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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission file number - 333-56097


 

HUDSON RESPIRATORY CARE INC.
(Exact name of registrant as specified in its charter)

 


 

California
(State or other jurisdiction of incorporation or organization)

 

95-1867330
(I.R.S. Employer Identification No.)

 

 

 

 

 

 

27711 Diaz Road, P.O. Box 9020
Temecula, California
(Address of Principal Executive Offices)

 

92589
(Zip Code)

 

 

 

(909) 676-5611
(Registrant’s telephone number, including area code)

 

Not Applicable
(Former name, former address and former fiscal year, if changed since last report).

               Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes

x

No

o

               Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes

o

No

x

               The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,654,293 on November 14, 2002.




Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

 

 

Page

 

 


PART I

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements:

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001

1

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and September 30, 2001

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and September 30, 2001

4

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

22

 

 

 

 

 

Item 4.

Controls and Procedures

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

 

 

CERTIFICATIONS

26

i


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(amounts in thousands)

 

 

September 30,
2002

 

December 31,
2001

 

 

 



 



 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash

 

$

5,023

 

$

7,085

 

 

Accounts receivable, less allowance for doubtful accounts of $1,567 and $1,801 at September 30, 2002 and December 31, 2001, respectively

 

 

21,575

 

 

19,287

 

 

Inventories, net

 

 

23,862

 

 

25,218

 

 

Other current assets

 

 

2,070

 

 

1,483

 

 

 



 



 

 

Total current assets

 

 

52,530

 

 

53,073

 

PROPERTY, PLANT AND EQUIPMENT, net

 

 

44,617

 

 

46,268

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Goodwill

 

 

32,453

 

 

28,498

 

 

Deferred financing and other costs, net

 

 

8,207

 

 

8,316

 

 

Other assets

 

 

1,102

 

 

900

 

 

 



 



 

 

Total other assets

 

 

41,762

 

 

37,714

 

 

 



 



 

 

Total assets

 

$

138,909

 

$

137,055

 

 

 



 



 

See notes to condensed consolidated statements

1


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS’ DEFICIT

(amounts in thousands, except per share amounts)

 

 

September 30,
2002

 

December 31,
2001

 

 

 



 



 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Notes payable to bank

 

$

12,809

 

$

20,680

 

 

Accounts payable

 

 

10,297

 

 

15,251

 

 

Accrued liabilities

 

 

23,325

 

 

17,302

 

 

 



 



 

 

Total current liabilities

 

 

46,431

 

 

53,233

 

NOTE PAYABLE TO AFFILIATE

 

 

37,217

 

 

17,217

 

NOTES PAYABLE TO BANK, net of current portion

 

 

61,603

 

 

73,250

 

SENIOR SUBORDINATED NOTES PAYABLE

 

 

115,000

 

 

115,000

 

OTHER NON-CURRENT LIABILITIES

 

 

1,559

 

 

1,187

 

 

 



 



 

 

Total liabilities

 

 

261,810

 

 

259,887

 

COMMITMENTS AND CONTINGENCIES (Note 4)

 

 

 

 

 

 

 

MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 1,800 shares authorized; 470 and 445 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively; liquidation preference --$47,031 and $44,474 respectively

 

 

46,595

 

 

43,847

 

 

Accrued preferred stock dividend, payable in kind

 

 

2,479

 

 

1,142

 

 

 



 



 

 

 

 

49,074

 

 

44,989

 

STOCKHOLDERS’ EQUITY (DEFICIT):

 

 

 

 

 

 

 

 

Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares outstanding at September 30, 2002 and December 31, 2001

 

 

3,422

 

 

3,137

 

 

Common stock, $0.01 par value; 15,000 shares authorized; 10,654 issued and outstanding at September 30, 2002 and December 31, 2001

 

 

98,258

 

 

98,258

 

 

Additional paid in capital

 

 

750

 

 

—  

 

 

Cumulative translation adjustment

 

 

1,316

 

 

(698

)

 

Accumulated deficit

 

 

(275,721

)

 

(268,518

)

 

 



 



 

 

Total stockholders’ deficit

 

 

(171,975

)

 

(167,821

)

 

 



 



 

 

Total liabilities, mandatorily-redeemable preferred stock and stockholders’ deficit

 

$

138,909

 

$

137,055

 

 

 



 



 

See notes to condensed consolidated statements

2


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 


 


 

 

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 



 



 



 



 

NET SALES

 

$

41,923

 

$

45,095

 

$

126,385

 

$

123,701

 

COST OF SALES

 

 

25,827

 

 

24,306

 

 

74,316

 

 

77,297

 

 

 



 



 



 



 

 

Gross Profit

 

 

16,096

 

 

20,789

 

 

52,069

 

 

46,404

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, general & administrative

 

 

11,579

 

 

12,118

 

 

35,002

 

 

39,374

 

 

Amortization of goodwill

 

 

—  

 

 

777

 

 

—  

 

 

2,547

 

 

Research and development

 

 

587

 

 

363

 

 

1,999

 

 

1,264

 

 

 



 



 



 



 

 

 

 

12,166

 

 

13,258

 

 

37,001

 

 

43,185

 

 

 



 



 



 



 

 

Income from operations

 

 

3,930

 

 

7,531

 

 

15,068

 

 

3,219

 

INTEREST EXPENSE AND OTHER, net

 

 

5,736

 

 

5,180

 

 

15,782

 

 

19,022

 

 

 



 



 



 



 

 

(Loss) income before provision for income taxes

 

 

(1,806

)

 

2,351

 

 

(714

)

 

(15,803

)

PROVISION FOR INCOME TAXES

 

 

740

 

 

398

 

 

2,066

 

 

926

 

 

 



 



 



 



 

 

Net (loss) income

 

$

(2,546

)

$

1,953

 

$

(2,780

)

$

(16,729

)

 

 

 



 



 



 



 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(177

)

 

(1,958

)

 

2,014

 

 

2,602

 

 

 



 



 



 



 

 

Comprehensive loss

 

$

(2,723

)

$

(5

)

$

(766

)

$

(14,127

)

 

 



 



 



 



 

See notes to condensed consolidated statements

3


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amount in thousands)

 

 

Nine Months Ended

 

 

 


 

 

 

September 30,
2002

 

September 30,
2001

 

 

 



 



 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,780

)

$

(16,729

)

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities-

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,968

 

 

9,243

 

 

Amortization of deferred financing costs

 

 

1,336

 

 

888

 

 

Provision for bad debts

 

 

351

 

 

—  

 

 

Loss on disposal of equipment

 

 

(37

)

 

—  

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,078

)

 

(2,990

)

 

Inventories

 

 

2,101

 

 

11,300

 

 

Other current assets

 

 

(654

)

 

365

 

 

Other assets

 

 

