carryforwards for tax purposes. As of December 31, 2003, the
Company had federal and state net operating loss carryforwards of approximately
$128.4 million and $78.4 million, which begin to expire in 2018 and 2004,
respectively.
Under SFAS No. 109, "Accounting for Income Taxes," the Company is required
to place a valuation allowance against any deferred tax assets, unless it is
more likely than not that the asset will be realized. In accordance with this
statement, the Company has placed a valuation allowance against its deferred tax
assets of approximately $107.6 million as of December 31, 2003.
The reconciliation of the actual tax expense to tax computed at the
statutory federal is as follows as of December 31 (amounts in thousands):
2003 2002 2001
Income taxes at statutory rate.............. $ 1,122 $ 80 $ (25,098)
Other....................................... 173 31 4,298
Foreign taxes .............................. 511 (484) 959
Valuation allowance......................... (90) 2,270 89,695
--------------- --------------- ---------------
Income tax expense.......................... $ 1,716 $ 1,897 $ 69,854
=============== =============== ===============
The provision for income taxes consists of the following for the years
ended December 31 (amounts in thousands):
2003
----------------------------------------------
UNITED STATES FOREIGN TOTAL
------------- ------------- -----------
Current.................................. $ -- $ 1,716 $ 1,716
Deferred................................. -- -- --
------------- ------------- -----------
$ -- $ 1,716 $ 1,716
============= ============= ===========
2002
----------------------------------------------
UNITED STATES FOREIGN TOTAL
------------- ------------- -----------
Current.................................. $ -- $ 1,662 $ 1,662
Deferred................................. 235 -- 235
------------- ------------- -----------
$ 235 $ 1,662 $ 1,897
============= ============= ===========
2001
----------------------------------------------
UNITED STATES FOREIGN TOTAL
------------- ------------- -----------
Current.................................. $ -- $ 959 $ 959
Deferred................................. 68,895 -- 68,895
------------- ------------- -----------
$ 68,895 $ 959 $ 69,854
============= ============= ===========
8. DEFERRED COMPENSATION AND BENEFIT PLANS
PROFIT SHARING AND 401(k) PLANS
In 2002, the Company froze its defined-contribution pension plan covering
substantially all its domestic employees who are 21 years of age with two or
more years of service. The plan was replaced by a new profit sharing plan that
covers substantially all of its domestic employees who are 18 years of age with
two or more years
F-21
of service. Company contributions to the new plan will be made at the Company's
discretion. The 2002 plan year was funded with $1.0 million, and the Company has
provided $1.0 million for future contributions relating to the new plan in 2003.
The Company has a 401(k) plan covering substantially all of its employees
who are 18 years of age with 30 days or more of service. Participants may
contribute up to 50% of their base compensation to this plan, subject to certain
Internal Revenue Code limitations, each year. The plan does not require matching
contributions by the Company, and to date, none have been made.
DEFERRED COMPENSATION
The Company maintains a deferred compensation plan for certain key
employees. As of December 31, 2003, no material amount of compensation has been
deferred.
STOCK SUBSCRIPTION PLANS
In April 1998, Holding adopted an Employee Stock Subscription Plan and an
Executive Stock Subscription Plan (collectively, the "Stock Subscription Plans")
pursuant to which executives of the Company purchased 800,000 shares of common
stock of Holding valued at $10.00 per share. The Stock Subscription Plans
provide for a repurchase option in favor of Holding upon termination of
employment at stated repurchase prices. In addition, the Stock Subscription
Plans provide for restrictions on the transferability of shares prior to the
fifth anniversary of the recapitalization or Hudson's initial public offering
(IPO). The shares are also subject to a right of first refusal in favor of
Holding, as well as obligations to sell at the request of Freeman Spogli (the
Company's majority Stockholder) and co-sale rights if Freeman Spogli sells its
shares to a third party. No additional shares of Holding common stock were sold
under the Stock Subscription Plans in 2003 or 2002.
