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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from              to             .

Commission file number 333-56135

RIVER HOLDING CORP.

(Exact name of registrant as specified in its charter)

(212) 758-2555

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

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   ¨    Not Applicable   x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ¨    Not Applicable  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of March 16, 2004 the number of shares of Common Stock, $.01 par value, outstanding (the only class of common stock of the registrant outstanding) was 9,069,293. The registrant’s Common Stock is not traded in a public market.

Aggregate market value of the registrant’s voting and nonvoting Common Stock: Not Applicable.

Documents Incorporated by Reference: None

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RIVER HOLDING CORP. AND SUBSIDIARIES

Fiscal Year Ended December 31, 2003

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PART I

Item 1. Business

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include without limitation the words “believes,” “anticipates,” “estimates,” “intends,” “expects,” and words of similar import. All statements other than statements of historical fact included under “Item 1. Business,” “Item 2. Properties,” “Item 3. Legal Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking information and may reflect certain judgments by management. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of River Holding Corp. and its subsidiaries or the respiratory care and anesthesia products industries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These potential risks, uncertainties and other factors include, but are not limited to, those identified in the “Risk Factors” section of this Form 10-K located at the end of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” River Holding Corp. disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

General

River Holding Corp. (“Holding” or “River”) conducts all of its business through its majority-owned subsidiary, Hudson Respiratory Care Inc. and its subsidiaries (collectively, “Hudson RCI” or the “Company”). Consequently, the following discussion relates primarily to the Company. The Company is a leading manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company offers one of the broadest respiratory care and anesthesia product lines in the industry, including such products as oxygen masks, humidification systems, incentive breathing exercisers, endotracheal tubes, small volume nebulizers, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers such as outpatient surgery centers, long-term care facilities, physician offices, home health care agencies and the pre-hospital market. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company’s products are sold to nearly 1,900 distributors and alternate site service providers and shipped to over 5,400 customer locations in more than 100 countries worldwide. The Company has supplied the disposable respiratory care market for over 58 years and is known for impeccable product quality, a strong brand name and leading market positions.

The Company manufactures and markets approximately 2,000 respiratory care and anesthesia products. The Company believes that its broad product offering represents a competitive advantage over suppliers with more limited product offerings, as health care providers seek to reduce medical supply costs and concentrate purchases among fewer vendors. The Company also benefits competitively in the United States from its extensive relationships with leading group purchasing organizations (“GPOs”) and Integrated Delivery Networks (“IDNs”), as these types of organizations play an increasingly important role in hospitals’ purchasing decisions.

The Company maintains two manufacturing facilities and three distribution facilities in the United States, one manufacturing facility and one assembly operation in Mexico, an assembly and distribution facility in Malaysia and sales and marketing offices in the United States, Sweden, the United Kingdom, France and Germany.

Hudson Oxygen Therapy Sales Company (“Hudson Oxygen”), Hudson RCI’s predecessor, was founded in 1945. In 1988, Hudson Oxygen formed Industrias Hudson, a subsidiary that oversees the Company’s assembly operation in Mexico. In 1989, Hudson Oxygen merged with Respiratory Care Inc. to form Hudson RCI. In April 1998, the Company consummated a recapitalization, pursuant to which it became a majority-owned subsidiary of River Holding Corp. (“Holding”). In the past five years, the Company has completed a number of strategic acquisitions in order to expand its product line and geographic penetration. Most significantly, the July 1999 acquisition of Hudson RCI AB (formerly Louis Gibeck AB), a Swedish company that manufactures and markets heat moisture exchangers (“HMEs”) and filters under the Gibeck brand name, the November 1999 acquisition of

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Tyco’s Voldyne^® incentive breathing exerciser product line and the October 2000 purchase of the SHERIDAN^® endotracheal tube product line from Tyco. Holding’s principal executive offices are located at 599 Lexington Avenue, 18^th floor, New York, New York 10022, and its telephone number is (212) 758-2555.

