Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number - 333-56135
----------------
RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
-----------------
DELAWARE 95-4674065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
599 Lexington Avenue, 18th 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 [X] No [_]
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 August
14, 2002.
================================================================================
RIVER HOLDING CORP. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. River Holding Corp. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001................................................................................1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2002 and June 30, 2001...................................................3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and June 30, 2001..................................................................4
Notes to Unaudited Condensed Consolidated Financial Statements...................................6
Hudson Respiratory Care Inc. Unaudited Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001...............................................................................15
Unaudited Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2002 and June 30, 2001..............................................17
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and June 30, 2001.................................................................18
Notes to Unaudited Condensed Consolidated Financial Statements..................................20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................29
Item 3. Quantitative and Qualitative Disclosures About Market Risks ....................................37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................38
Item 2. Changes in Securities...........................................................................38
Item 3. Defaults Upon Senior Securities.................................................................38
Item 4. Submission of Matters to a Vote of Security Holders.............................................38
Item 5. Other Information...............................................................................38
Item 6. Exhibits and Reports on Form 8-K................................................................38
SIGNATURE..............................................................................................................39
i
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
CURRENT ASSETS:
Cash ....................................................................... $ 3,378 $ 7,085
Accounts receivable, less allowance for doubtful accounts of
$1,167 and $1,801 at June 30, 2002 and December 31, 2001, respectively .... 20,595 19,287
Inventories, net ........................................................... 23,915 25,218
Other current assets ....................................................... 1,811 1,265
---------- ------------
Total current assets ................................................. 49,699 52,855
PROPERTY, PLANT AND EQUIPMENT, net .......................................... 51,852 53,613
OTHER ASSETS:
Goodwill ................................................................... 32,877 28,498
Deferred financing and other costs, net .................................... 8,625 8,316
Other assets ............................................................... 762 823
---------- ------------
Total other assets ................................................... 42,264 37,637
---------- ------------
Total assets ......................................................... $ 143,815 $ 144,105
========== ============
See notes to unaudited condensed consolidated financial statements
1
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(amounts in thousands, except per share amounts)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
CURRENT LIABILITIES:
Notes payable to bank .................................................... $ 22,927 $ 20,680
Accounts payable ......................................................... 9,683 14,943
Accrued liabilities ...................................................... 18,663 17,520
---------- ------------
Total current liabilities ................................................ 51,273 53,143
NOTE PAYABLE TO AFFILIATE ................................................. 37,217 17,217
NOTES PAYABLE TO BANK, net of current portion ............................. 53,000 73,250
SENIOR SUBORDINATED NOTES PAYABLE ......................................... 115,000 115,000
OTHER NON-CURRENT LIABILITIES ............................................. 1,480 1,187
---------- ------------
Total liabilities ....................................................... 257,970 259,797
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value;
1,800 shares authorized; 470 and 445 shares issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively; liquidation preference -- $47,031 and
$44,474 respectively ..................................................... 46,613 43,847
Accrued preferred stock dividend, payable in kind ........................ 1,127 1,142
---------- ------------
47,740 44,989
STOCKHOLDERS' EQUITY (DEFICIT):
Junior preferred stock, $0.01 par value; 6 shares authorized;
3 shares issued and outstanding at June 30, 2002 and
December 31, 2001 ....................................................... 3,325 3,137
Common stock, $0.01 par value; 15,000 shares authorized;
9,144 issued and outstanding at June 30, 2002 and
December 31, 2001 ....................................................... 97,848 97,848
Additional paid in capital ............................................... 750 --
Cumulative translation adjustment ........................................ 1,957 (234)
Accumulated deficit ...................................................... (265,775) (261,432)
---------- ------------
Total stockholders' deficit ............................................. (161,895) (160,681)
---------- ------------
Total liabilities, mandatorily-redeemable preferred stock
and stockholders' deficit .................................... $ 143,815 $ 144,105
========== ============
See notes to unaudited condensed consolidated financial statements
2
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SALES................................................... $ 41,477 $ 40,801 $ 84,462 $ 78,606
COST OF SALES............................................... 24,129 25,525 49,619 54,121
----------- ------------ ----------- -----------
Gross Profit.............................................. 17,348 15,276 34,843 24,485
OPERATING EXPENSES:
Selling, distribution, general & administrative........... 11,641 13,261 23,463 25,782
Amortization of goodwill.................................. -- 2,549 -- 5,785
Research and development.................................. 815 436 1,412 901
----------- ------------ ----------- -----------
12,456 16,246 24,875 32,468
----------- ------------ ----------- -----------
Income (loss) from operations........................... 4,892 (970) 9,968 (7,983)
INTEREST EXPENSE AND OTHER, net............................. 5,183 6,343 10,046 13,842
----------- ------------ ----------- -----------
Net loss before provision for income taxes.............. (291) (7,313) (78) (21,825)
PROVISION FOR INCOME TAXES.................................. 902 340 1,326 527
----------- ------------ ----------- -----------
$ (1,193) $ (7,653) $ (1,404) $ (22,352)
=========== ============ =========== ===========
Net loss................................................
