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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 March 31, 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
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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 MARCH 31, 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 March 31, 2001........ 1
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the
Three Months Ended March 31, 2000 and 2001........................................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2000 and 2001..................................................................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements.................................... 5
Unaudited Condensed Consolidated Financial Statements of Hudson Respiratory Care Inc:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001........ 7
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the
Three Months Ended March 31, 2000 and 2001........................................................ 9
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
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............. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 24
Item 2. Changes in Securities............................................................................. 24
Item 3. Defaults Upon Senior Securities................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............................................... 24
Item 5. Other Information................................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
SIGNATURE............................................................................................................ 25
i
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in Thousands)
December 31, March 31,
2000 2001
-------------- --------------
CURRENT ASSETS:
Cash......................................................... $ 3,530 $ 8,592
Accounts receivable, less allowance for doubtful accounts of
$3,500 and $3,412 at December 31, 2000 and March 31, 2001,
respectively................................................ 28,307 27,370
Inventories.................................................. 44,610 36,523
Other current assets......................................... 2,165 3,465
-------------- --------------
Total current assets....................................... 78,612 75,950
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net............................ 59,030 57,870
-------------- --------------
OTHER ASSETS:
Deferred tax asset........................................... 11,502 11,502
Deferred financing costs, net................................ 9,587 9,246
Goodwill, net................................................ 201,116 195,580
Other assets................................................. 1,189 3,495
-------------- --------------
Total other assets......................................... 223,394 219,823
-------------- --------------
Total assets.............................................. $ 361,036 $ 353,643
============== ==============
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, March 31,
2000 2001
------------ ------------
CURRENT LIABILITIES:
Notes payable to bank........................................... $ 10,686 $ 13,844
Accounts payable................................................ 20,420 14,371
Accrued liabilities............................................. 12,707 18,782
Note payable to affiliates...................................... 2,000 2,000
Other current liabilities....................................... 3,007 2,313
------------ ------------
Total current liabilities..................................... 48,820 51,310
------------ ------------
NOTE PAYABLE TO AFFILIATE........................................ 8,266 8,266
SENIOR SUBORDINATED NOTES PAYABLE................................ 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion.................... 85,962 89,040
OTHER NON-CURRENT LIABILITIES.................................... -- 1,009
------------ ------------
Total liabilities............................................... 258,048 264,625
------------ ------------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
authorized - 1,800 shares; issued and outstanding - 398 shares;
liquidation preference: $39,765................................ 39,043 39,043
Accrued preferred stock dividend, payable in kind............... 1,018 2,181
------------ ------------
40,061 41,224
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized - 15,000 shares: issued and outstanding - 8,877.... 97,748 97,748
Cumulative translation adjustment............................... (687) 42
Accumulated deficit............................................. (34,134) (49,996)
------------ ------------
Total stockholders' equity (deficit).......................... 62,297 47,794
------------ ------------
Total liabilities, mandatorily-redeemable preferred stock
and stockholders' equity (deficit).......................... $ 361,036 $ 353,643
============ ============
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
-----------------------------
March 31, March 31,
2000 2001
------------- ------------
NET SALES............................................................ $ 40,807 $ 37,805
COST OF SALES........................................................ 22,503 28,595
------------- ------------
Gross Profit........................................................ 18,304 9,210
------------- ------------
OPERATING EXPENSES:
Selling, distribution, general & administrative..................... 9,263 12,521
Amortization of goodwill............................................ 2,104 3,236
Research and development............................................ 620 464
------------- ------------
11,987 16,221
------------- ------------
Income (loss) from operations..................................... 6,317 (7,011)
INTEREST EXPENSE AND OTHER........................................... 5,337 7,499
------------- ------------
Net income (loss) before provision (benefit) for income taxes....... 980 (14,510)
PROVISION (BENEFIT) FOR INCOME TAXES................................. 482 188
------------- ------------
