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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
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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
-------- --------
100.0% 100.0%
======== ========
27
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. 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. As a result of the amendment,
the Company is currently in compliance with the terms and provisions of the
Credit Facility.
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 the Company's wholly-owned
Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial
covenants of the Hudson RCI AB bank facility. The Company 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, the Company 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.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Because River Holding Corp. ("Holding") is a holding company with no
operations other than those of Hudson Respiratory Care Inc. (the "Company" or
"Hudson RCI"), the following discussion throughout this section relates
primarily to the Company. The following discussion of Holding and the Company's
consolidated historical results of operations and financial condition should be
read in conjunction with the consolidated financial statements of Holding and
the Company and the notes thereto included elsewhere in this Form 10-Q.
Holding's acquisition of a majority of the Company's stock was accounted
for as a purchase. As a result of Holding's acquisition of the Company, Holding
recorded property, plant and equipment at fair value. Additional expenses
relating to amortization of goodwill, $5.8 million in the first six months of
2001, was recorded and additional depreciation related to the allocation of
purchase price at fair value to depreciable assets of $1.1 million in the first
six months of 2002 and 2001 was also recorded. As of June 30, 2002, the
remaining value of the step-up in basis to fair value was approximately $6.2
million.
Goodwill, resulting from the acquisition of the Company, was recorded on
the books of Holding and not pushed down to the Company. As result, an
additional $128.4 million of goodwill was recorded at Holding. As a result of
significant losses, both Holding and the Company recorded a goodwill impairment
of $161.6 million and $33.1 million, respectively, in the fourth quarter of
2001.
Holding and the Company also recorded deferred tax assets stemming from
Holding's purchase of the Company. Holding and the Company recorded an $11.2
million and $68.9 million valuation allowance against these assets in the fourth
quarter of 2001, respectively.
There are no other material differences between Holding consolidated and
the Company.
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
As of March 31, 2002, the Company was not in compliance with certain
financial and reporting covenants under agreements governing its Credit
Facility, Bank Notes Payable and Subordinated Notes. On March 31, 2002, the
Company did not make a scheduled amortization payment of the Term Loan Facility
to its senior lenders as required under the Credit Facility. As a result, in
early April 2002, the lenders under the Credit Facility blocked the Company from
making either the April 15, 2002 interest payment required under the Senior
Subordinated Notes or the April 15, 2002 dividend payment required under the
11-1/2% Senior Exchangeable PIK Preferred Stock due 2010.
On May 14, 2002, the Company reached an agreement with its senior lenders
to amend and restate 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
Holding's majority
29
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 to include only a limitation on
capital expenditures and a minimum EBITDA test. As a result of the amendment,
the Company is currently in compliance with the terms and provisions of the
Credit Facility.
As of June 30, 2002, the Company's wholly-owned Swedish subsidiary, Hudson
RCI AB, was not in compliance with certain financial covenants of the Hudson RCI
AB bank facility. The Company 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 this Item). Due to the uncertainty
of receiving this waiver from the lenders, the Company 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.
30
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 SIX MONTHS ENDED
---------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------- ------------ -------------- -------------
(amounts in thousands)
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
------------- ----------- -------------- -------------
Selling expenses.................................. 5,377 5,760 10,398 10,571
Distribution expenses............................. 2,096 2,221 4,408 4,998
General and administrative expenses............... 4,128 5,280 8,617 10,213
Amortization of goodwill.......................... -- 1,279 -- 3,245
Research and development expenses................. 815 436 1,412 901
------------- ----------- -------------- -------------
Total operating expenses.......................... 12,416 14,976 24,835 29,928
------------- ----------- -------------- -------------
Operating income.................................. $ 5,497 $ 864 $ 11,138 $ (4,313)
============= =========== ============== =============
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------- ----------- -------------- -------------
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 56.8 61.2 57.4 67.4
------------- ----------- -------------- -------------
Gross profit................................... 43.2 38.8 42.6 32.6
------------- ----------- -------------- -------------
Selling expenses.................................. 13.0 14.1 12.3 13.4
Distribution expenses............................. 5.1 5.4 5.2 6.4
General and administrative expenses............... 9.9 12.9 10.2 13.0
Amortization of goodwill.......................... -- 3.1 -- 4.1
Research and development expenses................. 2.0 1.1 1.7 1.1
------------- ----------- -------------- -------------
Total operating expenses.......................... 30.0 36.7 29.4 38.1
------------- ----------- -------------- -------------
Operating income.................................. 13.2% 2.1% 13.2% (5.5)%
============= =========== ============== =============
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net sales, reported net of accrued rebates, were $41.5 million in the
second quarter of 2002 as compared to $40.8 million in the second quarter of
2001, representing an increase of $0.7 million or 1.7%. This is primarily the
result of increased domestic hospital sales of $0.8 million or 3.5%, principally
due to variability in distributor buying patterns. Sales in Europe and other
International increased by $0.9 million as customers benefited from favorable
currency movement that made the price of the Company's products relatively less
expensive than for the second quarter of 2001. Sales in the Pacific Rim declined
by $0.8 million in the second quarter of 2002, the result of initial stocking of
SHERIDAN(R) product in the second quarter of 2001. The gains were partially
offset by sales declines of $0.2 million elsewhere.