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain......................... 1,778 3,831 2,191 4,560
----------- ------------ ----------- -----------
Comprehensive income (loss)............................. $ 585 $ (3,822) $ 787 $ (17,792)
=========== ============ =========== ===========
See notes to unaudited condensed consolidated financial statements
3
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in thousands)
SIX MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (1,404) $ (22,352)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization ....................................... 5,776 9,648
Amortization of deferred financing costs ............................ 888 505
Provision for bad debts ............................................. 54 --
Loss on disposal of equipment ....................................... 46 --
Change in operating assets and liabilities:
Accounts receivable ................................................. (568) (411)
Inventories ......................................................... 2,094 10,120
Other current assets ................................................ 375 (70)
Other assets ........................................................ 83 (2,323)
Accounts payable .................................................... (6,140) (9,156)
Accrued liabilities ................................................. 63 30
Other non-current liabilities ....................................... 96 981
---------- ----------
Net cash provided by (used in) operating activities .............. 1,363 (13,028)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............................. (3,904) (2,464)
Proceeds from sales of property, plant and equipment .................... 11 4,464
---------- ----------
Net cash (used in) provided by investing activities .............. (3,893) 2,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank ...................................... (20,258) (3,500)
Proceeds from bank borrowings ........................................... -- 6,227
Repayment of notes payable to affiliates ................................ -- (6,000)
Proceeds from notes payable to affiliates ............................... 20,000 9,451
Sale of common stock, net of issuance costs ............................. -- 803
Additions of deferred financing costs ................................... (447) 215
---------- ----------
Net cash (used in) provided by financing activities .............. (705) 7,196
Effect of exchange rate changes on cash ................................... (472) 4,560
---------- ----------
NET (DECREASE) INCREASE IN CASH ........................................... (3,707) 728
CASH, beginning of period ................................................. 7,085 3,530
---------- ----------
CASH, end of period ....................................................... $ 3,378 $ 4,258
========== ==========
See notes to unaudited condensed consolidated financial statements
4
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
2002 2001
--------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................... $ 8,747 $ 7,693
=============== ===============
Income taxes....................................................... $ 1,856 $ --
=============== ===============
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind........................... $ 2,734 $ 2,361
=============== ===============
Issuance of Warrants.................................................. $ 750 $ --
=============== ===============
See notes to unaudited condensed consolidated financial statements
5
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. Financial Statements. River Holding Corp. ("Holding") is a holding company
with no other operations than those of its majority-owned subsidiary, Hudson
Respiratory Care Inc. (the "Company"). The condensed consolidated financial
statements included herein have been prepared by Holding, without audit, and
include all adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial position at June 30, 2002, the results of
operations for the three-month and six-month periods ended June 30, 2002 and
June 30, 2001 and statements of cash flows for the six-month periods ended June
30, 2002 and June 30, 2001 pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although 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 2001 audited financial statements and the
notes thereto included in its Form 10-K filed with the SEC. The results of
operations for the six-month period ended June 30, 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 Holding'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
million in new senior term notes with warrants to Holding's 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, 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
and funding received on May 14, 2002 discussed above will enable the Company to
meet its ongoing obligations on a timely basis and continue operations for at
least the next twelve months.
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 the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
6
Effective January 1, 2001, Holding adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No.
138. SFAS No. 133, as amended, 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 adoption of this new standard did not have a material impact on
Holding's financial statements.
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
Holding after June 2001 will be recorded in accordance with SFAS 141.
Effective January 1, 2002, Holding 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. Holding stopped amortizing goodwill, effective January
1, 2002, and as a result no charge for goodwill amortization is included in
the 2002 financial statements. Holding 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 loss for the three and six
months ended June 30, 2001, excluding amortization of goodwill would have been
(in thousands) $5,104 and $16,567 compared to $7,653 and $22,352, respectively.
The change in goodwill for the six months ended June 30, 2002 is the result of
changes in foreign currency exchange rates. Holding operates in two reporting
units; North American operations (also the guarantor) and international
operations (also 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. Holding does not expect the adoption of SFAS 143 to
have a material impact on Holding's financial statements.
In August 2001, the FASB issued 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).
SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 did not
have a material impact on Holding'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
7
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. Holding 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):
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
Raw materials........................................ $ 4,884 $ 7,377
Work-in-process...................................... 5,358 5,392
Finished goods....................................... 15,701 14,481
------------- -------------
25,943 27,250
Provision for obsolescence........................... (2,028) (2,032)
------------- -------------
$ 23,915 $ 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):
8
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
----------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
---------- ---------- ------------- ----------
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 1,020 $ 2,358 $ -- $ 3,378
Accounts receivable ................................. 14,664 5,931 -- 20,595
Receivables from non-guarantor ...................... 1,320 -- (1,320) --
Inventories ......................................... 19,032 5,599 (716) 23,915
Other current assets ................................ 866 945 -- 1,811
---------- ---------- ------------- ----------
Total current assets ............................. 36,902 14,833 (2,036) 49,699
PROPERTY, PLANT
AND EQUIPMENT, NET ................................... 50,615 1,237 -- 51,852
OTHER ASSETS:
Goodwill, net ....................................... -- 32,877 -- 32,877
Deferred financing and other costs, net ............. 8,625 -- -- 8,625
Investment in non-guarantor subsidiaries at cost .... 28,636 4,000 (32,636) --
Other ............................................... 762 -- -- 762
---------- ---------- ------------- ----------
Total other assets ............................... 38,023 36,877 (32,636) 42,264
---------- ---------- ------------- ----------
$ 125,540 $ 52,947 $ (34,672) $ 143,815
========== ========== ============= ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank ............................... $ 6,750 $ 16,177 $ -- $ 22,927
Accounts payable .................................... 8,655 1,028 -- 9,683
Payables to guarantor ............................... -- 1,320 (1,320) --
Accrued liabilities ................................. 14,462 4,201 -- 18,663
---------- ---------- ------------- ----------
Total current liabilities ........................ 29,867 22,726 (1,320) 51,273
OTHER LIABILITIES:
NOTE PAYABLE TO AFFILIATE ........................... 26,951 10,266 -- 37,217
NOTES PAYABLE TO BANK, net of current portion ....... 53,000 -- -- 53,000
SENIOR SUBORDINATED NOTES PAYABLE ................... 115,000 -- -- 115,000
OTHER NON-CURRENT LIABILITIES ....................... 167 1,313 -- 1,480
---------- ---------- ------------- ----------
Total liabilities ................................ 224,985 34,305 (1,320) 257,970
Mandatorily-redeemable preferred stock ................ 47,740 -- -- 47,740
---------- ---------- ------------- ----------
COMMON STOCK .......................................... 97,848 28,636 (28,636) 97,848
STOCKHOLDERS' EQUITY (DEFICIT) ........................ (245,033) (9,994) (4,716) (259,743)
---------- ---------- ------------- ----------
$ 125,540 $ 52,947 $ (34,672) $ 143,815
========== ========== ============= ==========
9
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
----------------------------------------------------
NON-
GUARANTOR 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 ................................ 2,758 13,553 (15,046) 1,265
---------- ---------- ------------- ----------
Total current assets ............................. 48,352 28,253 (23,750) 52,855
PROPERTY, PLANT
AND EQUIPMENT, NET ................................... 52,470 1,143 -- 53,613
OTHER ASSETS:
Goodwill, net ....................................... -- 28,498 -- 28,498
Deferred financing and other costs, net ............. 8,316 -- -- 8,316
Investment in non-guarantor subsidiaries ............ 28,623 -- (28,623) --
Other ............................................... 599 224 -- 823
---------- ---------- ------------- ----------
Total other assets ............................... 37,538 28,722 (28,623) 37,637
---------- ---------- ------------- ----------
$ 138,360 $ 58,118 $ (52,373) $ 144,105
========== ========== ============= ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank ............................... $ 3,750 $ 16,930 $ -- $ 20,680
Accounts payable .................................... 13,761 1,182 -- 14,943
Payables to guarantor ............................... -- 6,515 (6,515) --
Accrued liabilities ................................. 14,584 15,356 (12,420) 17,520
---------- ---------- ------------- ----------
Total current liabilities ........................ 32,095 39,983 (18,935) 53,143
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 ................................ 235,442 43,290 (18,935) 259,797
Mandatorily-redeemable preferred stock ................ 44,989 -- -- 44,989
---------- ---------- ------------- ----------
STOCKHOLDERS' EQUITY (DEFICIT) ........................ (142,071) 14,828 (33,438) (160,681)
---------- ---------- ------------- ----------
$ 138,360 $ 58,118 $ (52,373) $ 144,105
========== ========== ============= ==========
10
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
----------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
---------- ---------- ------------- ----------
NET SALES ............................................. $ 36,085 $ 9,034 $ (3,642) $ 41,477
COST OF SALES ......................................... 24,026 4,231 (4,128) 24,129
---------- ---------- ------------- ----------
Gross Profit ........................................ 12,059 4,803 486 17,348
OPERATING EXPENSES:
Selling, distribution, general and administrative ... 9,103 2,538 -- 11,641
Amortization of goodwill ............................ -- -- -- --
Research and development ............................ 530 285 -- 815
---------- ---------- ------------- ----------
9,633 2,823 -- 12,456
---------- ---------- ------------- ----------
Income from operations .............................. 2,426 1,980 486 4,892
INTEREST EXPENSE AND OTHER, net: ...................... 4,820 380 (17) 5,183
---------- ---------- ------------- ----------