SHAREHOLDER AGREEMENT
Helen Hudson Lovaas (the "Continuing Shareholder") and Holding have
entered into a Shareholders' Agreement, as amended (the "Shareholders'
Agreement"). The Shareholder Agreement provides that i) Holding and the
Continuing Shareholder have the right to purchase their pro rata share of
certain new issuances, ii) in consideration for the contribution of
consideration received from Holding for certain issuances of the common stock of
Holding, the Company will issue equivalent shares of Company common stock to
Holding, iii) in the event of a sale of Company stock by Holding or Freeman
Spogli, the Continuing Shareholder is obligated to sell all or part of her
shares at the request of Holding and the Continuing Shareholder has the right to
participate in such sale on a pro rata basis, iv) the restriction on the
transferability of the shares for a two-year period following the
recapitalization and provides for a right of first offer on the Continuing
Shareholder's common stock, and v) in the event the Company participates in an
IPO, the Company will exchange all of the Company's existing common stock for
newly issued common stock.
2001 NON-QUALIFIED STOCK OPTION PLAN
In 2001, the Board of Directors of the Company approved adoption of a
Stock Option plan for eligible employees, officers and consultants of the
Company. The plan reserves for the issuance of up to 5,000,000 shares of Company
common stock in the form of unqualified or incentive stock options. The Board of
Directors shall determine the exercise price, which shall not be less than 100%
and 85% of fair market value of the underlying stock for incentive and
non-statutory options, respectively, on the date of grant. The option term and
vesting periods will also be determined by the Board of Directors on the date of
grant. A summary of the stock option activity for the years ended December 31,
2003 and 2002 is as follows:
F-22
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
------------ --------------
Options outstanding at December 31, 2001....... -- $ --
Options issued................................. 3,550,000 1.00
Options cancelled.............................. (50,000) 1.00
Options exercised.............................. -- --
------------ --------------
Options outstanding at December 31, 2002....... 3,500,000 $ 1.00
============ ==============
Options exercisable at December 31, 2002....... 2,625,000 $ 1.00
============ ==============
Weighted average remaining life (years)........ 3.25
============
Options issued................................. 800,000 1.30
Options cancelled.............................. -- --
Options exercised.............................. -- --
------------ --------------
Options outstanding at December 31, 2003....... 4,300,000 $ 1.02
============ ==============
Options exercisable at December 31, 2003....... 3,750,000 $ 1.02
============ ==============
Weighted average remaining life (years)........ 3.03
============
For purposes of the pro forma disclosure presented in Note 2, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.00%
and 2.83%, respectively; dividend yield of 0% for all years; expected lives of
three years and four years, respectively, and volatility of 50% for both years,
(see Note 2, Summary of Significant Accounting Policies - Stock-Based
Compensation).
RETIREE MEDICAL BENEFITS
Six retirees were provided continued medical benefits under the Company's
existing medical benefits program. Based on the estimated obligations, a reserve
of $0.3 million was recorded as of December 31, 2003 and 2002. As of January 1,
2003, the plan was frozen and no future retirees will participate in the plan.
9. GEOGRAPHIC, MAJOR CUSTOMER AND SEGMENT INFORMATION
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: guarantor, primarily the
United States; and non-guarantor, primarily international. The non-guarantor
subsidiaries consist principally of Hudson 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 sells respiratory care and anesthesia products to distributors
and medical facilities throughout the United States and internationally.
Operating results of the Company's various product groups have been aggregated
because of their common characteristics and their reliance on shared operating
functions. The Company operates primarily in the United States and in Europe.
During 2003, 2002 and 2001, the Company had foreign sales of approximately $53.4
million, $46.8 million and $40.8 million, respectively. International sales
represented approximately 28.9%, 27.2% and 25.8% of total sales in 2003, 2002
and 2001, respectively.