Net income (loss)................................................... 498 $ (14,698)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain................................... 206 728
------------- ------------
Comprehensive income (loss)....................................... $ 704 $ (13,970)
============= ============
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)
Three Months Ended
--------------------
March 31, March 31,
2000 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 498 $(14,698)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities--
Depreciation and amortization............................................... 4,433 5,877
Amortization of deferred financing costs.................................... 490 235
Deferred taxes.............................................................. 134 --
Change in operating assets and liabilities:
Accounts receivable......................................................... (2,359) 936
Inventories................................................................. (1,290) 8,088
Other current assets........................................................ (479) (1,300)
Other assets................................................................ 2,604 (2,307)
Accounts payable............................................................ 1,119 (6,049)
Accrued liabilities......................................................... 2,504 6,077
Other current liabilities................................................... -- (695)
Other non-current liabilities............................................... -- 1,009
-------- --------
Net cash provided by (used in) operating activities....................... 7,654 (2,827)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (3,702) (1,139)
Retirements of intangible assets............................................... -- 1,957
-------- --------
Net cash (used in) provided by investing activities....................... (3,702) 818
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (6,941) (1,500)
Proceeds from bank borrowings.................................................. 3,500 7,736
Additions of deferred financing costs.......................................... -- 106
-------- --------
Net cash (used in) provided by financing activities....................... (3,441) 6,342
Effect of exchange rate changes on cash......................................... 206 729
-------- --------
NET INCREASE IN CASH............................................................ 717 5,062
CASH, beginning of period....................................................... 2,917 3,530
-------- --------
CASH, end of period............................................................. $ 3,634 $ 8,592
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 2,312 $ 2,282
======== ========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind.................................... $ 1,034 $ 1,163
======== ========
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
MARCH 31, 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 March 31, 2001, and the results of
operations and cash flows for the three-month periods ended March 31, 2000 and
March 31, 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-month period ended March 31, 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, Hudson.
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, 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, the Holding will cease recording amortization of goodwill which would
increase income before taxes in 2002 by approximately $13.3 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 its 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 SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible
5
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.
2. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
December 31, March 31,
2000 2001
------------ ------------
Raw materials................................................. $ 8,134 $ 7,785
Work-in-process............................................... 6,591 5,476
Finished goods................................................ 29,885 23,262
------------ ------------
$ 44,610 $ 36,523
============ ============
3. Bank Borrowings for 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.
4. 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 April and May of 2001, the Company issued for cash unsecured senior
subordinated convertible notes to certain managers and shareholders in the
amount of $9,451,250. In August 2001, the Company issued for cash unsecured
senior subordinated convertible notes to certain managers and stockholders 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 note holder.
Additionally, in August of 2001 existing shareholders purchased $3,000,000 in
redeemable preferred stock of Holding (which Holding invested in preferred stock
of the Company).
6
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in Thousands)
December 31, March 31,
2000 2001
------------ ------------
CURRENT ASSETS:
Cash..................................................... $ 3,530 $ 8,592
Accounts receivable, less allowance for doubtful
accounts of $3,500 and $3,412 at December 31, 2000 and
March 31, 2001, respectively........................... 28,307 27,370
Inventories.............................................. 44,610 36,523
Other current assets..................................... 1,832 3,132
------------ ------------
Total current assets................................... 78,279 75,617
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net........................ 49,425 48,831
------------ ------------
OTHER ASSETS:
Intangible assets, net................................... 67,573 63,306
Deferred financing costs, net............................ 9,587 9,246
Deferred tax asset....................................... 69,105 69,105
Other assets............................................. 1,265 3,572
------------ ------------
Total other assets..................................... 147,530 145,229
------------ ------------
Total assets.......................................... $ 275,234 $ 269,677
============ ============
The accompanying notes are an integral part of these condensed consolidated
statements.