Industry Overview

The Company breaks down the worldwide market for disposable respiratory care and anesthesia products into the U.S. Hospital market, the U.S. Alternate Site market and the international market. In the respiratory and anesthesia clinical areas, oxygen or an anesthetic agent is delivered from a gas source, such as a mechanical ventilator or respirator, to the patient’s pulmonary system. The gas is typically delivered to the patient through specialized tubing connecting to a cannula, mask or endotracheal tube. In addition, it is often clinically desirable to humidify or medicate the gas prior to delivery to the patient. The market for respiratory care and anesthesia products, including disposable products, is expected to be positively impacted by demographic trends, both domestically and internationally. In the United States, changes in demographics, including an aging population, increased incidence and awareness of respiratory illnesses and heightened focus on cost-efficient treatment, have had a positive impact on the domestic respiratory care and anesthesia markets. There has been an increasing incidence of respiratory illnesses (such as asthma and emphysema), due in part to an increasingly susceptible aging population, environmental pollution, smoking-related illnesses and communicable diseases with significant respiratory impact, such as tuberculosis, HIV and influenza. The Company believes that the international respiratory care and anesthesia markets will experience many of the trends currently affecting domestic markets. In addition, many international markets have high incidences of communicable respiratory diseases and are becoming increasingly aware of the clinical and economic value of single-use, disposable products.

The market for respiratory care and anesthesia products is also affected by trends involving the health care market in general. In particular, the overall trend towards cost containment and infection control has increased the desirability of disposable products relative to reusable products, and has influenced pricing, product utilization, distribution channels, purchasing decisions and health care delivery methods.

Efforts to contain rising health care costs have increased the preference for disposable medical products that improve the productivity of health care professionals and reduce overall provider costs. Health care organizations are evaluating modes of treatment that are less labor and/or technology intensive as a means of decreasing the cost of care, which can often result in increased disposable usage. In particular, increased utilization of disposable products can decrease labor and other costs associated with sterilizing and reprocessing reusable products. In addition, the risks of transmission of infectious diseases such as HIV, hepatitis and tuberculosis, and related concerns about the occupational safety of health care professionals, have also contributed to an increased preference for disposable single-use medical products.

Cost containment has caused consolidation throughout the health care product supply channel, which has favored reliable manufacturers with large, high quality product offerings and competitive pricing. In an effort to contain costs, service providers have consolidated and affiliated with GPOs, which take advantage of group buying power to obtain lower supply costs. This, in turn, has led to consolidation among distributors, who seek to provide “one-stop shopping” for these large buying groups. Distributors have also sought to concentrate purchases among fewer vendors in an effort to reduce supply costs. Since selection as a contracted GPO provider and strong relationships with distributors are critical to many health care manufacturers, the Company has responded to these trends by providing a broad range of integrated products, combined with reliable delivery and strong after-sales support.

Cost containment has also caused a migration of the decision making function with respect to supply acquisition to include both the clinician and the administrator. As teams of clinicians, purchasing agents, materials managers and upper level administrative management become more involved in the purchasing decision, a greater emphasis will be placed on overall value (price/product features and clinical/patient benefits).

As a result of U.S. cost containment measures, health care is increasingly provided outside of traditional hospital settings through lower cost alternate health care sites, such as outpatient surgery centers, long-term care facilities, physician offices and patients’ homes. Growth of the U.S. Alternate Site market is also attributable to advances in technology that have facilitated the delivery of care outside of the hospital, an increased number of illnesses and diseases considered to be treatable outside of the hospital and increased acceptance by the medical community of, and patient preference for, non-hospital treatment.

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Products

The Company manufactures and markets products for use in respiratory care and anesthesia. The products for each market are similar and often overlap, as do the distribution channels.

The Company categorizes its products into four clinical product groups (i) oxygen therapy; (ii) airway management; (iii) humidification; and (iv) aerosol therapy. Although the Company’s sales efforts differ depending on the clinical use of its products, management focuses on geographic segments for strategic decision making.

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The Company’s percentage of sales by product group for the years ending December 31, 2003, 2002 and 2001 is as follows:

Sales, Marketing and Distribution

The Company’s main focus for operational management and strategic decisions is based on geographic segments. These are defined as the United States and European operations, each having their own, distinct management team.