F-23
The Company's sales and percentage of sales by geographic region for
the years ending December 31, 2003, 2002 and 2001 are as follows (amounts in
thousands):
YEAR ENDED
-------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
----------------------- ----------------------- ----------------------
United States..................... $ 131,182 71.1% $ 125,141 72.8% $ 117,483 74.3%
Europe............................ 30,174 16.3 24,595 14.3 19,982 12.7
Pacific Rim (Japan, Southeast
Asia, Australia/New Zealand)... 13,705 7.4 12,273 7.1 11,530 7.3
Canada............................ 2,500 1.4 2,432 1.4 2,109 1.3
Other international............... 7,034 3.8 7,518 4.4 6,964 4.4
------------ ----- ------------ ----- ------------ -----
$ 184,595 100.0% $ 171,959 100.0% $ 158,068 100.0%
============ ===== ============ ===== ============ =====
The Company's sales and percentage of sales by product group for the years
ending December 31, 2003, 2002 and 2001 is as follows (amounts in thousands):
YEAR ENDED
--------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
----------------------- -------------------- -------------------
Oxygen Therapy.................... $ 54,270 29.4% $ 55,199 32.1% $ 51,530 32.6%
Airway Management................. 47,072 25.5 48,321 28.1 46,156 29.2
Humidification.................... 44,857 24.3 40,410 23.5 34,143 21.6
Aerosol Therapy................... 38,396 20.8 28,029 16.3 26,239 16.6
------------- ----- --------- ----- --------- -----
$ 184,595 100.0% $ 171,959 100.0% $ 158,068 100.0%
============= ===== ========= ===== ========= =====
The following summarizes the net book value of fixed assets at the
respective locations as of December 31, 2003 and 2002 (amounts in thousands):
AS OF
---------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
----------- -----------
United States............................................... $ 26,743 $ 31,612
Ensenada, Mexico............................................ 5,115 4,757
Tecate, Mexico.............................................. 3,622 2,179
Stockholm, Sweden........................................... 1,213 528
Kuala Lampur, Malaysia...................................... 784 792
----------- -----------
$ 37,477 $ 39,868
=========== ===========
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 and non-guarantor subsidiaries (amounts in thousands):
F-24
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash........................................... $ 3,690 $ 2,992 $ -- $ 6,682
Accounts receivable............................ 17,938 7,169 -- 25,107
Intercompany receivables, net.................. -- 1,694 (1,694) --
Inventories.................................... 20,419 4,605 (1,195) 23,829
Other current assets........................... 1,587 918 -- 2,505
----------- --------- ------------ ------------
Total current assets........................ 43,634 17,378 (2,889) 58,123
PROPERTY, PLANT AND EQUIPMENT, NET 35,480 1,997 -- 37,477
GOODWILL....................................... -- 41,410 -- 41,410
DEFERRED FINANCING AND OTHER ASSETS, net....... 6,457 -- -- 6,457
INVESTMENT IN NON-GUARANTOR
SUBSIDIARIES, at cost....................... 28,636 4,000 (32,636) --
OTHER ASSETS................................... 1,216 27 -- 1,243
----------- --------- ------------ ------------
Total other assets.......................... 36,309 45,437 (32,636) 49,110
----------- --------- ------------ ------------
$ 115,423 $ 64,812 $ (35,525) $ 144,710
=========== ========= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of bank notes payable......... $ 3,680 $ 5,498 $ -- $ 9,178
Accounts payable.............................. 7,170 2,005 -- 9,175
Intercompany payables, net.................... 1,694 -- (1,694) --
Accrued liabilities........................... 13,459 3,514 -- 16,973
----------- --------- ------------ ------------
Total current liabilities.................. 26,003 11,017 (1,694) 35,326
INTEREST PAYABLE TO AFFILIATES................ 6,720 3,040 -- 9,760
NOTES PAYABLE TO AFFILIATES................... 26,951 12,366 -- 39,317
BANK NOTES PAYABLE, net of current portion.... 46,552 7,825 -- 54,377
SENIOR SUBORDINATED NOTES PAYABLE............. 115,000 -- -- 115,000
MANDATORILY REDEEMABLE PREFERRED STOCK........ 56,480 -- -- 56,480
OTHER NON-CURRENT LIABILITIES................. 229 2,136 -- 2,365
----------- --------- ------------ ------------
Total liabilities.......................... 277,935 36,384 (1,694) 312,625
STOCKHOLDERS' EQUITY (DEFICIT)................... (162,512) 28,428 (33,831) (167,915)