7
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in Thousands)
December 31, March 31,
2000 2001
------------ ------------
CURRENT LIABILITIES:
Notes payable to bank..................................... $ 10,686 $ 13,844
Accounts payable.......................................... 20,320 14,271
Accrued liabilities....................................... 12,707 18,782
Notes payable to affiliates............................... 2,000 2,000
Other current liabilities................................. 3,007 2,313
------------ ------------
Total current liabilities............................... 48,720 51,210
------------ ------------
NOTE PAYABLE TO AFFILIATE, net of current portion.......... 8,266 8,266
SENIOR SUBORDINATED NOTES PAYABLE.......................... 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion.............. 85,962 89,040
Other non-current liabilities.............................. -- 1,009
------------ ------------
Total liabilities......................................... 257,948 264,525
------------ ------------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
suthorized - 1,800 shares; issued and outstanding - 398
shares; liquidation preference: $39,765.................. 39,043 39,043
Accrued preferred stock dividend, payable in kind......... 1,018 2,181
------------ ------------
40,061 41,224
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized - 15,000 shares, issued and
Outstanding - 10,397 at December 31, 2000 and March
31, 2001............................................ 98,158 98,158
Cumulative translation adjustment......................... (1,151) (422)
Accumulated deficit....................................... (119,782) (133,808)
------------ ------------
Total stockholders' equity (deficit).................... (22,775) (36,072)
------------ ------------
Total liabilities, mandatorily-redeemable preferred
stock and stockholders' equity (deficit)............... $ 275,234 $ 269,677
============ ============
The accompanying notes are an integral part of these condensed consolidated
statements
8
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
Three Months Ended
--------------------------
March 31, March 31,
2000 2001
---------- ------------
NET SALES................................................................................ $ 40,807 $ 37,805
COST OF SALES............................................................................ 22,503 28,595
--------- -----------
Gross Profit............................................................................ 18,304 9,775
--------- -----------
OPERATING EXPENSES:
Selling, distribution, general & administrative......................................... 8,699 $ 12,521
Amortization of goodwill................................................................ 833 1,966
Research and development................................................................ 620 464
--------- -----------
10,152 $ 14,951
--------- -----------
Income (loss) from operations......................................................... 8,152 (5,176)
INTEREST EXPENSE AND OTHER............................................................... 5,337 7,499
--------- -----------
Net income (loss) before (provision) benefit for income taxes.......................... 2,815 (12,675)
1,216 188
PROVISION (BENEFIT) FOR INCOME TAXES..................................................... --------- -----------
Net income (loss)....................................................................... $ 1,599 $ (12,863)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain (loss)................................................ 206 728
--------- -----------
Comprehensive income (loss)........................................................... $ 1,805 $ (12,135)
========= ===========
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
(Amount in Thousands)
Three Months Ended
----------------------------------------------
March 31, March 31,
2000 2001
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 1,599 $ (12,863)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities-
Depreciation and amortization............................................... 2,598 4,043
Amortization of deferred financing costs.................................... 490 235
Deferred taxes.............................................................. 536 --
Change in operating assets and liabilities:
Accounts receivable......................................................... (2,359) 936
Inventories................................................................. (1,290) 8,088
Other current assets........................................................ (479) (1,300)
Other assets................................................................ 2,604 (2,307)
Accounts payable............................................................ 1,119 (6,049)
Accrued liabilities......................................................... 2,974 6,077
Other current liabilities................................................... (138) (695)
Other non-current liabilities............................................... -- 1,009
Net cash provided by (used in) operating activities....................... 7,654 (2,827)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (3,702) (1,139)
Retirements of intangible assets............................................... -- 1,957
------------ -----------
Net cash used in (provided by) investing activities....................... (3,702) 818
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (6,941) (1,500)
Proceeds from bank borrowings.................................................. 3,500 7,736
Additions of deferred financing costs.......................................... -- 106
------------ -----------
Net cash provided by (used in) financing activities....................... (3,441) 6,342
Effect of exchange rate changes on cash......................................... 206 729
------------ -----------
NET INCREASE IN CASH............................................................ 717 5,062
CASH, beginning of period....................................................... 2,917 3,530
------------ -----------
CASH, end of period............................................................. $ 3,634 $ 8,592
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 2,312 $ 2,282
============ ===========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind.................................... $ 1,034 $ 1,163
============ =============
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
MARCH 31, 2001
1. Financial Statements. The condensed consolidated financial statements
--------------------
included herein have been prepared by Hudson Respiratory Care Inc. (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
March 31, 2001, and the results of operations and cash flows for the three-month
periods ended March 31, 2000 and March 31, 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 three-month period ended
March 31, 2001 are not necessarily indicative of the results to be achieved for
a full year.
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 in 2002 by approximately $2.8 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.
