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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 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 - 333-56135
________________
RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
________________
Delaware 95-4674065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
599 Lexington Avenue, 18/th/ Floor 10022
New York, New York (Zip Code)
(Address of Principal Executive Offices)
(212) 758-2555
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No [X]
The number of shares of Common Stock, $0.01 par value, outstanding (the
only class of common stock of the Company outstanding) was 9,144,293 on
September 21, 2001.
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RIVER HOLDING CORP. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements of River Holding Corp.:
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
Unadited Condensed Consolidated Financial Statements of Hudson Respiratory Care Inc.:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2001.................................................................................... 7
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Three and Six Months Ended June 30, 2000 and 2001................................. 9
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 2001..................................................................... 10
Notes to Unaudited Condensed Consolidated Financial Statements................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risks...................................... 25
i
RIVER HOLDING CORP. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 26
Item 2. Changes in Securities............................................................... 26
Item 3. Defaults Upon Senior Securities..................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................................. 26
Item 5. Other Information................................................................... 26
Item 6. Exhibits and Reports on Form 8-K.................................................... 26
SIGNATURE.............................................................................................. 27
ii
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(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................................................. 2,165 2,236
------------- --------------
Total current assets.............................................. 78,612 69,703
------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net...................................... 59,030 56,224
------------- --------------
OTHER ASSETS:
Deferred tax asset................................................... 11,502 11,515
Deferred financing costs, net........................................ 9,587 8,867
Goodwill, net........................................................ 201,116 192,272
Other assets......................................................... 1,189 3,497
------------- --------------
Total other assets................................................ 223,394 216,151
------------- --------------
Total assets.................................................... $ 361,036 $ 342,078
============= ==============
The accompanying notes are an integral part of these condensed
consolidated statements.
1
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in Thousands)
December 31, June 30,
2000 2001
------------- -------------
CURRENT LIABILITIES:
Notes payable to bank................................................ $ 10,686 $ 12,184
Accounts payable..................................................... 20,420 11,867
Accrued liabilities.................................................. 12,707 12,737
Note payable to affiliates........................................... 2,000 5,000
Other current liabilities............................................ 3,007 2,404
------------- -------------
Total current liabilities......................................... 48,820 44,192
------------- -------------
NOTE PAYABLE TO AFFILIATE............................................... 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........................................... -- 982
------------- -------------
Total liabilities.................................................... 258,048 256,082
------------- -------------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
authorized- 1,800 shares; issued and outstanding at June 30, 2001-
421 shares; liquidation preference: $42,052.......................... 39,043 41,329
Accrued preferred stock dividend, payable in kind.................... 1,018 1,092
------------- -------------
40,061 42,421
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value:
Authorized- 15,000 shares; issued and
outstanding- 8,877 and 8,883 at December 31, 2000 and June
30, 2001, respectively........................................... 97,748 98,552
Cumulative translation adjustment.................................... (687) 3,872
Accumulated deficit.................................................. (34,134) (58,849)
------------- -------------
Total stockholders' equity (deficit).............................. 62,927 43,575
------------- -------------
Total liabilities, mandatorily-redeemable preferred stock and
stockholders' equity (deficit).................................. $ 361,036 $ 342,078
============= =============
The accompanying notes are an integral part of these condensed
consolidated statements
2
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(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 25,525 37,328 54,121
-------- -------- -------- --------
Gross Profit....................................... 16,986 15,276 35,290 24,485
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, distribution, general & administrative.... 11,361 13,261 20,654 25,782
Amortization of goodwill........................... 2,087 2,549 4,160 5,785
Research and development........................... 629 436 1,249 901
-------- -------- -------- --------
14,077 16,246 26,063 32,468
-------- -------- -------- --------
Income (loss) from operations................... 2,909 (970) 9,227 (7,983)
INTEREST EXPENSE AND OTHER............................ 5,130 6,343 10,466 13,842
-------- -------- -------- --------
Net loss before (benefit) provision for income
taxes............................................. (2,221) (7,313) (1,239) (21,825)
(BENEFIT) PROVISION FOR INCOME TAXES.................. (735) 340 (253) 527
-------- -------- -------- --------
Net Income (loss).................................. $ (1,486) $ (7,653) $ (986) $(22,352)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain (loss) .......... 77 3,831 307 4,560
-------- -------- -------- --------
Comprehensive loss.............................. $ (1,409) $ (3,822) $ (679) $(17,792)
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
statements.