(12

)

 

(1,674

)

 

Accounts payable

 

 

(5,139

)

 

(9,239

)

 

Accrued liabilities

 

 

5,527

 

 

3,088

 

 

Other non-current liabilities

 

 

304

 

 

1,007

 

 

 



 



 

 

Net cash provided by (used in) operating activities

 

 

5,887

 

 

(4,741

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(5,277

)

 

(3,200

)

 

Proceeds from sales of property, plant and equipment

 

 

156

 

 

2,801

 

 

 



 



 

 

Net cash used in investing activities

 

 

(5,121

)

 

(399

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayment of notes payable to bank

 

 

(24,004

)

 

(14,281

)

 

Proceeds from bank borrowings

 

 

2,450

 

 

6,227

 

 

Repayment of notes payable to affiliates

 

 

—  

 

 

—  

 

 

Payment of capital lease obligations

 

 

(29

)

 

—  

 

 

Proceeds from notes payable to affiliates

 

 

20,000

 

 

6,951

 

 

Net proceeds from sale of common, mandatorily-redeemable and junior preferred stock, net of transaction costs

 

 

—  

 

 

3,100

 

 

Additions of deferred financing costs

 

 

(477

)

 

(404

)

 

 



 



 

 

Net cash (used in) provided by financing activities

 

 

(2,060

)

 

1,593

 

Effect of exchange rate changes on cash

 

 

(768

)

 

2,602

 

 

 



 



 

NET DECREASE IN CASH

 

 

(2,062

)

 

(945

)

CASH, beginning of period

 

 

7,085

 

 

3,530

 

 

 



 



 

CASH, end of period

 

$

5,023

 

$

2,585

 

 

 



 



 

See notes to condensed consolidated statements

4


Table of Contents

 

 

 

Nine Months Ended

 

 

 


 

 

 

September 30,
2002

 

September 30,
2001

 

 

 



 



 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

10,045

 

$

11,070

 

 

 



 



 

 

Income taxes (primarily foreign)

 

$

2,259

 

 

—  

 

 

 



 



 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Preferred dividends accrued or paid-in-kind

 

$

4,183

 

$

3,593

 

 

 



 



 

 

Issuance of warrants in connection with debt

 

$

750

 

$

—  

 

 

 



 



 

See notes to condensed consolidated statements

5


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.                 Financial Statements.  The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2002, the results of operations for the three month and nine month periods ended September 30, 2002 and September 30, 2001 and statements of cash flows for the nine month periods ended September 30, 2002 and September 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 2001 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 nine-month periods ended September 30, 2002 are not necessarily indicative of the results to be achieved for a full year.

                    Management Plans to Improve Financial Condition and Results of Operations

                    Management believes that the Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing as may be required and, ultimately to attain profitable operations.  As further discussed in Note 5, on May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement.  As part of this amendment, the Company issued $20.0 million in new senior term notes with warrants to the majority stockholder of the Company’s parent, River Holding Corp. majority shareholder.

                    In addition, management has taken numerous actions to improve the operating performance of the Company.   Such actions included: the elimination of a distribution warehouse, sales of non-essential land and buildings, elimination of non-essential management personnel, reductions in inventory levels, aggressive collection of accounts receivable and elimination of individual products that did not attain acceptable levels of profitability.

                    Management believes that the results of its plans and the agreement reached, funding received on May 14, 2002 discussed above and operating results in line with current forecasts will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months.  If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. The Company currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required.  Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.

                    Significant Accounting Estimates

                    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and

6


Table of Contents

the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

                    The significant estimates made in the preparation of the Company’s consolidated financial statements relate to allowance for bad debts, rebate reserve, inventory reserve and deferred tax assets valuation.

                    Recent Accounting Pronouncements

                    In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” (“SFAS 141”).  This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,” and SFAS 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.  Any acquisitions made by the Company after June 2001 will be recorded in accordance with SFAS 141.

                    Effective January 1, 2002 the Company adopted SFAS 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 is no longer amortized and is assessed at least annually for impairment using a fair value methodology.  The Company stopped amortizing goodwill, effective January 1, 2002, and as a result, no charges for goodwill amortization are included in the 2002 financial statements. The Company completed its transitional impairment test of goodwill as of January 1, 2002 in the second quarter of 2002, which indicates no impairment of existing goodwill. Net income and loss for the three and nine months ended September 30, 2001, excluding amortization of goodwill would have been (in thousands) $2,730 and $(14,182) compared to $1,953 and $(16,729), respectively.  The change in goodwill for the nine months ended September 30, 2002 is the result of changes in foreign currency exchange rates.  The Company operates in two reporting units; North American operations (known as the guarantor) and international operations (known as the non-guarantor). These two reporting units are identical to the operating segments described in Note 3.

                    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 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred.  When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset.  Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement.  SFAS 143 is effective January 1, 2003.  The Company does not expect the adoption of SFAS 143 to have a material impact on the Company’s financial statements.

                    Effective January 1, 2002, the Company adopted SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion).  The adoption of SFAS 144 did not have a material impact on the Company’s financial statements.

                    In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a

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Table of Contents

liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.

2.                 Inventories.  Inventories consisted of the following (amounts in thousands):

 

 

September 30,
2002

 

December 31,
2001

 

 

 



 



 

Raw materials

 

$

5,311

 

$

7,377

 

Work-in-process

 

 

6,286

 

 

5,392

 

Finished goods

 

 

14,249

 

 

14,481

 

 

 



 



 

 

 

 

25,846

 

 

27,250

 

Provision for obsolescence

 

 

(1,984

)

 

(2,032

)

 

 



 



 

 

 

$

23,862

 

$

25,218

 

 

 



 



 

3.                 Segment Data and Subsidiaries Guaranteeing Debt.  The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance.  The company has two operating segments:  United States, or guarantor, and international or non-guarantor.  The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international).  Under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s operating segments are the same as its reporting segments.

