- --------------------------------------------------------------------------------
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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to________.
Commission file number - 333-56097
___________________
HUDSON RESPIRATORY CARE INC.
(Exact name of registrant as specified in its charter)
___________________
California 95-1867330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27711 Diaz Road, P.O. Box 9020 92589
Temecula, California (Zip Code)
(Address of Principal Executive Offices)
(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 [_] 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 10,391,435 on August
20, 2001.
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HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of December
31, 2000 and June 30, 2001................................................................. 1
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Six months Ended
June 30, 2000 and 2001..................................................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 2001............................................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 22
Item 2. Changes in Securities...................................................................... 22
Item 3. Defaults Upon Senior Securities............................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 5. Other Information.......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURE........................................................................................................... 23
i
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITIED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollar Amounts in Thousands)
December 31, June 30,
2000 2001
---------------------- ----------------
CURRENT ASSETS:
Cash................................................................................ $ 3,530 $ 4,258
Accounts receivable, less allowance for doubtful accounts of $3,500
and $3,757 at December 31, 2000 and June 30, 2001, respectively................... 28,307 28,718
Inventories......................................................................... 44,610 34,491
Other current assets................................................................ 1,832 1,903
----------- -----------
Total current assets.............................................................. 78,279 69,370
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net................................................... 49,425 47,749
----------- -----------
OTHER ASSETS:
Intangible assets, net.............................................................. 67,573 61,268
Deferred financing costs, net....................................................... 9,587 8,867
Deferred tax asset.................................................................. 69,105 69,117
Other assets........................................................................ 1,265 3,575
----------- -----------
Total other assets................................................................ 147,530 142,827
----------- -----------
Total assets.................................................................... $ 275,234 $ 259,946
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated statements.
1
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar Amounts in Thousands)
December 31, June 30,
2000 2001
-------------------- ----------------
CURRENT LIABILITIES:
Notes payable to bank................................................. $ 10,686 $ 12,184
Accounts payable...................................................... 20,320 11,767
Accrued liabilities................................................... 12,707 12,737
Note payable to affiliates............................................ 2,000 5,000
Other current liabilities............................................. 3,007 2,404
--------- ----------
Total current liabilities........................................... 48,720 44,092
--------- ----------
NOTE PAYABLE TO AFFILIATE, net of current portion...................... 8,266 8,717
SENIOR SUBORDINATED NOTES PAYABLE...................................... 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion.......................... 85,962 87,191
OTHER NON-CURRENT LIABILITIES.......................................... -- 981
--------- ----------
Total liabilities..................................................... 257,948 255,981
--------- ----------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
authorized- 1,800 shares; issued and outstanding at June 30, 2001-
421 shares; liquidation preference: $40,649.......................... 39,043 41,329
Accrued preferred stock dividend, payable in kind..................... 1,018 1,092
--------- ----------
40,061 42,421
--------- ----------
STOCKHOLDERS' DEFICIT:
Common stock, no par value:
Authorized- 15,000 shares, issued and
Outstanding- 10,387 and 10,391 at December 31, 2000
and June 30, 2001, respectively.................................... 98,158 98,962
Cumulative translation adjustment..................................... (1,151) 3,409
Accumulated deficit................................................... (119,782) (140,827)
--------- ----------
Total accumulated deficit........................................... (22,775) (38,456)
--------- ----------
Total liabilities, mandatorily-redeemable preferred
stock and accumulated deficit...................................... $ 275,234 $ 259,946
========= ==========
The accompanying notes are an integral part of these condensed consolidated
statements
2
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollar Amounts in Thousands)
Three Months Ended Six Months Ended
------------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 2001 2000 2001
----------- --------------- ----------- ------------
NET SALES........................................... $ 31,811 $ 40,801 $ 72,618 $ 78,606
COST OF SALES....................................... 14,825 24,961 37,328 52,991
----------- --------------- ----------- ------------
Gross Profit....................................... 16,986 15,840 35,290 25,615
----------- --------------- ----------- ------------
OPERATING EXPENSES:
Selling, distribution, general &
administrative.................................... 10,796 13,261 19,525 25,782
Amortization of goodwill........................... 817 1,279 1,620 3,245
Research and development........................... 629 436 1,249 901
----------- --------------- ----------- ------------
12,242 14,976 22,394 29,928
----------- --------------- ----------- ------------
Income (loss) from operations.................... 4,744 864 12,896 (4,313)
INTEREST EXPENSE AND OTHER.......................... 5,130 6,343 10,467 13,842
----------- --------------- ----------- ------------
Net income (loss) before (benefit) provision for
income taxes...................................... (386) (5,479) 2,429 (18,155)
PROVISION (BENEFIT) FOR INCOME TAXES................ (1) 340 1,215 527
----------- --------------- ----------- ------------
Net income (loss).................................. $ (385) $ (5,819) $ 1,214 $ (18,682)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain.................. 101 3,831 307 4,560
----------- --------------- ----------- ------------
Comprehensive income (loss)...................... $ (284) $ (1,988) $ 1,521 $ (14,122)
=========== =============== =========== ============
The accompanying notes are an integral part of these condensed
consolidated statements.