Net (loss) income before provision for income taxes . (2,394) 1,600 503 (291)
PROVISION FOR INCOME TAXES ............................ -- 902 -- 902
---------- ---------- ------------- ----------
Net (loss) income $ (2,394) $ 698 $ 503 $ (1,193)
========== ========== ============= ==========
THREE MONTHS ENDED JUNE 30, 2001
----------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
---------- ---------- ------------- ----------
NET SALES ............................................. $ 37,026 $ 7,033 $ (3,258) $ 40,801
COST OF SALES ......................................... 25,288 3,734 (3,497) 25,525
---------- ---------- ------------- ----------
Gross Profit ........................................ 11,738 3,299 239 15,276
OPERATING EXPENSES:
Selling, distribution, general and administrative ... 11,531 1,730 -- 13,261
Amortization of goodwill ............................ 1,655 894 -- 2,549
Research and development ............................ 179 257 -- 436
---------- ---------- ------------- ----------
13,365 2,881 -- 16,246
---------- ---------- ------------- ----------
Income (loss) from operations ....................... (1,627) 418 239 (970)
INTEREST EXPENSE AND OTHER, net: ...................... 4,949 425 969 6,343
---------- ---------- ------------- ----------
Net loss before provision for income taxes .......... (6,576) (7) (730) (7,313)
PROVISION FOR INCOME TAXES ............................ -- 340 -- 340
---------- ---------- ------------- ----------
Net Loss .............................................. $ (6,576) $ (347) $ (730) $ (7,653)
========== ========== ============= ==========
11
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
---------- ---------- ------------- ----------
NET SALES ............................................. $ 73,948 $ 17,588 $ (7,074) $ 84,462
COST OF SALES ......................................... 48,302 8,953 (7,636) 49,619
---------- ---------- ------------- ----------
Gross Profit ........................................ 25,646 8,635 562 34,843
OPERATING EXPENSES:
Selling, distribution, general and administrative ... 18,605 4,858 -- 23,463
Amortization of goodwill ............................ -- -- -- --
Research and development ............................ 865 547 -- 1,412
---------- ---------- ------------- ----------
19,470 5,405 -- 24,875
---------- ---------- ------------- ----------
Income from operations .............................. 6,176 3,230 562 9,968
INTEREST EXPENSE AND OTHER, net: 9,354 692 -- 10,046
---------- ---------- ------------- ----------
Net (loss) income before provision for income taxes . (3,178) 2,538 562 (78)
PROVISION FOR INCOME TAXES ............................ -- 1,326 -- 1,326
---------- ---------- ------------- ----------
Net (loss) income ..................................... $ (3,178) $ 1,212 $ 562 $ (1,404)
========== ========== ============= ==========
SIX MONTHS ENDED JUNE 30, 2001
----------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
---------- ---------- ------------- ----------
NET SALES ............................................. $ 72,219 $ 13,008 $ (6,621) $ 78,606
COST OF SALES ......................................... 53,254 6,935 (6,068) 54,121
---------- ---------- ------------- ----------
Gross Profit ........................................ 18,965 6,073 (553) 24,485
OPERATING EXPENSES:
Selling, distribution, general and administrative ... 22,619 3,163 -- 25,782
Amortization of goodwill ............................ 3,310 2,475 -- 5,785
Research and development ............................ 394 507 -- 901
---------- ---------- ------------- ----------
26,323 6,145 -- 32,468
---------- ---------- ------------- ----------
Loss from operations ................................ (7,358) (72) (553) (7,983)
INTEREST EXPENSE AND OTHER, net ....................... 9,585 2,175 2,082 13,842
---------- ---------- ------------- ----------
Net loss before provision for income taxes .......... (16,943) (2,247) (2,635) (21,825)
PROVISION FOR INCOME TAXES ............................ -- 527 -- 527
---------- ---------- ------------- ----------
Net loss .............................................. $ (16,943) $ (2,774) $ (2,635) $ (22,352)
========== ========== ============= ==========
12
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
--------- ---------- ----------
Net cash provided by (used in) operating activities.................. $ 5,559 $ (4,196) $ 1,363
Net cash used in investing activities................................ (3,620) (273) (3,893)
Net cash (used in) provided by financing activities.................. (5,697) 4,992 (705)
Effect of exchange rate changes on cash.............................. 65 (537) (472)
--------- ---------- ----------
NET DECREASE IN CASH................................................. (3,693) (14) (3,707)
CASH, beginning of period............................................ 4,713 2,372 7,085
--------- ---------- ----------
CASH, end of period.................................................. $ 1,020 $ 2,358 $ 3,378
========= ========== ==========
SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
--------- ---------- ----------
Net cash used in operating activities................................ $ (4,535) $ (8,493) $ (13,028)
Net cash (used in) provided by investing activities.................. (1,977) 3,977 2,000
Net cash provided by financing activities............................ 3,735 3,461 7,196
Effect of exchange rate changes on cash.............................. -- 4,560 4,560
--------- ---------- ----------
NET (DECREASE) INCREASE IN CASH...................................... (2,777) 3,505 728
CASH, beginning of period............................................ 437 3,093 3,530
--------- ---------- ----------
CASH, end of period.................................................. $ (2,340) $ 6,598 $ 4,258
========= ========== ==========
The Company's percentage of sales by geographic region for the three and
six month period ended June 30, 2002 and June 30, 2001 is as follows:
Three Months Ended
----------------------------
June 30, June 30,
2002 2001
------------ -----------
Domestic...................................................... 74.5% 74.6%
Europe........................................................ 15.2 13.9
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 6.0 8.0
Canada........................................................ 1.6 1.4