                    The Company is the 100% owner of certain subsidiaries that do not guarantee the Company’s senior subordinated notes and certain bank debt.  The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands):

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Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

 

 

September 30, 2002

 

 

 


 

 

 

Guarantor

 

Non-
Guarantor

 

Eliminations

 

Total

 

 

 



 



 



 



 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,991

 

$

3,032

 

$

—  

 

$

5,023

 

 

Accounts receivable

 

 

15,438

 

 

6,137

 

 

—  

 

 

21,575

 

 

Intercompany receivables

 

 

3,534

 

 

1,603

 

 

(5,137

)

 

—  

 

 

Inventories

 

 

19,681

 

 

5,290

 

 

(1,109

)

 

23,862

 

 

Other current assets

 

 

670

 

 

1,400

 

 

—  

 

 

2,070

 

 

 

 



 



 



 



 

 

Total current assets

 

 

41,314

 

 

17,462

 

 

(6,246

)

 

52,530

 

PROPERTY, PLANT AND EQUIPMENT, NET

 

 

43,304

 

 

1,313

 

 

—  

 

 

44,617

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

—  

 

 

32,453

 

 

—  

 

 

32,453

 

 

Deferred financing and other costs, net

 

 

8,207

 

 

—  

 

 

—  

 

 

8,207

 

 

Investment in non-guarantor subsidiaries at cost

 

 

28,636

 

 

4,000

 

 

(32,636

)

 

—  

 

 

Other

 

 

1,102

 

 

—  

 

 

—  

 

 

1,102

 

 

 

 



 



 



 



 

 

Total other assets

 

 

37,945

 

 

36,453

 

 

(32,636

)

 

41,762

 

 

 



 



 



 



 

 

 

$

122,563

 

$

55,228

 

$

(38,882)

 

$

138,909

 

 

 



 



 



 



 

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable to bank

 

$

8,500

 

$

4,309

 

$

—  

 

$

12,809

 

 

Accounts payable

 

 

8,785

 

 

1,512

 

 

—  

 

 

10,297

 

 

Intercompany payables

 

 

1,603

 

 

3,534

 

 

(5,137

)

 

—  

 

 

Accrued liabilities

 

 

17,955

 

 

5,370

 

 

—  

 

 

23,325

 

 

 

 



 



 



 



 

 

Total current liabilities

 

 

36,843

 

 

14,725

 

 

(5,137

)

 

46,431

 

OTHER LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable to affiliate

 

 

26,951

 

 

10,266

 

 

—  

 

 

37,217

 

 

Notes payable to bank, net of current portion

 

 

51,450

 

 

10,153

 

 

—  

 

 

61,603

 

 

Senior subordinated notes payable

 

 

115,000

 

 

—  

 

 

—  

 

 

115,000

 

 

Other non-current liabilities

 

 

245

 

 

1,314

 

 

—  

 

 

1,559

 

 

 

 



 



 



 



 

 

Total liabilities

 

 

230,489

 

 

36,458

 

 

(5,137

)

 

261,810

 

Mandatorily-redeemable preferred stock

 

 

49,074

 

 

—  

 

 

—  

 

 

49,074

 

 

 



 



 



 



 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

(157,000

)

 

18,770

 

 

(33,745

)

 

(171,975

)

 

 



 



 



 



 

 

 

$

122,563

 

$

55,228

 

$

(38,882)

 

$

138,909

 

 

 



 



 



 



 

9


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

 

 

December 31, 2001

 

 

 


 

 

 

Guarantor

 

Non-
 Guarantor

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

4,713

 

$

2,372

 

$

—  

 

$

7,085

 

 

Accounts receivable

 

 

13,989

 

 

5,298

 

 

—  

 

 

19,287

 

 

Receivables from non-guarantor

 

 

6,515

 

 

—  

 

 

(6,515

)

 

—  

 

 

Inventories

 

 

20,377

 

 

7,030

 

 

(2,189

)

 

25,218

 

 

Other current assets

 

 

2,976

 

 

13,931

 

 

(15,424

)

 

1,483

 

 

 

 



 



 



 



 

 

Total current assets

 

 

48,570

 

 

28,631

 

 

(24,128

)

 

53,073

 

PROPERTY, PLANT AND EQUIPMENT, NET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,125

 

 

1,143

 

 

—  

 

 

46,268

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

—  

 

 

28,498

 

 

—  

 

 

28,498

 

 

Deferred financing and other costs, net

 

 

8,316

 

 

—  

 

 

—  

 

 

8,316

 

 

Investment in non-guarantor subsidiaries

 

 

28,623

 

 

—  

 

 

(28,623

)

 

—  

 

 

Other

 

 

676

 

 

224

 

 

—  

 

 

900

 

 

 

 



 



 



 



 

 

Total other assets

 

 

37,615

 

 

28,722

 

 

(28,623

)

 

37,714

 

 

 



 



 



 



 

 

 

$

131,310

 

$

58,496

 

$

(52,751)

 

$

137,055

 

 

 



 



 



 



 

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable to bank

 

$

3,750

 

$

16,930

 

$

—  

 

$

20,680

 

 

Accounts payable

 

 

14,069

 

 

1,182

 

 

—  

 

 

15,251

 

 

Payables to guarantor

 

 

—  

 

 

6,515

 

 

(6,515

)

 

—  

 

 

Accrued liabilities

 

 

14,366

 

 

15,356

 

 

(12,420

)

 

17,302

 

 

 

 



 



 



 



 

 

Total current liabilities

 

 

32,185

 

 

39,983

 

 

(18,935

)

 

53,233

 

OTHER LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable to affiliate

 

 

14,951

 

 

2,266

 

 

—  

 

 

17,217

 

 

Notes payable to bank, net of current portion

 

 

73,250

 

 

—  

 

 

—  

 

 

73,250

 

 

Senior subordinated notes payable

 

 

115,000

 

 

—  

 

 

—  

 

 

115,000

 

 

Other non-current liabilities

 

 

146

 

 

1,041

 

 

—  

 

 

1,187

 

 

 

 



 



 



 



 

 

Total liabilities

 

 

235,532

 

 

43,290

 

 

(18,935

)

 

259,887

 

Mandatorily-redeemable preferred stock

 

 

44,989

 

 

—  

 

 

—  

 

 

44,989

 

 

 



 



 



 



 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

(149,211

)

 

15,206

 

 

(33,816

)

 

(167,821

)

 

 



 



 



 



 

 

 

$

131,310

 

$

58,496

 

$

(52,751)

 

$

137,055

 

 

 



 



 



 



 

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Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

 

Three Months Ended September 30, 2002

 

 

 



 

 

 

Guarantor

 

Non-
Guarantor

 

Eliminations

 

Total

 

 

 



 



 



 



 

NET SALES

 

$

36,905

 

$

8,849

 

$

(3,831

)

$

41,923

 

COST OF SALES

 

 

24,757

 

 

4,508

 

 

(3,438

)

 

25,827

 

 

 



 



 



 



 

 

Gross Profit

 

 

12,148

 

 

4,341

 

 

(393

)

 

16,096

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, general and administrative

 

 

8,984

 

 

2,595

 

 

—  

 

 

11,579

 

 

Amortization of goodwill

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

Research and development

 

 

444

 

 

143

 

 

—  

 

 

587

 

 

 



 



 



 



 

 

 

 

9,428

 

 

2,738

 

 

—  

 

 

12,166

 

 

 



 



 



 



 

 

Income from operations

 

 

2,720

 

 

1,603

 

 

(393

)

 

3,930

 

INTEREST EXPENSE AND OTHER, net:

 

 

5,079

 

 

657

 

 