3
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Six Months Ended
--------------------------------
June 30, June 30,
2000 2001
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 1,214 $(18,682)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities--
Depreciation and amortization............................................... 5,310 5,979
Amortization of deferred financing costs.................................... 490 505
Deferred taxes.............................................................. 88 (13)
Change in operating assets and liabilities:
Accounts receivable......................................................... (5,483) (411)
Inventories................................................................. (6,849) 10,120
Other current assets........................................................ 2,392 (71)
Other assets................................................................ 135 (2,310)
Accounts payable............................................................ 2,376 (8,553)
Accrued liabilities......................................................... 3,452 30
Other current liabilities................................................... (87) (603)
Other non-current liabilities............................................... -- 981
----------- -----------
Net cash provided by (used in) operating activities....................... 3,038 (13,028)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (5,755) (2.464)
Retirements of intangible assets............................................... -- 4,464
----------- -----------
Net cash provided by (used in) investing activities....................... (5,755) 2,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (1,500) (3,500)
Proceeds from bank note payable to bank........................................ 3,764 6,227
Repayment of notes payable to affiliates....................................... -- (6,000)
Proceeds from notes payable to affiliates...................................... -- 9,451
Additions of deferred financing costs.......................................... -- 215
Sale of common stock, net of issuance costs.................................... -- 803
----------- -----------
Net cash provided by financing activities................................. 2,264 7,196
Effect of exchange rate changes on cash......................................... 307 4,560
----------- -----------
NET (DECREASE) INCREASE IN CASH................................................. (146) 728
CASH, beginning of period....................................................... 2,917 3,530
----------- -----------
CASH, end of period............................................................. $ 2,771 $ 4,258
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 6,700 $ 7,693
=========== ===========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind.................................... $ 2,118 $ 2,361
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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, 2001, and the results of
operations and cash flows for the six month periods ended June 30, 2000 and 2001
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 2000 audited financial statements and the notes thereto included
in its Form 10-K filed with the SEC. The results of operations for the six month
periods ended June 30, 2001 are not necessarily indicative of the results to be
achieved for a full year.
2. Recent Accounting Pronouncements. In June 1998, the Financial Accounting
---------------------------------
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments. The statement requires that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value, and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The impact of adoption was not material to the financial
statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The Company will adopt SFAS 141 for all business combinations initiated after
June 30, 2001.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This
pronouncement addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Goodwill would no longer be amortized but would be
assessed at least annually for impairment using a fair value methodology. The
Company will adopt this statement for all goodwill and other intangible assets
acquired after June 30, 2001 and for all existing goodwill and other intangible
assets beginning January 1, 2002. Upon adoption of this standard on January 1,
2002, the Company will cease recording amortization of goodwill which would
increase income before taxes in 2002 by approximately $6.5 million, net of
income taxes. Other than ceasing the amortization of goodwill, the Company does
not anticipate that the adoption of SFAS 142 will have a significant effect on
our financial position or the results of our operations as the Company does not
currently anticipate any impairment charges for existing goodwill.
5
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
3. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
December 31, June 30,
2000 2001
----------- ---------
Raw materials................................................. $ 8,134 $ 7,090
Work-in-process............................................... 6,591 5,161
Finished goods................................................ 29,885 22,240
---------- ---------
$44,610 $34,491
========== =========
4. Subsidiaries Guaranteeing Debt and Segment Data. 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):
6
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2001
-----------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------- ------------- ------------- -------------
CURRENT ASSETS:
Cash................................... $ 2,010 $ 2,248 $ -- $ 4,258
Accounts receivable.................... 34,923 5,492 (11,697) 28,718
Inventories............................ 28,433 7,735 (1,677) 34,491
Other current assets................... 4,997 78,737 (81,831) 1,903
--------- -------- ---------- ----------
Total current assets................. 70,363 94,212 (95,205) 69,370
PROPERTY, PLANT
AND EQUIPMENT, NET..................... 46,654 1,095 -- 47,749
OTHER ASSETS:
Intangible assets, net................. 26,627 34,641 -- 61,268
Deferred financing costs, net......... 8,867 -- -- 8,867
Deferred tax asset..................... 68,881 236 -- 69,117
Investment in non-guarantor
subsidiaries.......................... 29,245 -- (29,245) --
Other.................................. 380 3,195 -- 3,575
--------- -------- ---------- ----------
Total other assets................... $ 134,000 $ 38,072 $ (29,245) $ 142,827
--------- -------- ---------- ----------
$ 251,017 $133,379 $ (124,450) $ 259,946
========= ======== ========== ==========
CURRENT LIABILITIES:
Notes payable to bank.................. 8,500 3,684 -- 12,184
Accounts payable....................... 17,149 1,276 (6,658) 11,767
Accrued liabilities.................... 10,522 2,215 -- 12,737
Notes payable to affiliate............. 5,000 -- -- 5,000
Other current liabilities.............. 971 23,960 (22,527) 2,404
--------- -------- ---------- ----------
Total current liabilities............ 42,142 31,135 (29,185) 44,092
OTHER LIABILITIES:
Note payable to affiliate, net of
current portion....................... 6,451 2,266 -- 8,717
Notes payable to bank, net of current
portion............................... 72,500 14,691 -- 87,191
Senior subordinated notes.............. 115,000 -- -- 115,000
Other non-current liabilities.......... -- 981 -- 981
--------- -------- ---------- ----------
Total liabilities.................... 236,093 49,073 (29,185) 255,981
Mandatorily-redeemable preferred stock.. 42,421 -- -- 42,421
STOCKHOLDERS' EQUITY (DEFICIT).......... (27,497) 84,306 (95,265) (38,456)
--------- -------- ---------- ----------
$ 251,017 $133,379 $ (124,450) $ 259,946
========= ======== ========== ==========
7
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2000
-----------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------- ---------------- -------------- ----------
CURRENT ASSETS:
Cash............................................... $ 437 $ 3,093 $ -- $ 3,530
Accounts receivable................................ 32,665 4,395 (8,753) 28,307
Inventories........................................ 38,703 7,973 (2,066) 44,610
Other current assets............................... 6,350 52,467 (56,985) 1,832
---------- ----------- ---------- ----------
Total current assets............................. 78,155 67,928 (67,804) 78,279
PROPERTY, PLANT
AND EQUIPMENT, NET................................. 48,260 1,165 -- 49,425
OTHER ASSETS:
Intangible assets, net............................. 27,719 39,854 -- 67,573
Deferred financing costs, net..................... 9,587 -- -- 9,587
Deferred tax asset................................. 68,881 224 -- 69,105
Investment in non-guarantor subsidiaries........... 29,245 -- (29,245) --
Other.............................................. 294 971 -- 1,265
---------- ----------- ---------- ----------
Total other assets............................... 135,726 41,049 (29,245) 147,530
---------- ----------- ---------- ----------
$ 262,141 $ 110,142 $ (97,049) $ 275,234
========== =========== ========== ==========
CURRENT LIABILITIES:
Notes payable to bank.............................. $ 7,500 $ 3,186 $ - $ 10,686
Accounts payable................................... 24,758 4,711 (9,149) 20,320
Accrued liabilities................................ 9,420 3,287 -- 12,707
Notes payable to affiliate......................... 2,000 -- -- 2,000
Other current liabilities.......................... 1,242 22,764 (20,999) 3,007
---------- ----------- ---------- ----------
Total current liabilities........................ 44,920 33,948 (30,148) 48,720
OTHER LIABILITIES:
Note payable to affiliate, net of
current portion................................... -- 8,266 -- 8,266
Notes payable to bank, net of current portion...... 75,000 10,962 -- 85,962
Senior subordinated notes.......................... 115,000 -- -- 115,000
Other non-current liabilties....................... -- 1,095 (1,095) --
---------- ---------- ---------- ----------
Total liabilities................................ 234,920 54,271 (31,243) 257,948
---------- ---------- ---------- ----------
Mandatorily-redeemable preferred stock.............. 40,061 -- -- 40,061
STOCKHOLDERS' EQUITY (DEFICIT)...................... (12,840) 55,871 (65,806) (22,775)
---------- ---------- ---------- ----------
$ 262,141 $ 110,142 $ (97,049) $ 275,234
========== ========== ========== ==========
8
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2001
------------------------------------------------------------------
Guarantor Non- Adjustments Total
Guarantor
------------ ------------- -------------- ------------
NET SALES...................................... $ 37,026 $ 7,033 $ (3,258) $ 40,801
COST OF SALES.................................. 24,724 3,734 (3,497) 24,961
----------- ----------- ---------- ---------
Gross Profit.................................. 12,302 3,299 239 15,840
OPERATING EXPENSES:
Selling, distribution, general and
administrative............................... 11,531 1,730 -- 13,261
Goodwill amortization......................... 385 894 -- 1,279
Research and development...................... 179 257 -- 436
----------- ----------- ---------- ----------
12,095 2,881 -- 14,976
----------- ----------- ---------- ----------
Income (loss) from operations................. 207 418 239 864
INTEREST AND OTHER EXPENSE..................... 4,949 425 969 6,343
----------- ----------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes................................. (4,742) (7) (730) (5,479)
PROVISION (BENEFIT) FOR INCOME TAXES........... -- 340 -- 340
----------- ------------ ---------- ----------
Net Income (loss).............................. $ (4,742) $ (347) $ (730) $ (5,819)
=========== ============ ========== ==========
9
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2000
----------------------------------------------------------------------
Guarantor Non- Adjustments Total
Guarantor
--------------- ------------ -------------- -------------
NET SALES...................................... $ 29,746 $ 4,823 $ (2,758) $ 31,811
COST OF SALES.................................. 15,634 1,949 (2,758) 14,825
---------- ----------- ---------- -----------
Gross Profit.................................. 14,112 2,874 -- 16,986
OPERATING EXPENSES:
Selling, distribution, general and
administrative............................... 9,211 1,585 -- 10,796
Amortization of goodwill...................... 329 488 -- 817
Research and development...................... 290 339 -- 629
---------- ----------- ---------- -----------
9,830 2,412 -- 12,242
---------- ----------- ---------- -----------
Income (loss) from operations................. 4,282 462 -- 4,744
---------- ----------- ---------- -----------
INTEREST AND OTHER EXPENSE.................... 4,598 532 -- 5,130
Income (loss) before provision (benefit) for
income taxes................................. (316) (70) -- (386)
PROVISION (BENEFIT) FOR INCOME TAXES........... (125) 124 -- (1)
---------- ----------- ---------- -----------
Net Income (loss).............................. $ (191) $ 194 $ -- $ (385)
========== =========== ========== ===========
10
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001
----------------------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