3
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Six Months Ended
--------------------------
June 30, June 30,
2000 2001
-------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ (986) $ (22,352)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization.................................... 8,980 9,649
Amortization of deferred financing costs......................... 490 505
Deferred taxes................................................... (1,380) (13)
Change in operating assets and liabilities:
Accounts receivable.............................................. (5,483) (411)
Inventories...................................................... (6,851) 10,120
Other current assets............................................. 2,392 (71)
Other assets..................................................... 135 (2,310)
Accounts payable................................................. 2,376 (8,553)
Accrued liabilities.............................................. 3,365 30
Other current liabilities........................................ -- (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 borrowings......................................... 3,764 6,227
Repayment of note payable to affiliate................................ -- (6,000)
Proceeds from note payable to affiliate............................... -- 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
RIVER HOLDING CORP. 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 River Holding Corp. ("Holding") and Hudson
Respiratory Care Inc. ("Hudson" or 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 three and 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 Holding believes that the disclosures in such financial
statements are adequate to make the information presented not misleading, the
accompanying unaudited condensed, consolidated financial statements should be
read in conjunction with Holding's 2000 audited financial statements and the
notes thereto included in its Form 10-K filed with the SEC. The results of
operations for the three and six-month period ended June 30, 2001 are not
necessarily indicative of the results to be achieved for a full year. Holding
has no operations apart from those conducted by its majority-owned subsidiary,
the Company and its subsidiaries
2. Recent Accounting Pronouncements. In June 1998, the Financial Accounting
--------------------------------
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") 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 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. Holding 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.
Holding 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, Holding will cease recording amortization of goodwill which would increase
income before taxes in 2002 by approximately $11.6 million (assuming current
goodwill amounts and currency exchange rates). Other than ceasing the
amortization of goodwill, Holding does not anticipate that the adoption of SFAS
142 will have a significant effect on Holding's financial position or the
results of operations as Holding does not currently anticipate any impairment
charges for existing goodwill.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
SFAS 143 addresses financial accounting and reporting obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
5
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
retirement costs are capitalized as part of the carrying amount of the long-
lived asset. SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002 (with earlier application being encouraged).
Holding does not expect the adoption of SFAS 143 to have a material impact on
Holding's financial condition and results of operations.
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. Bank Borrowings by Hudson Euro SarL.
-----------------------------------
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.
-----------------
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 invested an additional $18 million, of which approximately $8.6
million was invested in April and May of 2001 (consisting of approximately $2.6
million of new cash investment and $6.0 million of exchanged indebtedness) and
$9.5 million was invested in August of 2001 (consisting of $6.5 million of new
cash investment and $3.0 million of exchanged indebtedness), and (2) interest
rate margins increased.
In August 2001, the Company issued for cash unsecured senior subordinated
convertible notes to certain managers and 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 the notes
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 invested in preferred
stock of the Company).
6
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
statements.
7
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- 421 shares;
liquidation preference: $40,610..................................... 39,043 41,329
Accrued preferred stock dividend, payable in kind.................... 1,018 1,092
-------------- --------------
40,061 42,421
-------------- --------------
STOCKHOLDERS' EQUITY (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 stockholders' equity (deficit).............................. (22,775) (38,456)
-------------- --------------
Total liabilities, mandatorily-redeemable preferred stock and
stockholders' equity (deficit).................................. $ 275,234 $ 259,946
============== ==============
The accompanying notes are an integral part of these condensed consolidated
statements
8
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 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 (loss)........... 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.
9
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 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 borrowings......................................... 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 costs.................................... -- 803
--------------- --------------
Net cash provided by (used in) 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........................................................... $ 6,187 $ 7,693
=============== ==============
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind........................... $ 1,891 $ 2,361
=============== ==============
The accompanying notes are an integral part of these condensed consolidated
statements.