—  

 

 

5,736

 

 

 



 



 



 



 

 

(Loss) income before provision for income taxes

 

 

(2,359

)

 

946

 

 

(393

)

 

(1,806

)

PROVISION FOR INCOME TAXES

 

 

124

 

 

616

 

 

—  

 

 

740

 

 

 



 



 



 



 

Net (loss) income

 

$

(2,483)

 

$

330

 

$

(393

)

$

(2,546

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2001

 

 

 



 

 

 

Guarantor

 

Non-
Guarantor

 

Eliminations

 

Total

 

 

 



 



 



 



 

NET SALES

 

$

41,642

 

$

8,412

 

$

(4,959

)

$

45,095

 

COST OF SALES

 

 

25,705

 

 

4,009

 

 

(5,408

)

 

24,306

 

 

 



 



 



 



 

 

Gross Profit

 

 

15,937

 

 

4,403

 

 

449

 

 

20,789

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, general and administrative

 

 

9,825

 

 

2,293

 

 

—  

 

 

12,118

 

 

Amortization of goodwill

 

 

394

 

 

383

 

 

—  

 

 

777

 

 

Research and development

 

 

140

 

 

223

 

 

—  

 

 

363

 

 

 

 



 



 



 



 

 

 

 

10,359

 

 

2,899

 

 

—  

 

 

13,258

 

 

 



 



 



 



 

 

Income from operations

 

 

5,578

 

 

1,504

 

 

449

 

 

7,531

 

INTEREST EXPENSE AND OTHER, net:

 

 

4,971

 

 

(169

)

 

378

 

 

5,180

 

 

 



 



 



 



 

 

Income before provision for income taxes

 

 

607

 

 

1,673

 

 

71

 

 

2,351

 

PROVISION FOR INCOME TAXES

 

 

—  

 

 

398

 

 

—  

 

 

398

 

 

 



 



 



 



 

Net Income

 

$

607

 

$

1,275

 

$

71

 

$

1,953

 

 

 



 



 



 



 

11


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

 

Nine Months Ended September 30, 2002

 

 

 


 

 

 

Guarantor

 

Non-
Guarantor

 

Eliminations

 

Total

 

 

 


 


 


 


 

NET SALES

 

$

110,853

 

$

26,437

 

$

(10,905

)

$

126,385

 

COST OF SALES

 

 

71,929

 

 

13,461

 

 

(11,074

)

 

74,316

 

 

 



 



 



 



 

 

Gross Profit

 

 

38,924

 

 

12,976

 

 

169

 

 

52,069

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, general and administrative

 

 

27,549

 

 

7,453

 

 

—  

 

 

35,002

 

 

Amortization of goodwill

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

Research and development

 

 

1,309

 

 

690

 

 

—  

 

 

1,999

 

 

 

 



 



 



 



 

 

 

 

28,858

 

 

8,143

 

 

—  

 

 

37,001

 

 

 

 



 



 



 



 

 

Income from operations

 

 

10,066

 

 

4,833

 

 

169

 

 

15,068

 

INTEREST EXPENSE AND OTHER, net:

 

 

14,433

 

 

1,349

 

 

—  

 

 

15,782

 

 

 

 



 



 



 



 

 

(Loss) income before provision for income taxes

 

 

(4,367

)

 

3,484

 

 

169

 

 

(714

)

PROVISION FOR INCOME TAXES

 

 

124

 

 

1,942

 

 

—  

 

 

2,066

 

 

 

 



 



 



 



 

Net (loss) income

 

$

(4,491

)

$

1,542

 

$

169

 

$

(2,780

)

 

 



 



 



 



 

 

 

 

Nine Months Ended September 30, 2001

 

 

 


 

 

 

Guarantor

 

Non-
Guarantor

 

Eliminations

 

Total

 

 

 


 


 


 


 

NET SALES

 

$

113,861

 

$

21,420

 

$

(11,580

)

$

123,701

 

COST OF SALES

 

 

77,829

 

 

10,944

 

 

(11,476

)

 

77,297

 

 

 

 



 



 



 



 

 

Gross Profit

 

 

36,032

 

 

10,476

 

 

(104

)

 

46,404

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, distribution, general and administrative

 

 

32,444

 

 

6,930

 

 

—  

 

 

39,374

 

 

Amortization of goodwill

 

 

1,164

 

 

1,383

 

 

—  

 

 

2,547

 

 

Research and development

 

 

534

 

 

730

 

 

—  

 

 

1,264

 

 

 

 



 



 



 



 

 

 

 

34,142

 

 

9,043

 

 

—  

 

 

43,185

 

 

 



 



 



 



 

 

Income (loss) from operations

 

 

1,890

 

 

1,433

 

 

(104

)

 

3,219

 

INTEREST EXPENSE AND OTHER, net

 

 

14,556

 

 

2,006

 

 

2,460

 

 

19,022

 

 

 

 



 



 



 



 

 

Loss before provision for income taxes

 

 

(12,666

)

 

(573

)

 

(2,564

)

 

(15,803

)

PROVISION FOR INCOME TAXES

 

 

—  

 

 

926

 

 

—  

 

 

926

 

 

 

 



 



 



 



 

Net loss

 

$

(12,666

)

$

(1,499

)

$

(2,564

)

$

(16,729

)

 

 



 



 



 



 

12


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

 

Nine Months Ended September 30, 2002

 

 

 


 

 

 

Guarantor

 

Non-
Guarantor

 

Total

 

 

 


 


 


 

Net cash provided by (used in) operating activities

 

$

7,346

 

$

(1,459

)

$

5,887

 

Net cash used in investing activities

 

 

(4,614

)

 

(507

)

 

(5,121

)

Net cash (used in) provided by financing activities

 

 

(5,556

)

 

3,496

 

 

(2,060

)

Effect of exchange rate changes on cash

 

 

102

 

 

(870

)

 

(768

)

 

 



 



 



 

NET DECREASE IN CASH

 

 

(2,722

)

 

660

 

 

(2,062

)

CASH, beginning of period

 

 

4,713

 

 

2,372

 

 

7,085

 

 

 



 



 



 

CASH, end of period

 

$

1,991

 

$

3,032

 

$

5,023

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2001

 

 

 


 

 

 

Guarantor

 

Non-
Guarantor

 

Total

 

 

 


 


 


 

Net cash used in operating activities

 

$

(337

)

$

(4,404

)

$

(4,741

)

Net cash (used in) provided by investing activities

 

 

(3,234

)

 

2,835

 

 

(399

)

Net cash provided by financing activities

 

 

3,346

 

 

(1,753

)

 

1,593

 

Effect of exchange rate changes on cash

 

 

—  

 

 

2,602

 

 

2,602

 

 

 



 



 



 

NET DECREASE IN CASH

 

 