------------------- -------------- ---------------- --------------
NET SALES............................................... $ 72,219 $ 13,008 $ (6,621) $ 78,606
COST OF SALES........................................... 52,124 6,935 (6,068) 52,991
-------- -------- -------- ----------
Gross Profit........................................... 20,095 6,073 (553) 25,615
OPERATING EXPENSES:
Selling, distribution, general and administrative...... 22,619 3,163 -- 25,782
Amortization of goodwill............................... 770 2,475 -- 3,245
Research and development............................... 394 507 -- 901
-------- -------- -------- ----------
23,783 6,145 -- 29,928
-------- -------- -------- ----------
Income (loss) from operations.......................... (3,688) (72) (553) (4,313)
-------- -------- -------- ----------
INTEREST AND OTHER EXPENSE............................. 9,585 2,175 2,082 13,842
Income (loss) before provision (benefit) for
income taxes......................................... (13,273) (2,247) (2,635) (18,155)
PROVISION (BENEFIT) FOR INCOME TAXES.................... -- 527 -- 527
-------- -------- -------- ----------
Net Income (loss)....................................... $(13,273) $ (2,774) $ (2,635) $ (18,682)
======== ======== ======== ==========
11
S
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2000
-------------------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
--------------- ---------------- ------------------- ---------------
NET SALES................................................. $64,018 $13,672 $(5,072) $ 72,618
COST OF SALES............................................. 35,963 6,237 (4,872) 37,328
------- ------- ------- --------
Gross Profit............................................ 28,055 7,435 (200) 35,290
OPERATING EXPENSES:
Selling, distribution, general and administrative....... 16,082 3,443 -- 19,525
Amortization of goodwill................................ 598 1,022 -- 1,620
Research and development................................ 572 677 -- 1,249
------- ------- ------- --------
17,252 5,142 -- 22,394
------- ------- ------- --------
Income from operations.................................. 10,803 2,293 (200) 12,896
------- ------- ------- --------
INTEREST AND OTHER EXPENSE.............................. 9,150 1,317 -- 10,467
Income before provision for income taxes............... 1,653 976 (200) 2,429
PROVISION FOR INCOME TAXES............................... 699 516 -- 1,215
------- ------- ------- --------
Net Income................................................ $ 954 $ 460 $ (200) $ 1,214
======= ======= ======= ========
12
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2001
-------------------------------------------------------
Non-
Guarantor Guarantor Total
------------ ------------ ------------
Net cash used in operating activities..................... $ (4,535) $ (8,493) $ (13,028)
Net cash provided by (used in) investing activities....... (1,977) 3,977 2,000
Net cash provided by financing activities................. 3,735 3,461 7,196
Effect of exchange rate changes on cash................... $ -- 4,560 4,560
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH........................... (2,777) 3,505 728
CASH, beginning of period................................. 437 3,093 3,530
CASH, end of period....................................... $ 2,010 $ 2,248 $ 4,258
============ ============ ============
Six Months Ended June 30, 2000
-------------------------------------------------------
Non-
Guarantor Guarantor Total
------------ ------------ ------------
Net cash provided by (used in) operating activities....... $ (350) $ 3,388 $ 3,038
Net cash used in investing activities..................... (3,708) (2,047) (5,755)
Net cash provided (used in) by financing activities....... 3,900 (1,636) 2,264
Effect of exchange rate changes on cash................... 81 226 307
------------ ------------ ------------
NET DECREASE IN CASH...................................... (77) (69) (146)
CASH, beginning of period................................. 184 2,733 2,917
------------ ------------ ------------
CASH, end of period....................................... $ 107 $ 2,664 $ 2,771
============ ============ ============
The Company operates in two segments: North American operations (guarantor) and
international operations (non-guarantor). The financial data of these two
segments closely approximates the guarantor/non-guarantor information set forth
above and, accordingly, separate segment data is not provided.
On March 21, 2001, the Company replaced its existing lending agreement
denominated in Swedish krona with a new loan that allows for borrowings up to
$19.1 million. The principal is amortized over 18 equal quarterly payments
commencing June 30, 2001. Interest is based on the STIBOR rate + 0% to 1.65%,
based on the outstanding balance of the loan. The loan is secured by Hudson Euro
SarL, a wholly-owned subsidiary of the company and 100% owner of Hudson RCI AB,
Hudson RCI UK Ltd. and Hudson France S.A.S.
5. Subsequent Events.
------------------
In August 2001, the Company issued for cash unsecured senior subordinated
convertible notes to certain shareholders in the amount of $3,500,000. The notes
bear interest at 10% and are due in 2005. The interest may be paid or deferred
to the due date at the option of the Company and are convertible to common stock
at the demand of the holder. Additionally, in August 2001, the Company issued
for $3,000,000 cash an additional 300,000 shares of redeemable preferred stock
of Holding (which Holding will invest in preferred stock of the Company).
The company was not in compliance with certain restrictive covenants of the
Credit Facility at June 30, 2001. Subsequently, the Company amended its Credit
Facility covenants so that under the amended terms, the Company was in
compliance as of June 30, 2001 and expects to remain in compliance throughout
the term of the agreement. As part of the amendment, (1) the Company's
shareholders committed to invest an additional $18 million, of which $11.4
million was invested in April and May of 2001 (2) interest rate margins were
increased.
13
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 financial
statements of the Company and the notes thereto included elsewhere in this Form
10-Q.
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 has increased its net sales and improved its position within
the disposable health care products market in recent years by increasing its
respiratory care product offering, introducing disposable products for the
anesthesia health care market, expanding its presence in international markets
and establishing a position in the growing alternate site market.