The Company's gross profit for the second quarter of 2002 was $17.9
million, an increase of $2.1 million or 13.1% from the second quarter of 2001.
As a percentage of sales, the gross profit was 43.2% and 38.8% for the second
quarter of 2002 and 2001, respectively. This increase 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(R)
acquisition, (ii), an improvement in shipping costs in 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 and 2002 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 by (iv), an unfavorable mix variance in 2001 caused by higher
sales of products at lower gross margins.
31
Selling expenses were $5.4 million for the second quarter of 2002, as
compared to $5.8 million in the second quarter of 2001. The decrease of $0.4
million or 6.7% was primarily the result of temporary personnel vacancies in the
Company's European operations. As a percentage of net sales, selling expenses
were 13.0% in the first quarter of 2002 as compared to 14.1% in the second
quarter of 2001.
Distribution expenses were $2.1 million for the second quarter of 2002,
relatively unchanged from the second quarter of 2001.
General and administrative expenses were $4.1 million in the second quarter
of 2002, a decrease of $1.2 million or 21.8% from the second 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 9.9% in the second quarter of 2002 as
compared to 12.9% in the second quarter of 2001.
Research and development expenses were $0.8 million for the second quarter
of 2002 as compared to $0.4 million for the second quarter of 2001. This
increase of $0.4 million or 86.9% is the result of increased spending on product
development in 2002 through the use of outside consultants.
Amortization of goodwill was $0.0 million in the second quarter of 2002, as
compared to $1.3 million in the second 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 $5.2 million for the second quarter of 2002,
as compared to $6.3 million in the second quarter 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 asset. The Company continues to
evaluate the need for the valuation allowance and will reverse it when it is
more likely than not that the deferred tax asset will be realized.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net sales, reported net of accrued rebates, were $84.5 million in the first
six months of 2002 as compared to $78.6 million in the first six months of 2001,
representing an increase of $5.9 million or 7.4%. Domestic hospital sales
increased by $3.4 million or 7.4% due principally to customers increased
purchases at the end of 2000 in anticipation of a strong influenza season in the
first quarter of 2001 that did not materialize, negatively impacting sales in
the first quarter of 2001. These customers did not exhibit those purchasing
patterns at the end of 2001. International sales increased by $2.7 million or
14.9%, primarily driven by continued growth in Europe, which benefited from
favorable currency movement that made the price of the Company's products
relatively less expensive than for the first six months of 2001. These gains
were partially offset by a decline in sales to the Pacific Rim, the result of
initial stocking of SHERIDAN(R) product in the second quarter of 2001.
The Company's gross profit for the first six months of 2002 was $36.0
million, an increase of $10.4 million or 40.4% from the first six months of
2001. As a percentage of sales, the gross profit was 42.6% and 32.6% for the
first six months of 2002 and 2001, respectively. This increase 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(R)
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.
Selling expenses were $10.4 million for the first six months of 2002, a
$0.2 million or 1.6% decrease from the first six months of 2001. This decrease
was primarily due to temporary personnel vacancies in the Company's European
32
operations. As a percentage of net sales, selling expenses were 12.3% in the
first six months of 2002 as compared to 13.4% in the first six months of 2001.