(225

)

 

(720

)

 

(945

)

CASH, beginning of period

 

 

437

 

 

3,093

 

 

3,530

 

 

 



 



 



 

CASH, end of period

 

$

212

 

$

2,373

 

$

2,585

 

 

 



 



 



 

                    The Company’s percentage of sales by geographic region for the three and nine month period ended September 30, 2002 and September 30, 2001 is as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

 


 


 

 

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 


 


 


 


 

Domestic

 

 

74.8

%

 

75.4

%

 

75.2

%

 

81.8

%

Europe

 

 

14.6

 

 

13.7

 

 

14.9

 

 

7.8

 

Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)

 

 

7.0

 

 

6.4

 

 

6.1

 

 

6.5

 

Canada

 

 

1.1

 

 

1.6

 

 

1.4

 

 

1.5

 

Other international

 

 

2.5

 

 

2.9

 

 

2.4

 

 

2.4

 

 

 



 



 



 



 

 

 

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 

 



 



 



 



 

4.                 Commitments and Contingencies.  The Company is not a party to any material lawsuits or other proceedings, such as suits relating to product liability and patent infringement. While the results of the Company’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company.

5.                 Credit Facility.  On May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. Under the terms of the amendment to the Credit Facility, the lenders and the

13


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Company agreed to (i) waive all existing events of default; (ii) extend the final maturity of the Credit Facility to June 30, 2004; (iii) amend existing amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend future financial covenants.  As a result of the amendment, the Company is currently in compliance with the terms and provisions of the Credit Facility. In conjunction with the amendment, the Company and its subsidiary HRC Holding Inc. ("HRC") issued an aggregate of $20 million in new senior term notes with warrants to Holding’s majority stockholder, $12.0 million of which was exchanged for bank term loans previously acquired.  These notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004. Proceeds from the senior notes were used to pay interest due under the Subordinated Notes, fund expenses associated with the amendment and provide funds for ongoing working capital purposes.

                    In September 2002, the Company’s wholly-owned subsidiary, Hudson RCI AB, reached an agreement with its lenders to amend the credit agreement and bring Hudson RCI AB into compliance with all terms and provisions of the agreement.  As a part of the agreement, (i) Hudson RCI AB agreed to pay down $1.0 million in principal on the term loan facility and (ii) certain financial covenants were amended.

6.                 Additional Paid In Capital.  In conjunction with the debt restructuring the Company issued to Holding’s majority stockholder warrants to purchase 20 million shares of common stock.  The warrants are exercisable upon issuance for $1.00 per share and expire on May 15, 2009.  The warrants were valued at $750,000, based on the Black-Sholes valuation model. The fair value of these warrants was estimated at the date of grant with the following assumptions;  5-year risk-free interest rate of 5.25%; no dividend yield; an average volatility factor of 50.0%; and weighted average expected lives of 7 years.  The warrant value was deferred and is being amortized to interest expense over the term of the debt.

7.                 Subsequent Events.

                   Notes Payable to Affiliates and Additional Paid In Capital

                   In October 2002, HRC issued an additional $2.1 million senior term notes to existing shareholders of the Company.  The notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004.  HRC used proceeds from the issuance of the notes to buy intercompany receivables from the Company.  Proceeds to the Company from sales of the receivables will be used to provide funds for ongoing working capital purposes.  In conjunction with issuance of the notes by HRC, the Company issued warrants to purchase 2.1 million shares of common stock at $1.00 per share.  The warrants will expire on May 15, 2009 and will be accounted for in a manner consistent with the warrants issued in May 2002, as discussed in Note 6.

                   Sale of Facilities

                   In October 2002, the Company sold two ten-acre parcels, buildings and other related assets having a net book value of approximately $4.7 million for cash consideration of approximately $7.5 million. The Company will temporarily continue to occupy one of the parcels for a one-year period to efficiently transfer its operations out of the facility.

14


Table of Contents

ITEM 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                   The following discussion of Hudson Respiratory Care Inc.’s (the “Company” or “Hudson RCI”) consolidated historical results of operations and financial condition should be read in conjunction with the consolidated 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’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

                   In September 2002, the Company’s wholly-owned subsidiary, Hudson RCI AB, reached an agreement with its lenders to amend the credit agreement and bring Hudson RCI AB into compliance with all terms and provisions of the agreement (see the “Liquidity and Capital Resources” section of this item).

                   In October 2002, the Company sold two ten-acre parcels and buildings in Temecula, California for cash consideration of approximately $7.5 million.  The Company will temporarily occupy one of the parcels for up to one year to efficiently transfer its operations out of the facility.  The Company believes that with planned decreases in inventory levels and the transfer of certain production to its Tecate, Mexico facility, the remaining space at its existing locations will be sufficient to support ongoing operations.

                   In October 2002, HRC Holding Inc., a subsidiary of the Company (“HRC”), issued $2.1 million in senior term loans to existing shareholders of the Company.  The notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004.  HRC used the proceeds from these notes to buy intercompany receivables from the Company.  Proceeds to the Company from sales of the receivables will be used to provide funds for ongoing working capital purposes.  In conjunction with issuance of these notes, the Company issued warrants to purchase 2.1 million shares of common stock at $1.00 per share.  The warrants will expire on May 15, 2009 and will be accounted for in a manner consistent with the warrants issued in May 2002 (see Notes to Consolidated Financial Statements -- Note 6).

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Results of Operations

                   The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company’s net sales.

 

 

Three Months Ended

 

Nine Months Ended

 

 

 


 


 

 

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 


 


 


 


 

 

 

(amounts in thousands)

 

Net sales

 

$

41,923

 

$

45,095

 

$

126,385

 

$

123,701

 

Cost of sales

 

 

25,827

 

 

24,306

 

 

74,316

 

 

77,297

 

 

 



 



 



 



 

 

Gross profit

 

 

16,096

 

 

20,789

 

 

52,069

 

 

46,404

 

 

 



 



 



 



 

Selling expenses

 

 

4,970

 

 

4,626

 

 

15,368

 

 

15,197

 

Distribution expenses

 

 

2,482

 

 

2,661

 

 

6,890

 

 

7,658

 

General and administrative expenses

 

 

4,127

 

 

4,831

 

 

12,744

 

 

16,519

 

Amortization of goodwill

 

 

—  

 

 

777

 

 

—  

 

 

2,547

 

Research and development expenses

 

 

587

 

 

363

 

 

1,999

 

 

1,264

 

 

 



 



 



 



 

Total operating expenses

 

 

12,166

 

 

13,258

 

 

37,001

 

 

43,185

 

 

 



 



 



 



 

Operating income

 

$

3,930

 

$

7,531

 

$

15,068

 

$

3,219

 

 

 



 



 



 



 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 


 


 

 

 

September 30,
2002

 