11
2. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
December 31, March 31,
2000 2001
------------ ------------
Raw materials................................................. $ 8,134 $ 7,785
Work-in-process............................................... 6,591 5,476
Finished goods................................................ 29,885 23,262
------------ ------------
$ 44,610 $ 36,523
============ ============
3. Subsidiaries Guaranteeing Debt and Segment Data. The Company is the 100%
-----------------------------------------------
owner of certain subsidiaries which 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 March 31, 2001
---------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
--------------- --------------- --------------- ---------------
CURRENT ASSETS:
Cash................................................ $ 162 $ 8,431 $ -- $ 8,592
Accounts receivable................................. 31,900 4,644 (9,174) 27,370
Inventories......................................... 31,936 6,743 (2,156) 36,523
Other current assets................................ 6,048 48,983 (51,899) 3,132
--------------- --------------- --------------- ---------------
Total current assets.............................. 70,045 68,800 (63,229) 75,617
PROPERTY, PLANT AND EQUIPMENT, NET................... 47,736 1,095 -- 48,831
OTHER ASSETS:
Intangible assets, net.............................. 27,018 36,288 -- 63,306
Deferred financing costs, net....................... 9,246 -- -- 9,246
Deferred tax asset.................................. 68,881 224 -- 69,105
Investment in non-guarantor subsidiaries............ 29,245 -- (29,245) --
Other............................................... 398 3,174 -- 3,572
--------------- --------------- --------------- ---------------
Total other assets................................ $ 134,788 $ 39,686 $ (29,245) $ 145,229
--------------- --------------- --------------- ---------------
252,569 109,582 $ (92,474) $ 269,677
=============== =============== =============== ===============
CURRENT LIABILITIES:
Notes payable to bank............................... 10,000 3,844 -- 13,844
Accounts payable.................................... 19,968 1,426 (7,123) 14,271
Accrued liabilities................................. 12,918 5,864 -- 18,782
Notes payable to affiliate.......................... 2,000 -- -- 2,000
Other current liabilities........................... 900 21,348 (19,935) 2,313
--------------- --------------- --------------- ---------------
Total current liabilities......................... 45,786 32,482 (27,058) 51,210
OTHER LIABILITIES:
Note payable to affiliate, net off current portion.. -- 8,266 -- 8,266
Notes payable to bank, net of current portion....... 73,000 16,040 -- 89,040
Senior subordinated notes........................... 115,000 -- -- 115,000
Other non-current liabilities....................... -- 1,009 -- 1,009
--------------- --------------- --------------- ---------------
Total liabilities................................. 233,786 57,797 (27,058) 264,525
Mandatorily-redeemable preferred stock............... 41,224 -- -- 41,224
STOCKHOLDERS' EQUITY (DEFICIT)....................... (22,441) 51,785 (65,416) (36,072)
--------------- --------------- --------------- ---------------
$ 252,569 $ 109,582 $ (92,474) $ 269,677
=============== =============== =============== ===============
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 March 31, 2001
---------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
----------- ----------- ------------- -------------
NET SALES...................................... $35,192 $ 5,976 $(3,363) $ 37,805
COST OF SALES.................................. 27,400 3,201 (2,571) 28,030
--------- ----------- ----------- -------------
Gross Profit.................................. 7,792 2,775 (792) 9,775
OPERATING EXPENSES:
Selling, distribution, general and
administrative............................... 11,088 1,433 -- 12,521
Goodwill amortization......................... 385 1,581 -- 1,966
Research and development...................... 215 249 -- 464
--------- ----------- ----------- -------------
11,688 3,263 -- 14,951
--------- ----------- ----------- -------------
Loss from operations.......................... (3,896) (488) (792) (5,176)
OTHER INCOME AND (EXPENSES):
Interest and other expense.................... 4,471 669 -- 5,140
Other, net.................................... 165 1,081 1,113 2,359
--------- ----------- ----------- -------------
4,636 1,750 1,113 7,499
Loss before provision for income taxes........ (8,532) (2,238) (1,905) (12,675)
PROVISION FOR INCOME TAXES..................... -- 188 -- 188
--------- ----------- ----------- -------------
Net Loss....................................... $(8,532) $(2,425) $(1,905) $(12,863)
========= =========== =========== =============
Three Months Ended March 31, 2000
------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
----------- ----------- ------------ --------------
NET SALES...................................... $34,271 $8,850 $(2,314) $40,807
COST OF SALES.................................. 20,329 4,288 (2,114) 22,503
----------- ---------- ---------- --------------
Gross Profit.................................. 13,942 4,562 (200) 18,304
OPERATING EXPENSES:
Selling, distribution, general and
administrative............................... 6,841 1,858 -- 8,699
Amortization of goodwill...................... 299 534 -- 833
Research and development...................... 281 339 -- 620
----------- ---------- ---------- --------------
7,421 2,731 -- 10,152
----------- ---------- ---------- --------------
Income from operations........................ 6,521 1,831 (200) 8,152
----------- ---------- ---------- --------------
INTEREST AND OTHER EXPENSE.................... 4,552 785 -- 5,337