----------- --------- ------------ ------------
$ 115,423 $ 64,812 $ (35,525) $ 144,710
=========== ========= ============ ============
F-25
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
--------------------------------------------------------
NON-
GUARANTOR 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
GOODWILL......................................... -- 34,137 -- 34,137
DEFERRED FINANCING AND OTHER ASSETS, 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:
Current portion of bank notes payable............ $ 9,250 $ 4,533 $ -- $ 13,783
Accounts payable................................. 8,540 1,839 -- 10,379
Intercompany payables, net....................... 1,227 -- (1,227) --
Accrued liabilities.............................. 14,704 3,033 -- 17,737
----------- --------- ------------ -----------
Total current liabilities..................... 33,721 9,405 (1,227) 41,899
INTEREST PAYABLE TO AFFILIATES................... 3,322 1,333 -- 4,655
NOTES PAYABLE TO AFFILIATES...................... 26,951 12,366 -- 39,317
BANK NOTES PAYABLE, net of current portion....... 46,300 9,492 -- 55,792
SENIOR SUBORDINATED NOTES PAYABLE................ 115,000 -- -- 115,000
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
=========== ========= ============ ===========
F-26
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES............................................ $ 159,539 $ 42,280 $ (17,224) $ 184,595
COST OF SALES........................................ 99,005 20,517 (16,912) 102,610
----------- --------- ------------ -----------
Gross Profit...................................... 60,534 21,763 (312) 81,985
OPERATING EXPENSES:
Selling, distribution, general and administrative,
including. provision for bad debts............. 36,893 13,635 -- 50,528
Research and development.......................... 1,859 1,377 -- 3,236
----------- --------- ------------ -----------
38,752 15,012 -- 53,764
----------- --------- ------------ -----------
Income from operations............................ 21,782 6,751 (312) 28,221
INTEREST EXPENSE AND OTHER, net: 22,288 2,633 -- 24,921
----------- --------- ------------ -----------
(Loss) income before provision for income taxes... (506) 4,118 (312) 3,300
PROVISION FOR INCOME TAXES........................... 349 1,367 -- 1,716
----------- --------- ------------ -----------
Net (loss) income.................................... $ (855) $ 2,751 $ (312) $ 1,584
=========== ========= ============ ===========
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES............................................ $ 150,044 $ 36,766 $ (14,851) $ 171,959
COST OF SALES........................................ 99,206 18,551 (15,246) 102,511
----------- --------- ------------ -----------
Gross Profit...................................... 50,838 18,215 395 69,448
OPERATING EXPENSES:
Selling, distribution, general and administrative,
including provision for bad debts.............. 37,280 10,813 -- 48,093
Research and development.......................... 1,653 925 -- 2,578
----------- --------- ------------ -----------
38,933 11,738 -- 50,671
----------- --------- ------------ -----------
Income from operations............................ 11,905 6,477 395 18,777
INTEREST EXPENSE AND OTHER, net: 16,591 1,953 -- 18,544
----------- --------- ------------ -----------
(Loss) income before provision for income taxes... (4,686) 4,524 395 233
PROVISION FOR INCOME TAXES........................... 207 1,690 -- 1,897
----------- --------- ------------ -----------
Net (loss) income.................................... $ (4,893) $ 2,834 $ 395 $ (1,664)
=========== ========= ============ ===========
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES............................................ $ 144,511 $ 28,319 $ (14,762) $ 158,068
COST OF SALES........................................ 106,745 15,749 (13,484) 109,010
----------- --------- ------------ -----------
Gross Profit...................................... 37,766 12,570 (1,278) 49,058
OPERATING EXPENSES:
Selling, distribution, general and administrative,
including provision for bad debts.............. 47,257 10,383 -- 57,640
Amortization of goodwill.......................... 1,561 1,929 -- 3,490
Impairment of goodwill............................ 26,217 6,911 -- 33,128
Impairment of fixed assets........................ 4,469 -- -- 4,469
Research and development.......................... 1,015 1,028 -- 2,043
----------- --------- ------------ -----------
80,519 20,251 -- 100,770