September 30,
2001

 

September 30,
2002

 

September 30,
2001

 

 

 


 


 


 


 

Net sales

 

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

Cost of sales

 

 

61.6

 

 

53.9

 

 

58.8

 

 

62.5

 

 

 



 



 



 



 

 

Gross profit

 

 

38.4

 

 

46.1

 

 

41.2

 

 

37.5

 

 

 



 



 



 



 

Selling expenses

 

 

11.9

 

 

10.3

 

 

12.2

 

 

12.3

 

Distribution expenses

 

 

5.9

 

 

5.9

 

 

5.5

 

 

6.2

 

General and administrative expenses

 

 

9.8

 

 

10.7

 

 

10.1

 

 

13.4

 

Amortization of goodwill

 

 

—  

 

 

1.7

 

 

—  

 

 

2.1

 

Research and development expenses

 

 

1.4

 

 

.8

 

 

1.6

 

 

1.0

 

 

 



 



 



 



 

Total operating expenses

 

 

29.0

 

 

29.4

 

 

29.3

 

 

34.9

 

 

 



 



 



 



 

Operating income

 

 

9.4

%

 

16.7

%

 

11.9

%

 

2.6

%

 

 



 



 



 



 

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

                   Net sales, reported net of accrued rebates, were $41.9 million in the third quarter of 2002 as compared to $45.1 million in the third quarter of 2001, representing an decrease of $3.2 million or 7.0%.  Domestic hospital declined by $4.5 million or 16.0%, principally due to variability in distributor buying patterns. Sales in Europe increased by $1.4 million or 30.1%, the result of market share growth driven by the Company’s European subsidiaries.  Additionally, European customers benefited from favorable currency movement that made the price of the Company’s products relatively less expensive in the third quarter of 2002, as compared to the third quarter of 2001.  Sales in the Pacific Rim were relatively unchanged, while sales in other international areas declined by declined by $0.4 million, also the result of variability in customer buying patterns.  Sales elsewhere in the Company increased by $0.3 million.

                   The Company’s gross profit for the third quarter of 2002 was $16.1 million, a decrease of $4.7 million or 22.6% from the third quarter of 2001.  As a percentage of sales, the gross profit was 38.4% and 46.1% for the third quarter of 2002 and 2001, respectively.  The decline in margin was primarily due to underabsorption in 2002 of manufacturing overhead as a result of lower production levels than planned in the third quarter of 2002 due to lower demand than anticipated and costs associated with the move of the Argyle, New York facility to Tecate, Mexico. Additionally, there was an unfavorable mix variance in the third quarter of 2002 caused by higher sales of products at lower gross margins than occurred in the third quarter of 2001.

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                   Selling expenses were $5.0 million for the third quarter of 2002, as compared to $4.6 million in the third quarter of 2001.  The increase of $0.3 million or 7.4% was primarily the result of increased GPO fees resulting from increased sales to affiliated hospitals.  As a percentage of net sales, selling expenses were 11.9% in the third quarter of 2002 as compared to 10.3% in the third quarter of 2001.

                   Distribution expenses were $2.5 million for the third quarter of 2002 as compared to $2.7 million in the third quarter of 2001.  This decline is primarily the result of lower sales in the third quarter of 2002 as compared to the third quarter of 2001.  As a percentage of sales, distribution expense was 5.9% in the third quarter of 2002 and 2001.

                   General and administrative expenses were $4.1 million in the third quarter of 2002, a decrease of $0.7 million or 14.6% from the third quarter of 2001.  This decrease was primarily the result of decreased temporary staffing levels and the elimination of certain consulting fees.  As a percentage of net sales, general and administrative expenses were 9.8% in the third quarter of 2002 as compared to 10.7% in the third quarter of 2001.

                   Research and development expenses were $0.6 million for the third quarter of 2002 as compared to $0.4 million for the third quarter of 2001.  This increase of $0.2 million or 61.7% is the result of increased spending on product development in 2002 through the use of outside consultants.

                   No amortization of goodwill was recorded in the third quarter of 2002, as compared to $0.8 million in the third quarter of 2001.  This is the result of the Company’s adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002.

                   Interest expense and other was $5.7 million for the third quarter of 2002, as compared to $5.2 million in the third quarter of 2001.  The increase was primarily due to higher levels of debt somewhat offset by lower interest rates.

                   The Company’s tax expense relates primarily to foreign taxes earned on its international operations.  For U.S. and state tax purposes, the Company has significant net operating loss carryforwards for which a valuation allowance has been established against the deferred tax assets.  The Company continues to evaluate the need for the valuation allowance and will reverse it only when it is more likely than not that the deferred tax assets will be realized.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

                   Net sales, reported net of accrued rebates, were $126.4 million in the first nine months of 2002 as compared to $123.7 million in the first nine months of 2001, representing an increase of $2.7 million or 2.2%.  Domestic hospital sales were relatively unchanged, decreasing by $0.5 million. Sales to Europe increased by $3.6 million or 23.9%, the result of market share growth driven by the Company’s European subsidiaries.  Additionally, European customers benefited from favorable currency movement that made the price of the Company’s products relatively less expensive in 2002 as compared to 2001.  These gains were partially offset by a decline in sales to the Pacific Rim of $0.3 million, the result of initial stocking of SHERIDAN® product in the second quarter of 2001.  Sales elsewhere in the Company declined by $0.1 million.

                   The Company’s gross profit for the first nine months of 2002 was $52.1 million, an increase of $5.7 million or 12.2% from the first nine months of 2001.  As a percentage of sales, the gross profit was 41.2% and 37.5% for the first nine months of 2002 and 2001, respectively.  This increase in margin was primarily due to (i) 2001 sales of inventory originally recorded at a higher net realizable value rather than internal manufacturing costs as a result of the SHERIDAN® acquisition, (ii), an improvement in shipping costs in the first quarter of 2002, the result of the Company streamlining and enhancing the new management information system implemented in 2000 (implementation problems with the new system adversely affected shipping costs in 2001 due to difficulties the Company was experiencing in its installation and the implementation of programs in 2001 designed to reduce freight costs) (iii), underabsorption in 2001 of manufacturing overhead as a result of an aggressive plan to reduce inventories by slowing production and (iv) an unfavorable mix variance caused by higher sales of products at lower gross margins in 2001 as compared to 2002.  These gains were partially offset by costs associated with the start-up of the Tecate facility incurred in 2002 and other factors in the third quarter as previously discussed.

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                   Selling expenses were $15.4 million for the first nine months of 2002, a $0.2 million or 1.1% increase from the first nine months of 2001.  The increase was primarily the result of increased GPO fees resulting from increased sales to GPO member hospitals; offset somewhat by decreases due to temporary personnel vacancies in the Company’s European operations. As a percentage of net sales, selling expenses were 12.2% in the first nine months of 2002 as compared to 12.3% in the first nine months of 2001.