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a number of factors, including, among others,
the buying patterns of the Company's distributors, group purchasing
organizations ("GPOs") and other purchasers of the Company's products, forecasts
regarding the severity of the annual cold and flu season, announcements of new
product introductions by the Company or its competitors, changes in the
Company's pricing of its products and the prices offered by the Company's
competitors, rate of overhead absorption due to variability in production levels
and variability in the number of shipping days in a given quarter.
Recent Developments
Beginning in April 2000, the company experienced disruption to its
operations resulting from difficulties in the implementation of a new management
information system. Consequently, the Company's financial results for the
quarter and six months ended June 30, 2001 reflect increased freight,
distribution, and general and administrative expenses related to the system
implementation. The Company also experienced liquidity pressures beginning in
the fourth quarter of 2000 due to such expense increases, delays in the
collection of due receivables and unplanned increases in inventory related to
difficulties in implementation and a lack of familiarity with the new system.
Management continued to implement a series of initiatives in 2001 designed to
improve the Company's proficiency with the new management information system,
decrease the Company's operating expenses, improve receivables collections and
reduce inventory levels. Despite the disruption related to the system
implementation, management believes it has generally maintained strong customer
service levels and relationships.
14
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 Month Period Ended Six Month Period Ended
(unaudited) (unaudited)
------------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
2000 2001 2000 2001
--------------- ------------------- ---------------- ---------------
(in thousands) (in thousands)
Net sales............................... $ 31,811 $ 40,801 $ 72,618 $ 78,606
Cost of sales........................... 14,825 24,961 37,328 52,991
--------------- ---------------- -------------- ---------------
Gross profit.......................... 16,986 15,840 35,290 25,615
Selling expenses........................ 3,896 5,760 7,715 10,571
Distribution expenses................... 1,990 2,221 3,463 4,998
General and administrative expenses..... 4,910 5,280 8,347 10,213
Amortization of goodwill................ 817 1,279 1,620 3,245
Research and development expenses....... 629 436 1,249 901
--------------- ---------------- -------------- ---------------
Total operating expenses................ 12,242 14,976 22,394 29,928
--------------- ---------------- -------------- ---------------
Operating income........................ $ 4,744 $ 864 $ 12,896 $ (4,313)
=============== ================ ============== ===============
Three Month Period Ended Six Month Period Ended
(unaudited) (unaudited)
----------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 2001 2000 2001
------------ ------------- ------------ ------------
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 46.6 61.2 51.4 67.4
------------ ------------- ------------ ------------
Gross profit...................... 53.4 38.8 48.6 32.6
Selling expenses..................... 12.2 14.1 10.6 13.4
Distribution expenses................ 6.3 5.4 4.8 6.4
General and administrative expenses.. 15.4 12.9 11.5 13.0
Amortization of goodwill............. 2.6 3.1 2.2 4.1
Research and development expenses.... 2.0 1.1 1.7 1.1
------------ ------------- ------------ ------------
Total operating expenses............. 38.5 36.7 30.8 38.1
------------ ------------- ------------ ------------
Operating income..................... 14.9% 2.1% 17.8% (5.5)%
============ ============= ============ ============
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net sales, reported net of accrued rebates, were $40.8 million in the
second quarter of 2001 as compared to $31.8 million in the second quarter of
2000, an increase of $9.0 million or 28.3%. Domestic hospital sales increased by
$2.6 million or 12.7% due to shipping difficulties encountered in the second
quarter of 2000 relating to the implementation of the new management information
system. Additionally, sales in the second quarter of 2001 reflect sales of the
acquired SHERIDAN(R)product line. Alternate site sales increased by $1.0 million
or 19.3%, the result of shipping difficulties associated with the new management
information system in the second quarter of 2000. International sales increased
by $4.9 million or 102%, the result of shipping difficulties associated with the
new management information system in the second quarter of 2000, as well as
sales of the acquired SHERIDAN(R) product line. OEM sales increased by $0.5
million due to changes in purchasing patterns from some of its OEM customers.
The Company's gross profit for the second quarter of 2001 was $15.8
million, a decrease of $1.1 million or 6.7% from the second quarter of 2000. As
a percentage of sales, gross profit was 38.8% and 53.4% for the second quarter
of 2001 and 2000, respectively. This decrease was primarily due to the
recognition of inventory revalued as a result of the Tyco SHERIDAN(R)
acquisition, increased shipping costs as a result of shipping difficulties
caused by
15
problems associated with the new management information system, underabsorption
of manufacturing overhead as a result of an aggressive plan to reduce
inventories by slowing production and an unfavorable mix variance caused by
higher sales of products with lower gross margins.
Selling expenses were $5.8 million for the second quarter of 2001, a $1.9
million increase over the second quarter of 2000. This increase was due
primarily to increases in staffing levels required to support additional product
lines and costs associated with the France and U.K. sales offices established in
fiscal 2000. As a percentage of net sales, selling expenses were 14.1% in the
second quarter of 2001 as compared to 12.2% in the second quarter of 2000.