Other international........................................... 2.7 2.1
------------ -----------
100.0% 100.0%
============ ===========
Six Months Ended
----------------------------
June 30, June 30,
2002 2001
------------ -----------
Domestic...................................................... 75.4% 77.0%
Europe........................................................ 15.0 13.2
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 5.7 6.5
Canada........................................................ 1.6 1.5
Other international........................................... 2.3 1.8
------------ -----------
100.0% 100.0%
============ ===========
13
4. Commitments and Contingencies. Holding is not a party to any material
lawsuits or other proceedings, including suits relating to product liability and
patent infringement. While the results of Holding'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 Holding.
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. As part of this amendment, the
Company issued $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. Under the terms of the amendment to the Credit Facility, the lenders
and the 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.
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. Hudson RCI AB Bank Facility. As of June 30, 2002, Holding's wholly-owned
Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial
covenants of the Hudson RCI AB bank facility. Holding and Hudson RCI AB are
currently in discussions with the lender and expect to receive a waiver curing
all defaults (see the "Liquidity and Capital Resources" section of Item 2). Due
to the uncertainty of receiving this waiver from the lenders, Holding has
classified the entire Hudson RCI AB bank facility as a current liability on the
consolidated balance sheet. The Credit Facility and Senior Subordinated notes
are not cross-defaulted to the Hudson RCI AB bank facility.
14
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
CURRENT ASSETS:
Cash.................................................................... $ 3,378 $ 7,085
Accounts receivable, less allowance for doubtful accounts of
$1,167 and $1,801 at June 30, 2002 and December 31, 2001,
respectively........................................................... 20,595 19,287
Inventories, net........................................................ 23,915 25,218
Other current assets.................................................... 2,069 1,483
----------- ------------
Total current assets.............................................. 49,957 53,073
PROPERTY, PLANT AND EQUIPMENT, net....................................... 45,637 46,268
OTHER ASSETS:
Goodwill................................................................ 32,877 28,498
Deferred financing and other costs, net................................. 8,625 8,316
Other assets............................................................ 839 900
----------- ------------
Total other assets................................................ 42,341 37,714
----------- ------------
Total assets...................................................... $ 137,935 $ 137,055
=========== ============
See notes to unaudited condensed consolidated financial statements
15
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)
JUNE 30, DECEMBER 31,
2002 2001
---------- -------------
CURRENT LIABILITIES:
Notes payable to bank ...................................................... $ 22,927 $ 20,680
Accounts payable ........................................................... 9,683 15,251
Accrued liabilities ........................................................ 18,753 17,302
---------- -------------
Total current liabilities .................................................. 51,363 53,233
NOTE PAYABLE TO AFFILIATE ................................................... 37,217 17,217
NOTES PAYABLE TO BANK, net of current portion ............................... 53,000 73,250
SENIOR SUBORDINATED NOTES PAYABLE ........................................... 115,000 115,000
OTHER NON-CURRENT LIABILITIES ............................................... 1,480 1,187
---------- -------------
Total liabilities ......................................................... 258,060 259,887
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value;
1,800 shares authorized; 470 and 445 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively;
liquidation preference -- $47,031 and $44,474 respectively ................. 46,613 43,847
Accrued preferred stock dividend, payable in kind .......................... 1,127 1,142
---------- -------------
47,740 44,989
STOCKHOLDERS' EQUITY (DEFICIT):
Junior preferred stock, $0.01 par value; 6 shares authorized;
3 shares issued and outstanding at June 30, 2002 and December
31, 2001 .................................................................. 3,325 3,137
Common stock, $0.01 par value; 15,000 shares authorized; 10,654 issued
and outstanding at June 30, 2002 and December 31, 2001 .................... 98,258 98,258
Additional paid in capital ................................................. 750 --
Cumulative translation adjustment .......................................... 1,493 (698)
Accumulated deficit ........................................................ (271,691) (268,518)
---------- -------------
Total stockholders' deficit ............................................... (167,865) (167,821)
---------- -------------
Total liabilities, mandatorily-redeemable preferred stock
and stockholders' deficit ...................................... $ 137,935 $ 137,055
========== =============
See notes to unaudited condensed consolidated financial statements
16
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 SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
NET SALES ...................................................... $ 41,477 $ 40,801 $ 84,462 $ 78,606
COST OF SALES .................................................. 23,564 24,961 48,489 52,991
---------- ---------- ---------- ----------
Gross Profit ................................................. 17,913 15,840 35,973 25,615
OPERATING EXPENSES:
Selling, distribution, general & administrative .............. 11,601 13,261 23,423 25,782
Amortization of goodwill ..................................... -- 1,279 -- 3,245
Research and development ..................................... 815 436 1,412 901
---------- ---------- ---------- ----------