Distribution expenses were $4.4 million for the first six months of 2002, a
decrease of $0.6 million or 11.8% from the first six 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 5.2% in the first six months of 2002
as compared to 6.4% in the first six months of 2001.
General and administrative expenses were $8.6 million in the first six
months of 2002, a decrease of $1.6 million or 15.6% from the first six 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 10.2% in the first six months of
2002 as compared to 13.0% in the first six months of 2001.
Research and development expenses were $1.4 million for the first six
months of 2002, an increase of $0.5 million or 56.7% for the fist six months of
2001. The increase is primarily the result of increased spending on product
development in 2002 through the use of outside consultants.
Amortization of goodwill was $0.0 million in the first six months of 2002,
as compared to $3.2 million in the first six 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 $10.0 million for the first six months of
2002, as compared to $13.8 million in the first six 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 asset. The Company continues to
evaluate the need for the valuation allowance and will reverse it when it is
more likely than not that the deferred tax asset 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 $1.4 million
and $(13.0) million for the first six months of 2002 and 2001, respectively. The
increase for the first six months of 2002 as compared to the first six months of
2001 is primarily attributable to increased operating income and a decrease in
working capital. The Company had an operating working capital deficit of $1.4
million and $0.2 million as of the end of June 30, 2002 and December 31, 2001,
respectively. Inventories were $23.9 million and $25.2 million as of the end of
June 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 $20.6 million and $19.3 million at June 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 aging of its accounts receivable will continue to increase as the
alternate site and international markets become a larger percentage of the
Company's overall sales.
During the six months ended June 30, 2002, net cash used in investing
activities was $3.9 million, reflecting primarily purchases of manufacturing
equipment, new heater production and costs incurred to move the Company's Argyle
operation to Tecate, Mexico. This move is anticipated to cost approximately $4.6
million and will be completed in 2003. Through June 30, 2002, expenditures
related to the move have totaled $2.3 million ($1.4 million in 2002). During the
six months ended June 30, 2001, favorable currency translation gains
attributable to foreign operations
33
exceeded purchases of manufacturing equipment resulting in net cash provided by
investing activities of $2.0 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 six months ended June 30, 2002 and June 30, 2001, net cash (used
in) provided by financing was $(0.7) million and $7.2 million, respectively,
reflecting repayment on the Company's borrowings in the first six months of 2002
and borrowings made through Hudson RCI AB, the Company's Swedish subsidiary in
the first six months of 2001.
As of June 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 $228.2 million of indebtedness,
consisting of $115.0 million of Senior Subordinated Notes, borrowings of $59.8
million under the Company's Credit Facility, $37.2 million in notes payable to
affiliates and $16.2 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 $8.8 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 June 30, 2002, total usage of the
Working Capital Portion was $12.0 million (including letters of credit) and $3.0
million was available for borrowings.
As of June 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.
As of June 30, 2002, Hudson RCI AB, the Company's Swedish subsidiary, was
not in compliance with certain financial covenants in its bank facility (the
"Hudson RCI AB Facility"). The Company and Hudson RCI AB are currently in
negotiations with the lender concerning an amendment curing these defaults and
expects to receive from the lender a waiver curing all past covenant violations,
but no assurance can be given that such an agreement will be reached.
Accordingly, the entire outstanding balance of the Hudson RCI AB Facility is
classified as current on the consolidated balance sheet. The Company's Credit
Facility and the Senior Subordinated Notes are not cross-defaulted to the Hudson
RCI AB facility. If a waiver of such default is not obtained, the lender may
pursue its remedies under the facility, including, among other things, immediate
acceleration of all borrowings of the facility. In addition, the default
entitles the lender to take control of all the common stock of Hudson RCI AB and
its European parent companies.
Holding has issued 470,310 shares (including shares issued as payment in
kind dividends) of its 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010
with an aggregate liquidation preference of $47.0 million. At Holding's
election, 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 the "mirror" preferred stock the Company has issued to
Holding.
34
In August 2001, Holding issued 3,000 shares of 12% Junior Convertible
Cumulative Preferred Stock (the "Junior Preferred Stock") to Holding, for total
cash consideration of $3.0 million, which Holding invested in the Company in
exchange for the Company's junior preferred stock. 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 June 30, 2002, the liquidation preference of the Junior Preferred
Stock including accrued dividends was $3.3 million.