Distribution expenses were $2.2 million for the second quarter of 2001, an
increase of $0.2 million or 11.6% over the second quarter of 2000. As a
percentage of sales, distribution expenses decreased to 5.4% in the second
quarter of 2001 as compared to 6.3% in the second quarter of 2000. The increase
is primarily the result of the increased cost of freight between the Company's
distribution facilities, increased headcount to operate the new management
information system and additional expenses related to the establishment of an
expanded Temecula distribution facility, However, this increase would have been
greater if not offset by high levels of overtime in the second quarter of 2000,
the result of difficulties with the implementation and lack of experience with
the new management information system.
General and administrative expenses were $5.3 million in the second quarter
of 2001, an increase of $0.4 million or 7.5% over the second quarter of 2000.
This increase resulted primarily from increased staffing levels required to
maintain acceptable customer service levels and operate the business with the
new management information system. As a percentage of net sales, general and
administrative expenses were 12.9% in the second quarter of 2001 as compared to
15.4% in the second quarter of 2000.
Research and development expenses were $0.4 million for the second quarter
of 2001, a decrease of $0.2 million from the second quarter of 2000.
Interest expense and other was $6.3 million for the second quarter of 2001,
as compared to $5.1 million in the second quarter of 2000. The increase was due
to higher debt levels as a result of the Tyco SHERIDAN(R) acquisition and
increased borrowings for working capital requirements.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net sales, reported net of accrued rebates, were $78.6 million in the first
six months of 2001 as compared to $72.6 million in the first six months of 2000,
representing an increase of $6.0 million or 8.2%. Domestic hospital sales were
$45.4 million for the first six months of 2001, a decrease of $0.5 million or
1.1% from the first six months of 2000. Shipping difficulties in the second
quarter of 2000 and sales in 2001 of the SHERIDAN(R) product line, acquired in
the fourth quarter of 2000, were offset by a weak influenza season in early
2001. Alternate site sales increased by $1.2 million or 10.9%, the result of
shipping difficulties in the second quarter of 2000 relating the implementation
of the management information system. International sales increased by $4.3
million or 30.8%, the result of 2001 sales of SHERIDAN products as well as the
shipping difficulties seen in the second quarter of 2000. OEM sales were $2.4
million in the first six months of 2001, unchanged from the first six months of
2000.
The Company's gross profit for the first six months of 2001 was $25.6
million, a decrease of $9.7 million or 27.4% from the first six months of 2000.
As a percentage of sales, the gross profit was 32.6% and 48.0% for the first six
months of 2001 and 2000, respectively. This decrease was primarily due to the
recognition of inventory revalued as a result of the Tyco SHERIDAN(R)
acquisition, increased shipping costs as a result of shipping difficulties
caused by problems associated with the new management information system,
underabsorption of manufacturing overhead as a result of an aggressive plan to
reduce inventories by slowing production, and an unfavorable mix variance caused
by higher sales of products with lower gross margins. In addition, certain non-
recurring, unfavorable inventory adjustments occurred in the first quarter of
2001as a result of a lack of familiarity with the new management information
system.
Selling expenses were $10.6 million for the first six months of 2001, a
$2.9 million increase over the first six months of 2000. This increase was due
primarily to increases in staffing levels required to support additional product
16
lines and costs associated with the France and U.K. sales offices established in
fiscal 2000. As a percentage of net sales, selling expenses were 13.4% in the
first six months of 2001 as compared to 10.6% in the first six months of 2000.
Distribution expenses were $5.0 million for the first six months of 2001,
an increase of $1.5 million or 44.3 % over the first six months of 2000. As a
percentage of sales, distribution expenses increased to 6.4% in the first six
months of 2001 as compared to 4.8% in the first six months of 2000. The increase
is primarily the result of the increased cost of freight between the Company's
distribution facilities, increased headcount to operate the new management
information system and additional expenses related to the establishment of an
expanded Temecula distribution facility.
General and administrative expenses were $10.2 million in the first six
months of 2001, an increase of $1.9 million or 22.4% over the first six months
of 2000. This increase resulted primarily from increased staffing levels
required to maintain acceptable customer service levels and operate the business
with the new management information system. As a percentage of net sales,
general and administrative expenses were 13.0% in the first six months of 2001
as compared to 11.5% in the first six months of 2000.
Research and development expenses were $0.9 million for the first six
months of 2001, a decrease of $0.3 from the first six months 2000.
Interest expense and other was $13.8 million for the first six months of
2001, as compared to $10.4 million in the first six months of 2000. The increase
was due to higher debt levels as a result of the Tyco SHERIDAN(R) acquisition.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations,
borrowings under its working capital bank facility and historically, investments
from shareholders. Cash provided by (used in) operations totaled $3.0 million
and $(13.0) million in the first six months of 2000 and 2001, respectively. The
decrease from the second quarter of 2000 to the second quarter of 2001 is
primarily attributable to decreased operating income, increased interest expense
due to higher debt levels and a decline in accounts payable. For the six months
ended June 30, 2001, the Company reduced trade payables by approximately $8.6
million. This was partially offset by a $10.1 million reduction in inventories.