Income before provision for income taxes...... 1,969 1,046 (200) 2,815
PROVISION FOR INCOME TAXES..................... 824 392 -- 1,216
----------- ---------- ---------- --------------
Net Income..................................... $ 1,145 $ 654 $ (200) $ 1,599
=========== ========== ========== ==============
15
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2001
-------------------------------------------------------
Non-
Guarantor Guarantor Total
------------- ------------- -------------
Net cash provided by (used in) operating activities....... $ 200 $ (3,027) $ (2,827)
Net cash provided by (used in) investing activities....... (975) 1,900 925
Net cash provided by financing activities................. 500 5,736 6,236
Effect of exchange rate changes on cash................... -- 728 728
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH........................... (275) 5,337 5,062
CASH, beginning of period................................. 437 3,093 3,530
CASH, end of period....................................... $ 162 $ 8,431 $ 8,592
============= ============= =============
Three Months Ended March 31, 2000
-------------------------------------------------------
Non-
Guarantor Guarantor Total
------------- ------------- -------------
Net cash provided by operating activities................. $ 5,984 $ 1,670 $ 7,654
Net cash (used in) investing activities................... (4,014) 312 (3,702)
Net cash provided by financing activities................. (2,100) (1,341) (3,441)
Effect of exchange rate changes on cash................... (5) 211 206
------------- ------------- -------------
NET INCREASE IN CASH...................................... (135) 852 717
CASH, beginning of period................................. 184 2,733 2,917
------------- ------------- -------------
CASH, end of period....................................... $ 49 $ 3,585 $ 3,634
============= ============= =============
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.
4. 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 investments and $3.0 million of exchanged
indebtedness), and (2) interest rate margins increased.
In April, May and August of 2001, the Company issued for cash unsecured
senior subordinated convertible notes to certain managers and shareholders in
the amount of $15.1 million. 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 existing shareholders contributed $3.0
million in redeemable preferred stock of Holding (which Holding invested in
preferred stock of the Company).
16
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 of 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 March 31, 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.
17
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
(unaudited)
---------------------------------
March 31, March 31,
2000 2001
------------- ------------
(in thousands)
Net sales............................................................. $ 40,807 $ 37,805
Cost of sales......................................................... 22,503 28,031
------------- ------------
Gross profit......................................................... 18,304 9,775
Selling expenses...................................................... 3,819 4,933
Distribution expenses................................................. 1,472 2,777
General and administrative expenses................................... 3,408 4,868
Amortization of goodwill.............................................. 833 1,966
Research and development expenses..................................... 620 464
------------- ------------
Total operating expenses.............................................. 10,152 14,954
------------- ------------
Operating income...................................................... $ 8,152 $ (5,176)
============= ============
Three Months Period Ended
(unaudited)
---------------------------------
March 31, March 31,
2000 2001
------------- ------------
Net sales............................................................. 100.0% 100.0%
Cost of sales......................................................... 55.1 74.1
------------- ------------
Gross profit......................................................... 44.6 25.8
Selling expenses...................................................... 9.4 12.7
Distribution expenses................................................. 3.6 7.3
General and administrative expenses................................... 8.4 13.0
Amortization of goodwill.............................................. 2.0 5.2
Research and development expenses..................................... 1.5 1.2
------------- ------------
Total operating expenses.............................................. 24.9 39.5
------------- ------------
Operating income...................................................... 20.0% (13.7)%
============= ============
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Net sales, reported net of accrued rebates, were $37.8 million in the first
quarter of 2001 as compared to $40.8 million in the first quarter of 2000. This
represents a decrease of $3.0 million or 7.4%. Domestic hospital sales decreased
by $5.6 million or 23.6% due to decreased demand at the hospital level,
primarily the result of an extremely weak influenza season. Alternate site sales
increased by $0.2 million or 3.5%. International sales decreased by $1.9 million
or 18.6%, as demand internationally for the Hudson U.S. manufactured product was
reduced due to the relative strength of the U.S. dollar. OEM sales declined by
$0.5 million due to changes in purchasing patterns from some of its OEM
customers and their reduced customer demand as the result of the weak influenza
season. These declines were partially offset by $4.6 million in sales of the
acquired Tyco SHERIDAN(R) endotracheal tube product line.