                   Distribution expenses were $6.9 million for the first nine months of 2002, a decrease of $0.8 million or 10.0% from the first nine months of 2001.  This decline is primarily the result of specific programs implemented by management designed to improve the efficiency of its distribution facilities, including closure of the Company’s Atlanta distribution center in August 2001.  The majority of the benefit from these special programs (excluding closure of the Atlanta facility) was realized in the second quarter of 2001.  As a percentage of sales, distribution expenses decreased to 5.5% in the first nine months of 2002 as compared to 6.2% in the first nine months of 2001.

                   General and administrative expenses were $12.7 million in the first nine months of 2002, a decrease of $3.8 million or 22.9% from the first nine months of 2001.  This decrease was primarily the result of decreased temporary staffing levels and the elimination of certain consulting fees.  As a percentage of net sales, general and administrative expenses were 10.1% in the first nine months of 2002 as compared to 13.4% in the first nine months of 2001.

                   Research and development expenses were $2.0 million for the first nine months of 2002, an increase of $0.7 million or 58.1% for the fist nine months of 2001. The increase is primarily the result of increased spending on product development in 2002 through the use of outside consultants.

                   No amortization of goodwill was recorded in the first nine months of 2002, as compared to $2.5 million in the first nine months of 2001.  This is the result of the Company’s adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002.

                   Interest expense and other was $15.8 million for the first nine months of 2002, as compared to $19.0 million in the first nine months of 2001.  The decrease was primarily due to lower interest rates.

                   The Company’s tax expense relates primarily to foreign taxes earned on its international operations.  For U.S. and state tax purposes, the Company has significant net operating loss carryforwards for which a valuation allowance has been established against the deferred tax assets.  The Company continues to evaluate the need for the valuation allowance and will reverse it only when it is more likely than not that the deferred tax assets will be realized.

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 $5.9 million and $(4.7) million for the first nine months of 2002 and 2001, respectively.  The increase for the first nine months of 2002 as compared to the first nine months of 2001 is primarily attributable to increased operating income, somewhat offset by a decrease in working capital and costs incurred to move the Company’s Argyle, New York operations to Tecate, Mexico.  The move is anticipated to cost approximately $4.6 million and will be completed in 2003.  Through September 30, 2002, expenditures related to the move have totaled $2.4 million ($1.5 million in 2002). The Company had an operating working capital of $6.1 million and a deficit of $0.2 million as of the end of September 30, 2002 and December 31, 2001, respectively.  Inventories were $23.9 million and $25.2 million as of the end of September 30, 2002 and December 31, 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 markets increase.  Accounts receivable, net of allowances, were $21.6 million and $19.3 million at September 30, 2002 and December 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

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Table of Contents

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 nine months ended September 30, 2002, net cash used in investing activities was $5.1 million, reflecting primarily purchases of manufacturing equipment and new heater production.  During the nine months ended September 30, 2001, favorable currency translation gains attributable to foreign operations offset purchases of manufacturing equipment resulting in net cash used in investing activities of $0.4 million. The Company currently estimates that capital expenditures will be approximately $8.0 million in each of 2002 and 2003, consisting primarily of additional and replacement manufacturing equipment, new heater production and costs related to the start-up of the Tecate facility.

                   During the nine months ended September 30, 2002 and September 30, 2001, net cash (used in) provided by financing was $(2.1) million and $1.6 million, respectively, reflecting repayment on the Company’s borrowings in the first nine months of 2002 offset by borrowings on notes payable to affiliates and borrowings made through Hudson RCI AB, the Company’s Swedish subsidiary in the first nine months of 2001.

                   In September 2002, the Company’s wholly-owned subsidiary, Hudson RCI AB, reached an agreement with its lenders to amend the credit agreement and bring Hudson RCI AB into compliance with all terms and provisions of the agreement.  As a part of the agreement, (i) Hudson RCI AB agreed to pay down $1.0 million in principal on the term loan facility and (ii) certain financial covenants were amended.

                   As of September 30, 2002, after giving effect to the amendment and restatement of the Credit Facility and related transactions consummated in May 2002 (the “Restructuring”), the Company had outstanding $226.6 million of indebtedness, consisting of $115.0 million of Senior Subordinated Notes, borrowings of $60.0 million under the Company’s Credit Facility, $37.2 million in notes payable to affiliates and $14.4 million in outstanding borrowings under the bank facility of Hudson RCI AB, the Company’s Swedish subsidiary.  For additional information regarding the Restructuring, reference is made to Item 2 of the Company’s Quarterly report on Form 10-Q, for the Quarter Ended March 31, 2002.

                   The Credit Facility currently consists of a $40.0 million Term Loan Facility  (of which $7.5 million is currently outstanding) and a $55.0 million Revolving Loan Facility of which up to $40.0 million (all of which has been borrowed and is outstanding) may be used for permitted acquisitions (“Acquisition Facility”) and up to $15.0 million (the “Working Capital Portion”) may be used for general corporate purposes (other than acquisitions). The Revolving Loan Facility has a letter of credit sub-limit of $7.5 million. The Term Loan Facility and Acquisition Facility mature on June 30, 2003 and June 30, 2004, respectively and require quarterly principal installments totaling $3.8 million in 2002, $9.3 million in 2003 and  $37.0 million in 2004.  The Revolving Loan Facility matures on June 30, 2004.  As of October 12, 2002, total usage of the Working Capital Portion was $8.5 million (including letters of credit) and $6.5 million was available for borrowings.

                   As of September 30, 2002, the Company had $37.2 million outstanding pursuant to unsecured promissory notes payable to affiliates of the Company, (including Freeman Spogli, Holding’s majority stockholder).  Of these notes, $20.0 million bear interest at 12.0% per annum and are due December 2004, $14.9 million bear interest at 10.0% per annum and are due March 2005 and $2.3 million bear interest at 9.0% per annum and are due August 2006.  Interest may be paid or deferred to the due date at the option of the Company.  Of the December 2004 notes, $12.0 million rank pari-passu with the Credit Facility and senior to the Senior Subordinated Notes and $8.0 million are senior, on a structural basis, to both the Credit Facility and the Senior Subordinated Notes.  The March 2005 notes are convertible into the Company’s common stock at the option of the holder and are subordinated to borrowings under the Credit Facility and rank pari-passu with the Senior Subordinated Notes. The August 2006 notes rank senior, on a structural basis, to both the Credit Facility and the Senior Subordinated Notes.  All of the notes held by affiliates have been pledged for the benefit of the lenders under the Credit Facility.