12,416 14,976 24,835 29,928
---------- ---------- ---------- ----------
Income (loss) from operations .............................. 5,497 864 11,138 (4,313)
INTEREST EXPENSE AND OTHER, net ................................ 5,183 6,343 10,046 13,842
---------- ---------- ---------- ----------
Net income (loss) before provision for income taxes ........ 314 (5,479) 1,092 (18,155)
PROVISION FOR INCOME TAXES ..................................... 902 340 1,326 527
---------- ---------- ---------- ----------
Net loss ................................................... $ (588) $ (5,819) $ (234) $ (18,682)
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain ............................ 1,778 3,831 2,191 4,560
---------- ---------- ---------- ----------
Comprehensive income (loss) .............................. $ 1,190 $ (1,988) $ 1,957 $ (14,122)
========== ========== ========== ==========
See notes to unaudited condensed consolidated financial statements
17
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in thousands)
SIX MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................... $ (234) $ (18,682)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization ......................................... 4,646 5,979
Amortization of deferred financing costs .............................. 888 505
Provision for bad debts ............................................... 54 --
Loss on disposal of equipment ......................................... 46 --
Change in operating assets and liabilities:
Accounts receivable ................................................... (568) (411)
Inventories ........................................................... 2,094 10,120
Other current assets .................................................. 375 (71)
Other assets .......................................................... 83 (2,323)
Accounts payable ...................................................... (6,140) (8,553)
Accrued liabilities ................................................... 23 (573)
Other non-current liabilities ......................................... 96 981
---------- ----------
Net cash provided by (used in) operating activities ................. 1,363 (13,028)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................................. (3,904) (2,464)
Proceeds from sales of property, plant and equipment ....................... 11 4,464
---------- ----------
Net cash (used in) provided by investing activities ................. (3,893) 2,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank ......................................... (20,258) (3,500)
Proceeds from bank borrowings .............................................. -- 6,227
Repayment of notes payable to affiliates ................................... -- (6,000)
Proceeds from notes payable to affiliates .................................. 20,000 9,451
Sale of common stock, net of issuance costs ................................ -- 803
Additions of deferred financing costs ...................................... (447) 215
---------- ----------
Net cash (used in) provided by financing activities ................. (705) 7,196
Effect of exchange rate changes on cash ...................................... (472) 4,560
---------- ----------
NET (DECREASE) INCREASE IN CASH .............................................. (3,707) 728
CASH, beginning of period .................................................... 7,085 3,530
---------- ----------
CASH, end of period .......................................................... $ 3,378 $ 4,258
========== ==========
See notes to unaudited condensed consolidated financial statements
18
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
2002 2001
--------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................... $ 8,747 $ 7,693
=============== ===============
Income taxes (primarily foreign)................................... $ 1,856 $ --
=============== ===============
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind........................... $ 2,734 $ 2,361
=============== ===============
Issuance of warrants.................................................. $ 750 $ --
=============== ===============
See notes to unaudited condensed consolidated financial statements
19
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. Financial Statements. The condensed consolidated financial statements
included herein have been prepared by the Company, without audit, and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position at June 30, 2002, the results of
operations for the three month and six month periods ended June 30, 2002 and
June 30, 2001 and statements of cash flows for the six month periods ended June
30, 2002 and June 30, 2001 pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading, the accompanying unaudited condensed, consolidated financial
statements should be read in conjunction with the Company's 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 six-month period ended June
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
million in new senior term notes with warrants to the Company's 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, 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
and funding received on May 14, 2002 discussed above will enable the Company to
meet its ongoing obligations on a timely basis and continue operations for at
least the next twelve months.
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 the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No.
138. SFAS No. 133, as amended, establishes accounting and reporting standards
for derivative
20
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 adoption of this
new standard did not have a material impact on the Company's financial
statements.
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 loss
for the three and six months ended June 30, 2001, excluding amortization of
goodwill would have been (in thousands) $4,540 and $15,437 compared to $5,819
and $18,682, respectively. The change in goodwill for the six months ended June
30, 2002 is the result of changes in foreign currency exchange rates. The
Company operates in two reporting units; North American operations (also the
guarantor) and international operations (also 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 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.