The Company's gross profit for the first quarter of 2001 was $9.8 million,
a decrease of $8.5 million or 46.4% from the first quarter of 2000. As a
percentage of sales, the gross profit was 25.9% and 44.9% for the first 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 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 at lower gross margins. In addition, certain non-
recurring, unfavorable inventory adjustments occurred as a result of a lack of
familiarity with the new management information system.
18
Selling expenses were $4.8 million for the first quarter of 2001, a $1.0
million increase over the first 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 12.7% in the first
quarter of 2001 as compared to 9.4% in the first quarter of 2000.
Distribution expenses were $2.8 million for the first quarter of 2001, an
increase of $1.3 million or 88.7 % over the first quarter of 2000. As a
percentage of sales, distribution expenses increased to 7.4% in the first
quarter of 2001 as compared to 3.6% in the first 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.
General and administrative expenses were $4.9 million in the first quarter
of 2001, an increase of $1.5 million or 44.0% over the first 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 13.0% in the first quarter of 2001 as compared to
8.4% in the first quarter of 2000.
Research and development expenses were $0.5 million for the first quarter
of 2001, relatively unchanged from the expense of $0.6 million incurred in the
first quarter 2000.
Interest expense was $5.1 million for the first quarter of 2001, as
compared to $3.6 million in the first 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.
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 $7.7 million
and $(2.8) million in the first quarter of 2000 and 2001, respectively. The
decrease from the first quarter of 2000 to the first quarter of 2001 is
primarily attributable to increased interest expense due to higher debt levels
and a decline in accounts payable. For the three months ended March 31, 2001,
the Company reduced trade payables by approximately $6.0 million. The Company
had operating working capital, excluding cash and short-term debt, of $36.8
million and $31.7 million as of the end of the first quarter of 2000 and 2001,
respectively. Inventories were $25.3 million and $36.5 million as of the end of
the first quarter of 2000 and 2001, respectively. During the first quarter of
2001, the Company reduced inventories by approximately $8.1 million. 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 $32.8 million and
$27.3 million at March 31, 2000 and March 31, 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 three months ended March 31, 2000, net cash used in investing
activities was $3.7 million, reflecting purchases of manufacturing equipment and
a new management information system. During the three months ended March 31,
2001, net cash used in investing activities was $0.8 million, primarily
reflecting purchases of manufacturing equipment. 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 three months ended March 31, 2000 and March 31, 2001, net cash
provided by (used by) financing was $(3.4) million and $6.6 million,
respectively, reflecting repayment of the Company's borrowings as well as
borrowings made through Hudson RCI AB, the Company's Swedish subsidiary.
19
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.
As of March 31, 2001, The Company had outstanding $228.2 million of
indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of
$83.0 million under the Company's Credit Facility, $10.3 million in notes
payable to affiliates and $14.1 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
20
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.
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 waived.
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 March 31, 2001, the Company had $10.3 million outstanding pursuant to
unsecured promissory notes payable to affiliates of Freeman Spogli and Co., the
Company's majority shareholder. The notes bear interest at 12.0% per annum and
14.0% per annum and 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 March 31, 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 March 31, 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 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 $11.6 million in the form of convertible
subordinated debt and equity in October 2000, April and May of 2001 and
contributed an additional $3.5 million in convertible subordinated debt and $3.0
million in redeemable preferred stock of Holding (which Holding invested 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.
Recent Accounting Pronouncements
21
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 in 2002 by approximately $2.8 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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
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
None.
(b) Reports on Form 8-K
None.
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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)
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