At June 30, 2002, the Company was in compliance with all provisions of its
debt securities and preferred stock, with the exception of the Hudson RCI AB
Credit Facility noted above.
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.
The Company believes that cash generated from anticipated improved
operating performance, together with the net available proceeds from the
Refinancing and available borrowing capacity under the Revolving Credit
Facility, 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, asset sales and/or curtail operations. Neither Holding nor the
Company currently have 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 Holding and the Company.
As Holding is a holding company, its primary source of liquidity is
dividends or other distributions from the Company. Holding's only asset is its
investment in Hudson RCI. The ability of the Company to pay cash dividends or
make distributions to Holding when required is restricted by law and restricted
or prohibited under the terms of debt instruments, including the Credit
Facility. Since the Credit Agreement currently prohibits the Company from paying
cash dividends to Holding, Holding may not be able to pay cash dividends to the
Holders of Holding Preferred Stock commencing in April, 2003 as required by the
terms of the Holding Preferred Stock. In the event that Holding is unable to pay
cash dividends to the holders of Holding Preferred Stock for two consecutive
periods, the sole remedy of the holders is the ability to elect two members to
Holding's Board of Directors.
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 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
35
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.
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.
36
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 Holding's 10-K for the fiscal year ended December 31,
2001.
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1(1) Amended and restated Credit Agreement dated as of May
14, 2002 among Hudson RCI, Holding, the Lenders party
thereto, and Deutsche bank Trust Americas ("Deutsche
Bank"), as administrative agent and collateral agent
10.2(1) Form of Amended and Restated Security Agreement dated as
of May 14, 2002 between Hudson RCI and Deutsche Bank.
10.13(1) Form of Nonrecourse Pledge Agreement dated as of May 14,
2002 among the Pledgor and Deutsche Bank, as collateral
agent for the Lenders.
10.15(1) Tecate Facility Sub-Lease
10.16(1) Form of Supplement No. 1 dated as of May 14, 2002, to
the Pledge Agreement.
10.17(1) Form of Master Assignment and Exchange Agreement dated
as of May 14, 2002 by and among Holding, Hudson RCI, the
financial institutions listed on the signature pages
thereof, Deutsche Bank, as administrative agent for the
Lenders and FSEP IV.
10.18(1) Letter agreement dated August 17, 2001 between Hudson
RCI and Charles French.
10.19(1) Form of Stock Option Plan
10.20(1) Form of Stock Option Agreement
10.21(1) Receivables Purchase Agreement dated May 14, 2002 by and
between Hudson RCI and HRC Holding.
10.22 First Amendment to Pledge Agreement among Hudson RCI,
Holding, each subsidiary pledgor of Hudson RCI and
Collateral Agent, dated as of February 25, 2002.
10.23 Subsidiary Guaranty by and among Guarantors of Hudson
RCI and Collateral Agent, dated as of May 14, 2002.
10.24 Supplement No. 1 to Subsidiary Guaranty for Industrias
Hudson, S.A. de C.V.
10.25 Supplement No. 2 to Subsidiary Guranty for Hudson
Respiratory Care Tecate S. De R.L. de C.V.
10.26 Form of Stock Purchase Warrant, dated May 15, 2002,
issued by Hudson RCI to FSEP IV.
(b) Reports on Form 8-K
None.
- ----------
(1) Incorporated by reference to the exhibit designated
by the same number in the Form 10-K filed by the
Company for the fiscal year ended December 31,
2001.
38
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVER HOLDING CORP.,
a Delaware corporation
August 14, 2002 By: /s/ Patrick G. Yount
-------------------------------------
Patrick G. Yount
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Each of the undersigned hereby certifies in his capacity as an officer of
Holding that the Quarterly Report of Holding on Form 10-Q for the period ended
June 30, 2002 fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained in such
report fairly presents, in all material respects, the financial condition of
Holding at the end of such period and the results of operations of Holding for
such period.
RIVER HOLDING CORP.,
a Delaware corporation
August 14, 2002 By: /s/ Patrick G. Yount
-------------------------------------
Patrick G. Yount
Chief Financial Officer
/s/ Charles A. French
-------------------------------------
Charles A. French
President and Chief Executive Officer
39