21
2. Inventories. Inventories consisted of the following (amounts in thousands):
JUNE 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials........................................................ $ 4,884 $ 7,377
Work-in-process...................................................... 5,358 5,392
Finished goods....................................................... 15,701 14,481
------------- ------------
25,943 27,250
Provision for obsolescence........................................... (2,028) (2,032)
------------- ------------
$ 23,915 $ 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):
22
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash........................................... $ 1,020 $ 2,358 $ -- $ 3,378
Accounts receivable............................ 14,664 5,931 -- 20,595
Receivables from non-guarantor................. 1,320 -- (1,320) --
Inventories.................................... 19,032 5,599 (716) 23,915
Other current assets........................... 1,124 945 -- 2,069
----------- --------- --------- -----------
Total current assets........................ 37,160 14,833 (2,036) 49,957
PROPERTY, PLANT
AND EQUIPMENT, NET.............................. 44,400 1,237 -- 45,637
OTHER ASSETS:
Goodwill....................................... -- 32,877 -- 32,877
Deferred financing and other costs, net........ 8,625 -- -- 8,625
Investment in non-guarantor subsidiaries at cost 28,636 4,000 (32,636) --
Other.......................................... 839 -- -- 839
----------- --------- --------- -----------
Total other assets.......................... 38,100 36,877 (32,636) 42,341
----------- --------- --------- -----------
$ 119,660 $ 52,947 $ (34,672) $ 137,935
=========== ========= ========= ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank......................... $ 6,750 $ 16,177 $ -- $ 22,927
Accounts payable.............................. 8,655 1,028 -- 9,683
Payables to guarantor......................... -- 1,320 (1,320) --
Accrued liabilities........................... 14,552 4,201 -- 18,753
----------- --------- --------- -----------
Total current liabilities.................. 29,957 22,726 (1,320) 51,363
OTHER LIABILITIES:
Note payable to affiliate..................... 26,951 10,266 -- 37,217
Notes payable to bank, net of current portion. 53,000 -- -- 53,000
Senior subordinated notes payable............. 115,000 -- -- 115,000
Other non-current liabilities................. 167 1,313 -- 1,480
----------- --------- --------- -----------
Total liabilities.......................... 225,075 34,305 (1,320) 258,060
Mandatorily-redeemable preferred stock........... 47,740 -- -- 47,740
----------- --------- --------- -----------
COMMON STOCK..................................... 98,258 28,636 (28,636) 98,258
STOCKHOLDERS' EQUITY (DEFICIT)................... (251,413) (9,994) (4,716) (266,123)
----------- --------- --------- -----------
$ 119,660 $ 52,947 $ (34,672) $ 137,935
=========== ========= ========= ===========
23
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
--------------------------------------------------------
NON-
GUARANTOR 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 13,553 (15,046) 1,483
----------- --------- ---------- -----------
Total current assets.......................... 48,570 28,253 (23,750) 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 $ 58,118 $ (52,373) $ 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) 14,828 (33,438) (167,821)
------------ --------- --------- -----------
$ 131,310 $ 58,118 $ (52,373) $ 137,055
=========== ========= =========- ===========
24
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES........................................... $ 36,085 $ 9,034 $ (3,642) $ 41,477
COST OF SALES....................................... 23,461 4,231 (4,128) 23,564
----------- --------- --------- -----------
Gross Profit..................................... 12,624 4,803 486 17,913
OPERATING EXPENSES:
Selling, distribution, general and administrative 9,063 2,538 -- 11,601
Amortization of goodwill......................... -- -- -- --
Research and development......................... 530 285 -- 815
----------- --------- --------- -----------
9,593 2,823 -- 12,416
----------- --------- --------- -----------
Income from operations........................... 3,031 1,980 486 5,497
INTEREST EXPENSE AND OTHER, net: 4,820 380 (17) 5,183
----------- --------- --------- -----------
Net (loss) income before provision for income taxes (1,789) 1,600 503 314
PROVISION FOR INCOME TAXES.......................... -- 902 -- 902
----------- --------- --------- -----------
Net (loss) income................................... $ (1,789) $ 698 $ 503 $ (588)
=========== ========= ========= ===========
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES........................................... $ 37,026 $ 7,033 $ (3,258) $ 40,801
COST OF SALES....................................... 24,724 3,734 (3,497) 24,961
----------- --------- --------- -----------
Gross Profit..................................... 12,302 3,299 239 15,840
OPERATING EXPENSES:
Selling, distribution, general and administrative 11,531 1,730 -- 13,261
Amortization of goodwill......................... 385 894 -- 1,279
Research and development......................... 179 257 -- 436
----------- --------- --------- -----------
12,095 2,881 -- 14,976
----------- --------- --------- -----------
Income from operations........................... 207 418 239 864