                   The Company has issued to Holding 470,310 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior Exchangeable PIK Preferred Stock due 2010 with an aggregate liquidation preference of $47.0 million, which has terms and provisions materially similar to those of the 11 ½% Senior Exchangeable PIK Preferred Stock due

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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.  The Credit Facility currently prohibits the Company from paying cash dividends on this Preferred Stock.

                   In August 2001, the Company issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”) to Holding, for total cash consideration to the Company of $3.0 million.  Each share of the Junior Preferred Stock may be redeemed, from time to time, in whole or in part, at the option of the Company at a redemption price of 100% of the Liquidation Preference of the Junior Preferred Stock or $1,000 per share plus accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock.

                   At September 30, 2002, the Company was in compliance with all provisions of its debt securities and preferred stock.

                   In October 2002, HRC Holding Inc, a subsidiary of the Company (“HRC”), issued $2.1 million in senior term notes to existing shareholders of the Company.  The notes will bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004.  HRC used the proceeds from the issuance of the notes to buy intercompany receivables from the Company.  Proceeds to the Company from the sale of the receivables will be used to provide funds for ongoing working capital purposes.  In conjunction with issuance of the notes by HRC, the Company issued warrants to purchase 2.1 million shares of common stock at $1.00 per share.  The warrants will expire on May 15, 2009 and will be accounted for in a manner consistent with the warrants issued in May 2002 (See Notes to Consolidated Financial Statements -- Note 7).

                   The following is a summary of the Company’s consolidated contractual obligations as of December 31, 2001:

(amounts in thousands)
Payments Due by Period

  Total     Less Than
1 Year
    1-3
Years
    4-5
Years
    After 5
Years
 

 

 

 

 

Long-term debt $
226,629
 
$
12,809
 
$
93,941
 
$
2,266
 
$
117,613
Mandatorily redeemable preferred securities  
49,074
 
--
 
--
 
--
 
49,074
Leases and other commitments  
12,336
 
2,247
 
6,065
 
1,792
 
2,232
 

 

 

 

 

Total contractual obligations $
288,039
 
$
15,056
 
$
100,006
 
$
4,058
 
$
168,919
 

 

 

 

 

                   The Company believes that cash generated from anticipated improved operating performance, together with the net available proceeds from the Refinancing, available borrowing capacity under the Revolving Credit Facility and sale of non-essential assets, will provide sufficient liquidity to fund its operations and meet its obligations for the next twelve months.  If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations.  The Company currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required.  Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.

                   For additional information regarding the Company’s debt securities and preferred stock, reference is made to Item 7 of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2001 and Item 2 of the Company’s Quarterly Report on Form 10-Q, Item 2, for the quarter ended March 31, 2002 and the quarter ended June 30, 2002.

Recent Accounting Pronouncements

                   In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” (“SFAS 141”).  This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations,” and SFAS 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.  Any acquisitions made by the Company after June 2001 will be recorded in accordance with SFAS 141.

                   Effective January 1, 2002 the Company adopted SFAS 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 is no longer amortized and is assessed at least annually for impairment using a fair value methodology.  The Company stopped amortizing goodwill, effective January 1, 2002, and as a result, no charges for goodwill amortization are included in the 2002 financial statements. The Company completed its transitional impairment test of goodwill as of January 1, 2002 in the second quarter of 2002, which indicates no impairment of existing goodwill.

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Net income and loss for the three and nine months ended September 30, 2001, excluding amortization of goodwill would have been (in thousands) $2,730 and $(14,182) compared to $1,953 and $(16,729), respectively.  The change in goodwill for the nine months ended September 30, 2002 is the result of changes in foreign currency exchange rates.

                   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 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred.  When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset.  Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement.  SFAS 143 is effective January 1, 2003.  The Company does not expect the adoption of SFAS 143 to have a material impact on the Company’s financial statements.

                   Effective January 1, 2002, the Company adopted SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion).  The adoption of SFAS 144 did not have a material impact on the Company’s financial statements.

                   In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.

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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, 2001.

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ITEM 4.           CONTROLS AND PROCEDURES

                   For the fiscal years ending December 31, 2000 and December 31, 2001, the Company experienced significant disruptions to its operations resulting from the implementation of a new enterprise resource planning (“ERP”) software platform.  This implementation created issues in the accounting for doubtful accounts receivable and the accrual against accounts receivable for rebates. These items were resolved to the satisfaction of the auditors and the 2000 financial statements were released with an unqualified opinion. These issues affecting the audit of the Company’s financial statements for 2000 and the Company’s response to such issues including a description of corrective actions is presented by reference to the 8K filed with the SEC dated January 25, 2002.

                   Management also conducted its own review and evaluation of the Company's internal control procedures and is in the process of implementing the corrective actions that have been presented and approved by the Company’s audit committee. Management believes that such corrective actions will provide the necessary internal controls and procedures to correct such deficiencies for the year ending December 31, 2002. The Company’s December 31, 2001 financial statements were issued with an unqualified opinion.

                   Within the past ninety days prior to the date of this report, the Company has completed an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer of the effectiveness of the Company’s disclosure controls and procedures.  Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, with the exception of the matters discussed above with respect to the internal control weaknesses and ongoing implementation of corrective actions relating to the Company’s internal controls, the Company’s disclosure controls and procedures were effective with respect to timely communicating to them all material information required to be disclosed in this report as it related to the Company and its subsidiaries.

                   There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed this evaluation, other than the Company’s continued progress towards completing the corrective actions referenced above.

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PART II.  OTHER INFORMATION

ITEM 1.                     LEGAL PROCEEDINGS

          None.

ITEM 2.                     CHANGES IN SECURITIES

          None.

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

                                   99.1      Certification of Chief Executive Officer.

                                   99.2      Certification of Chief Financial Officer.

           (b)                   Reports on Form 8-K

                                   None.

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SIGNATURE

                   Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

HUDSON RESPIRATORY CARE INC.,
a California corporation

 

 

 

 

November 14, 2002

by:

/s/ PATRICK G. YOUNT

 

 


 

 

Patrick G. Yount
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

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CERTIFICATIONS

          I, Charles French, certify that:

          1.          I have reviewed this quarterly report on Form 10-Q of Hudson Respiratory Care Inc.;

          2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                       a.     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

                       b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

                       c.     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5.          The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

                       a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

                       b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6.          The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002

/s/ CHARLES FRENCH

 

 


 

 

Charles French
Chief Executive Officer and President

 

 

 

 

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          I, Patrick Yount, certify that:

          1.          I have reviewed this quarterly report on Form 10-Q of Hudson Respiratory Care Inc.;

          2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

                       a.     designed such disclosure controls and to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

                       b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

                       c.     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5.           The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

                       a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

                       b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6.          The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002

/s/ PATRICK YOUNT

 

 


 

 

Patrick Yount
Chief Financial Officer and Secretary

 

 

 

 

 

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