10
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 June
30, 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 period 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 ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") 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 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. 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.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Retirement Obligations" ("SFAS 143"). SFAS
143 addresses financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of
11
fair value can be made. The associated retirement costs are capitalized as part
of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 (with
earlier application being encouraged). The Company does not expect the adoption
of SFAS 143 to have a material impact on the Company's financial condition and
results of operations.
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):
12
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 off 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
============= ============== ============= =============
13
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 liabilities.................. -- 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
============== ============== ============= ============
14
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2001
-------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
------------ ----------- ------------- -------------
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)
============ =========== ============= =============
Three Months Ended June 30, 2000
-------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
------------ ----------- ------------- -------------
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)
============ =========== ============= =============
15
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)
============ =========== ============ =============
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
============ =========== ============ =============
16
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 by (used in) 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.
5. Subsequent Events.
------------------
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 invested an additional $18 million, of which approximately $8.6
million was invested in April and May of 2001 (consisting of approximately $2.6
million of new cash investment and $6.0 million of exchanged indebtedness) and
$6.5 million was invested in August of 2001 (consisting of $6.5 million of new
cash investment and $3.0 million of exchanged indebtedness), and (2) interest
rate margins increased.
In August 2001, the Company issued for cash unsecured senior
subordinated convertible notes to certain managers and 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 the notes 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 invested in preferred stock of the Company).
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As River Holding Corp. ("Holding") is a holding company with no
operations, the following discussion relates to Hudson Respiratory Care Inc.
(the "Company" or "Hudson RCI"). The following discussion or the Company's
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 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 has implemented 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.
18
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
19
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.
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 11.5% 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 $0.1 million or
0.3% 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 $4.9
million or 36.9%, 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
2001 as 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
20
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 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 and
increased borrowings for working capital.
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 three
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 from 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 principally additions of notes payable to
affiliates and additional bank borrowings, in each case net of repayments. This
was somewhat offset by repayment of certain notes payable to affiliates.
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
21
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 $228.0 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 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.
22
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 December 31, 2000, 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 $10.3 million outstanding pursuant to
unsecured promissory notes payable to affiliates of Freeman Spogli, the
Company's majority shareholder. 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 $14.9 million in the form of convertible
subordinated debt and equity in October 2000, 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.
23
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.
Holding 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.
Holding 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 Holding will cease recording amortization of goodwill which would increase
income before taxes in 2002 by approximately $11.6 million. Other than ceasing
the amortization of goodwill, Holding does not anticipate that the adoption of
SFAS 142 will have a significant effect on Holding's financial position or the
results of operations as Holding does not currently anticipate any impairment
charges for existing goodwill.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated retirement costs are capitalized as part
of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 (with
earlier application being encouraged). Holding does not expect the adoption of
SFAS 143 to have a material impact on Holding's financial condition and results
of operations.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in Holding's market risk exposure
from that reported in Holding's 10-K for the fiscal year ended December 31,
2000.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On April 17, 2001, Holding sold 7,501 shares of its common stock, as
adjusted, to Jerry Burns for total cash consideration to Holding of $75,010, and
sold 2,501 shares of its common stock, as adjusted, to Paul Vallina for total
cash consideration to Holding of $25,010; each sale was made pursuant to
Holding's 1998 Employee Stock Subscription Plan.
The issuances of common stock referenced above were exempt from
registration as issuances made pursuant to a compensatory benefit plan under
Rule 701 of the Securities Act of 1933, as amended.
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.
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.
10.20 (1) Amendment No. 5 to and Limited Waiver of Certain Provisions of
the Credit Agreement dated as of July 30, 2001 among the
Company, Holding and the lenders party thereto.
(b) Reports on Form 8-K
None.
______________________
(1) Incorporated by reference to the exhibit designated by the
same number in the form 10-Q filed by the Company for the
quarter ended June 30, 2001 (File No.: 333-56097).
26
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.
RIVER HOLDING CORP.,
a Delaware corporation
September 21, 2001 By: /s/ Patrick G. Yount
----------------------------------
Patrick G. Yount
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
27