INTEREST EXPENSE AND OTHER, net: 4,949 425 969 6,343
----------- --------- --------- -----------
Net loss before provision for income taxes....... (4,742) (7) (730) (5,479)
PROVISION FOR INCOME TAXES.......................... -- 340 -- 340
----------- --------- --------- -----------
Net Loss............................................ $ (4,742) $ (347) $ (730) $ (5,819)
=========== ========== ========= ===========
25
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- --------- ------------ -----------
NET SALES........................................... $ 73,948 $ 17,588 $ (7,074) $ 84,462
COST OF SALES....................................... 47,172 8,953 (7,636) 48,489
----------- --------- --------- -----------
Gross Profit..................................... 26,776 8,635 562 35,973
OPERATING EXPENSES:
Selling, distribution, general and administrative 18,565 4,858 -- 23,423
Amortization of goodwill......................... -- -- -- --
Research and development......................... 865 547 -- 1,412
----------- --------- --------- -----------
19,430 5,405 -- 24,835
----------- --------- --------- -----------
Income from operations........................... 7,346 3,230 562 11,138
INTEREST EXPENSE AND OTHER, net: 9,354 692 -- 10,046
----------- --------- --------- -----------
Net (loss) income before provision for income taxes (2,008) 2,538 562 1,092
PROVISION FOR INCOME TAXES.......................... -- 1,326 -- 1,326
----------- --------- --------- -----------
Net (loss) income................................... $ (2,008) $ 1,212 $ 562 $ (234)
=========== ========= ========= ============
SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATIONS TOTAL
----------- ---------- ------------ -----------
NET SALES........................................... $ 72,219 $ 13,008 $ (6,621) $ 78,606
COST OF SALES....................................... 52,124 6,935 (6,068) 52,991
----------- --------- --------- -----------
Gross Profit..................................... 20,095 6,073 (553) 25,615
OPERATING EXPENSES:
Selling, distribution, general and administrative 22,619 3,163 -- 25,782
Amortization of goodwill......................... 770 2,475 -- 3,245
Research and development......................... 394 507 -- 901
----------- --------- --------- -----------
23,783 6,145 -- 29,928
----------- --------- --------- -----------
Loss from operations............................. (3,688) (72) (553) (4,313)
INTEREST EXPENSE AND OTHER, net..................... 9,585 2,175 2,082 13,842
----------- --------- --------- -----------
Net loss before provision for income taxes....... (13,273) (2,247) (2,635) (18,155)
PROVISION FOR INCOME TAXES.......................... -- 527 -- 527
----------- --------- --------- -----------
Net loss............................................ $ (13,273) $ (2,774) $ (2,635) $ (18,682)
=========== ========= ========= ===========
26
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
-------- ---------- ------------
Net cash provided by (used in) operating activities..... $ 5,559 $ (4,196) $ 1,363
Net cash used in investing activities................... (3,620) (273) (3,893)
Net cash (used in) provided by financing activities..... (5,697) 4,992 (705)
Effect of exchange rate changes on cash................. 65 (537) (472)
-------- --------- ------------
NET DECREASE IN CASH.................................... (3,693) (14) (3,707)
CASH, beginning of period............................... 4,713 2,372 7,085
-------- --------- ------------
CASH, end of period..................................... $ 1,020 $ 2,358 $ 3,378
======== ========= ============
SIX MONTHS ENDED JUNE 30, 2001
----------------------------------------
NON-
GUARANTOR GUARANTOR TOTAL
-------- ---------- ------------
Net cash used in operating activities................... $ (4,535) $ (8,493) $ (13,028)
Net cash (used in) provided by investing activities..... (1,977) 3,977 2,000
Net cash provided by financing activities............... 3,735 3,461 7,196
Effect of exchange rate changes on cash................. -- 4,560 4,560
-------- --------- ------------
NET (DECREASE) INCREASE IN CASH......................... (2,777) 3,505 728
CASH, beginning of period............................... 437 3,093 3,530
-------- --------- ------------
CASH, end of period..................................... $ (2,340) $ 6,598 $ 4,258
======== ========= ============
The Company's percentage of sales by geographic region for the three and
six month period ended June 30, 2002 and June 30, 2001 is as follows:
Three Months Ended
-------------------------
June 30, June 30,
2002 2001
-------- --------
Domestic...................................................... 74.5% 74.6%
Europe........................................................ 15.2 13.9
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 6.0 8.0
Canada........................................................ 1.6 1.4
Other international........................................... 2.7 2.1
-------- --------
100.0% 100.0%
======== ========
Six Months Ended
-------------------------
June 30, June 30,
2002 2001
-------- --------
Domestic...................................................... 75.4% 77.0%
Europe........................................................ 15.0 13.2
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 5.7 6.5
Canada........................................................ 1.6 1.5
Other international........................................... 2.3 1.8
-------- --------