The Company had operating working capital, excluding cash and short-term debt,
of $38.7 million and $38.2 million as of December 31, 2000 and June 30, 2001,
respectively. Inventories were $44.6 million and $34.5 million as of December
31, 2000 and June 30, 2001, respectively. In order to meet the needs of its
customers, the Company must maintain inventories sufficient to permit same-day
or next-day filling of most orders. Such inventories are higher than those that
would be required for delayed filling of orders, thus adversely impacting
liquidity. Over time, the Company expects its level of inventories to increase
as the Company's sales in the international market increase. Accounts
receivable, net of allowances, were $28.3 million and $28.7 million at December
31, 2000 and June 30, 2001, respectively. The Company typically offers 30 day
credit terms to its U.S. hospital distributors. Alternate site and international
customers typically receive 60 to 90 day terms and, as a result, as the
Company's alternate site and international sales have increased, the amount and
aging of its accounts receivable have increased. The Company anticipates that
the amount and aging of its accounts receivable will continue to increase as the
alternate site and international markets become a larger percentage of the
Company's overall sales.
During the six months ended June 30, 2001, net cash provided by investing
activities was $2.0 million, reflecting purchases of manufacturing equipment,
offset by exchange losses on intangible assets of foreign affiliates. The
Company currently estimates that capital expenditures will be approximately $8.0
million in each of 2001 and 2002, consisting primarily of additional and
replacement manufacturing equipment and new heater placements.
During the six months ended June 30, 2001, net cash provided by financing
was $7.2 million, reflecting additions of notes payable to affiliates and
additional bank borrowings. This was somewhat offset by repayment of certain
notes payable to affiliates and banks.
On March 21, 2001, the Company replaced its existing lending agreement
denominated in Swedish krona with a new loan that allows for borrowings up to
$19.1 million. The principal is amortized over 18 equal quarterly payments
commencing June 30, 2001. Interest is based on the STIBOR rate + 0% to 1.65%,
based on the outstanding balance
17
of the loan. The loan is secured by Hudson Euro SarL, a wholly-owned subsidiary
of the company and 100% owner of Hudson RCI AB, Hudson RCI UK Ltd. and Hudson
France S.A.S.
As of June 30, 2001, The Company had outstanding $228.1 million of
indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of
$81.0 million under the Company's Credit Facility, $13.7 million in notes
payable to affiliates and $18.4 million in outstanding borrowings under the bank
facility of Hudson RCI AB.
The Credit Facility currently consists of a $40.0 million Term Loan
Facility 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 and up to $15 million (the "Working Capital Portion") may
be used for general corporate purposes (other than acquisitions). The Revolving
Loan Facility has a letter of credit sublimit of $7.5 million. As of January,
2001 the Company had fully utilized the Working Capital Portion of the Revolving
Loan Facility. The Term Loan Facility matures on June 30, 2003 and, commencing
June 30, 1999, requires quarterly principal installments totaling $3.0 million
in 1999, $5.5 million in 2000, $7.5 million in 2001, $9.5 million in 2002 and
$14.5 million in 2003. The Revolving Loan Facility matures on June 30, 2003. The
interest rate under the Credit Facility is 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 as follows:
Margin
--------------------------
Period and Loan Type Base Rate Eurodollar
-------------------- --------- ---------
Through June, 2002
Term and Working Capital 3.00% 4.00%
Acquisition 3.25% 4.25%
July, 2002 through March, 2003
Term and Working Capital 3.50% 4.50%
Acquisition 3.75% 4.75%
Thereafter
Term and Working Capital 4.00% 5.00%
Acquisition 4.25% 5.25%
For periods after June, 2002, the margins set forth above are subject to
pricing reductions depending on the Company's then existing leverage ratio.
Borrowings under the Credit Facility are required to be prepaid, subject to
certain exceptions, with (i) 75% (or 50% for years when the Company's ratio of
Debt to EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined),
(ii) 50% of the net cash proceeds of an equity issuance by River Holding Corp.,
the Company's parent ("Holding") or the Company in connection with an initial
public offering or 100% of the net cash proceeds of an equity issuance by
Holding. Holding or the Company other than in connection with an initial public
offering (subject in each case to certain exceptions), (iii) 100% of the net
cash proceeds of the sale or other disposition of any properties or assets of
Holding and its subsidiaries (subject to certain exceptions), (iv) 100% of the
net proceeds of certain issuances of debt obligations of the Company and its
subsidiaries and (v) 100% of the net proceeds from insurance recoveries and
condemnations. The Revolving Loan Facility must be repaid upon payment in full
of the Term Loan Facility.
The Credit Facility is guaranteed by Holding and certain of the Company's
subsidiaries. The Credit Facility is secured by a first priority lien in
substantially all of the properties and assets of the Company and the guarantors
now owned or acquired later, including a pledge of all of the capital stock of
the Company owned by Holding and all of the shares held by the Company of its
existing and future subsidiaries; provided, that such pledge is limited to 65%
of the shares of any foreign subsidiary to the extent a pledge of a greater
percentage would result in adverse tax consequences to the Company.
18
The Credit Facility contains covenants restricting the ability of Holding,
the Company and the Company's 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.
Hudson RCI is also required to comply with financial covenants with respect to
(a) limits on annual aggregate capital expenditures (as defined), (b) a fixed
charge coverage ratio, (c) a maximum leverage ratio, (d) a minimum EBITDA test
and (e) an interest coverage ratio. As of June 30, 2001, the Company was
not in compliance with certain of these restrictive covenants. Subsequently,
the Credit Facility has been amended and all non-compliance was cured.