----------- --------- ------------ -----------
Loss from operations.............................. (42,753) (7,681) (1,278) (51,712)
INTEREST EXPENSE AND OTHER, net: 19,895 2,327 (117) 22,105
----------- --------- ------------ -----------
Loss before provision for income taxes............ (62,648) (10,008) (1,161) (73,817)
PROVISION FOR INCOME TAXES........................... 69,097 757 -- 69,854
----------- --------- ------------ -----------
Net loss............................................. $ (131,745) $ (10,765) $ (1,161) $ (143,671)
=========== ========= ============ ===========
F-27
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
----------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
--------- --------- -----------
Net cash provided by operating activities..................... $ 12,626 $ 5,985 $ 18,611
Net cash used in investing activities......................... (6,280) (1,216) (7,496)
Net cash used in financing activities......................... (6,150) (3,318) (9,468)
Effect of exchange rate changes on cash....................... (74) (1,316) (1,390)
--------- --------- -----------
NET INCREASE IN CASH.......................................... 122 135 257
CASH, beginning of year....................................... 3,568 2,857 6,425
--------- --------- -----------
CASH, end of year............................................. $ 3,690 $ 2,992 $ 6,682
========= ========= ===========
YEAR ENDED DECEMBER 31, 2002
----------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
--------- --------- -----------
Net cash provided by (used in) operating activities........... $ 8,314 $ (2,053) $ 6,261
Net cash provided by (used in) investing activities........... 409 (788) (379)
Net cash (used in) provided by financing activities........... (9,968) 4,423 (5,545)
Effect of exchange rate changes on cash....................... 100 (1,097) (997)
--------- --------- -----------
NET (DECREASE) INCREASE IN CASH............................... (1,145) 485 (660)
CASH, beginning of year....................................... 4,713 2,372 7,085
--------- --------- -----------
CASH, end of year............................................. $ 3,568 $ 2,857 $ 6,425
========= ========= ===========
YEAR ENDED DECEMBER 31, 2001
----------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
--------- --------- -----------
Net cash provided by operating activities..................... $ 3,740 $ 1,824 $ 5,564
Net cash used in investing activities......................... (8,366) (651) (9,017)
Net cash provided by (used in) financing activities........... 8,902 (1,572) 7,330
Effect of exchange rate changes on cash....................... -- (322) (322)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH............................... 4,276 (721) 3,555
CASH, beginning of year....................................... 437 3,093 3,530
--------- --------- -----------
CASH, end of year............................................. $ 4,713 $ 2,372 $ 7,085
========= ========= ===========
10. ADDITIONAL PAID-IN CAPITAL
In May 2002, in conjunction with the 2002 debt restructuring the Company
issued to Holding's majority stockholder and other shareholders warrants to
purchase 20 million shares of Company Common Stock. Additionally, in December
2002, the Company issued to other existing shareholders warrants to purchase 2.1
million shares of common stock. The warrants are exercisable upon issuance for
$1.00 per share and expire on May 15, 2009. The warrants were valued at $0.9
million, based on the Black-Scholes valuation model. The fair value of these
warrants was estimated at the date of grant, with the following assumptions;
five-year risk-free interest rate of 5.25%; no dividend yield; an average
volatility factor of 50.0%; and weighted average expected lives of seven years.
The warrant value was deferred and is being amortized to interest expense over
the term of the debt.
F-28
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is unaudited summarized quarterly financial data (amounts in
thousands):
2003 QUARTER ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
Net sales..................... $ 45,879 $ 45,268 $ 44,566 $ 48,882
Gross profit.................. 19,849 20,045 19,659 22,432
Net income (loss)............. 510 1,138 (1,021) 957
2002 QUARTER ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
Net sales...................... $ 43,292 $ 41,728 $ 42,144 $ 44,795
Gross profit................... 18,060 17,993 16,016 17,379
Net income (loss).............. 354 (588) (2,546) 1,116
F-29