The Subordinated Notes bear interest at the rate of 9-1/8%, payable
semiannually on each April 15 and October 15, and will require no principal
repayments until maturity. The Subordinated Notes are general unsecured
obligations of the Company. The Subordinated Notes contain covenants that place
limitations on, among other things, (i) the ability of the Company, any
subsidiary guarantors and other restricted subsidiaries to incur additional
debt, (ii) the making of certain restricted payments including investments,
(iii) the creation of certain liens, (iv) the issuance and sale of capital stock
of restricted subsidiaries, (v) asset sales, (vi) payment restrictions affecting
restricted subsidiaries, (vii) transactions with affiliates and (viii) the
ability of the Company and any subsidiary guarantor to incur layered debt, (ix)
the ability of Holding to engage in any business or activity other than those
relating to ownership of capital stock of the Company and (x) certain mergers,
consolidations and transfers of assets by or involving the Company.
As of June 30, 2001, the Company had $13.7 million outstanding pursuant to
unsecured promissory notes payable to affiliates of Freeman Spogli. The notes
bear interest at 12.0% per annum to 14.0% per annum, mature in August 2006. Of
these notes, $2.0 million require semiannual interest payments.
The Company, through Hudson RCI AB, has incurred bank debt in Sweden (the
"HRCI AB Facility") that totaled $14.1 million as of June 30, 2001. The HRCI AB
Facility, which is denominated in Swedish krona, bears interest at three-month
STIBOR plus 0.75% to 1.75% (4.884% to 5.884% at June 30, 2001), matures in
December 2003, and is guaranteed by Steamer Holding AB, Hudson RCI AB's parent,
and is secured by the common stock of Hudson RCI AB.
The Company has issued to Holding 300,000 shares of its 11-1/2% Senior
Exchangeable PIK Preferred Stock due 2010 with an initial aggregate liquidation
preference of $30.0 million, which has terms and provisions materially similar
to those of the 11 1/2% 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, 2003 and thereafter must be paid in cash.
As the result of a number of factors affecting the Company in fiscal 2000,
management has taken numerous actions during 2001 including elimination of a
distribution warehouse, elimination of non-essential management personnel,
reduction in inventory levels, aggressive collection efforts of accounts
receivable and other cost reduction measures as management deemed necessary to
fund the operations of the Company, meet anticipated capital expenditures and
make required payments of principal and interest on its debt, including payments
due on the Subordinated Notes and obligations under the Credit Facility.
Management does not believe the restructuring charges referred to above will be
material to the Company. In addition, existing shareholders and key management
personnel contributed approximately $15.1 million in the form of convertible
subordinated debt and equity in April May and August of 2001 and contributed an
additional $3.0 million in redeemable preferred stock of Holding (which Holding
will invest in preferred stock of the Company) in August of 2001, in order to
improve the Company's liquidity position. Based on these actions, as well as
anticipated improved operating performance, management believes it will have
sufficient sources of liquidity to meet its obligations for a period of at least
18 months.
19
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and SFAS No. 138, effective for fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments. The statement requires that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at its
fair value, and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
impact of adoption was not be material to the financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The Company will adopt SFAS 141 for all business combinations initiated after
June 30, 2001.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This
pronouncement addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Goodwill would no longer be amortized but would be
assessed at least annually for impairment using a fair value methodology. The
Company will adopt this statement for all goodwill and other intangible assets
acquired after June 30, 2001 and for all existing goodwill and other intangible
assets beginning January 1, 2002. Upon adoption of this standard on January 1,
2002 the Company will cease recording amortization of goodwill which would
increase net income before taxes in 2002 by approximately $6.5 million, net of
income taxes. Other than ceasing the amortization of goodwill, the Company does
not anticipate that the adoption of SFAS 142 will have a significant effect on
our financial position or the results of our operations as the Company does not
currently anticipate any impairment charges for existing goodwill.
20
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,
2000.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On April 17, 2001, the Company issued Senior Subordinated Convertible
Promissory Notes Due 2005 (the "Notes"), convertible into an aggregate of
645,125 shares of the Company's common stock, for total cash consideration to
the Company of $6,451,250, to existing shareholders of Holding and management.
Each Note is convertible into common stock of the Company at the rate of one
share of common stock for each $10 of principal on the Note. Each Note is
convertible at the option of the holder thereof, and all of the Notes are
subject to mandatory conversion upon the vote of the holders of a majority of
the aggregate outstanding principal balance of all of the Notes.
The sale and issuance of the Notes was exempt from registration under Rule
506 of Regulation D of the Securities Act of 1933, as amended, as a sale of
securities to no more than thirty-five purchasers, each of whom was an
"Accredited Investor", as that term is defined in Rule 501 of Regulation D.
On April 17, 2001, the Company sold 10,002 shares of its common stock, as
adjusted, to River Holding Corp., for total cash consideration to the Company of
$100,020.
The sale issuance of the common stock to River Holding Corp. was exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
as a transaction not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.3(1) Form of Senior Subordinated Convertible Promissory Note Due
2005 made by the Company.
4.4(1) Certificate of Determination of Preferences of 12% Junior
Convertible Cumulative Preferred Stock of the Company.
10.19(1) Subordination Agreement dated as of April 17, 2001 among the
Company, FS Equity Partners IV, L.P., Bankers Trust Company
and the Subordinated Creditors party thereto.
(b) Reports on Form 8-K
None.
(1) To be filed by Amendment
22
SIGNATURE
Pursuant to the requirements of the Securities 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.,
a California corporation
August 15, 2001 By: /s/ Patrick G. Yount
------------------------------------------------
Patrick G. Yount
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)