The Company has sales offices in California, Sweden, Germany, France and the United Kingdom and two distribution facilities in the United States, one in Europe and one in Malaysia. Additionally, the Company contracts with a third-party distribution facility in Charlotte, North Carolina. The Company also employs sales managers in Thailand, China, Mexico, Chile and Australia. While a majority of the Company’s U.S. Hospital sales logistically moves through distributors, the Company’s marketing efforts are focused on the health care service provider. In the alternate site market, the Company both sells and markets directly to the service provider. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. See Note 9 to “Item 8. Financial Statements” for information with respect to international sales. The Company’s U.S. sales personnel currently call on approximately 5,300 hospitals and surgery centers, over 50 hospital distributors and over 1,100 alternate site customers. Due to consolidation and cost pressures among the Company’s customer base, the Company’s target call point at the health care provider has changed to include the clinician, a purchasing manager or corporate executive.

In the current U.S. Hospital market environment, GPO and Integrated Delivery Network (“IDN”) relationships are an essential part of access to the Company’s target markets and the Company has entered into preferred supplier arrangements with eight national GPOs. The Company is typically positioned as either a sole supplier of respiratory care disposables to the GPO, or as one of two suppliers. While these arrangements set forth pricing and terms for various levels of purchasing, they do not obligate either party to purchase or sell a specific amount of product. In addition, GPO affiliated hospitals often purchase products from other suppliers notwithstanding the existence of sole or dual source GPO arrangements. Further, these arrangements are terminable at any time, but in practice usually run for two to three years. The Company enjoys longer terms with three of its major GPOs, Novation LLC, Consorta and HealthTrust Purchasing Group. The Company’s most significant GPO relationships are with Novation LLC, HealthTrust Purchasing Group, AmeriNet Inc., Consorta, Broadlane and Med Assets.

Health care providers have responded to pressures to reduce their costs by merging with other facilities, which make up the care continuum. Changes to the Company’s customer base may result in the renegotiation of contracts, the granting of price concessions or in the loss of the customer. Alternatively, to the extent a customer of the Company grows through acquisition activity, the Company may benefit from increased sales to the larger entity.

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The Company markets its products primarily through consultative dialogue with health care providers, targeted print and web site advertising, trade shows, selective promotional arrangements with distributors and the Company’s heater lease program. To support sales of the entire line of humidification and ventilation products, the Company leases heaters to domestic customers without charge. The revenues from the sale of products used in connection with the operation of the heaters covers the depreciation of the heater cost.

The Company utilizes a network of over 50 hospital distributors, as well as over 1,100 alternate site distributors and end-users, to reach its markets. The Company has been selected as the FOCUS preferred vendor of respiratory disposables for Owens & Minor Inc. Such status provides some competitive advantage to the Company’s products versus competing product lines. Owens & Minor Inc. is the Company’s largest distributor, accounting for approximately $35.9 million or approximately 19.4% of total 2003 net sales, $32.7 million or approximately 19.1% of total 2002 net sales and $30.4 million or 19.4% of total 2001 net sales. The Company provides a price list to its distributors which details base acquisition prices. Distributors receive orders from the healthcare service providers and charge the contract pricing (which is determined by their GPO affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between base acquisition price and the specific contract price to the distributor. The Company’s international distributors outside of the European Union (“EU”), Middle East and Africa place their orders directly with dedicated international customer service representatives. Customer orders are shipped from one of two warehouse locations. Sales strategies and marketing plans are tailored to each specific country and clinical product group. Region and territory sales managers are responsible for the launch of products into their markets, including related support and training. The Company utilizes a network of approximately 120 international distributors, typically on an exclusive basis by product group or market/country. Customers within Europe, the Middle East and Africa are serviced by the Company’s Sweden office.

Manufacturing and Assembly

The Company operates two manufacturing facilities in the United States, one in Tecate, Mexico and assembly facilities in Ensenada, Mexico and Kuala Lumpur, Malaysia. While the Company believes that it is operating at a high utilization rate, existing facilities could support increased capacity with additional machinery and workers. The Company’s manufacturing facility in Temecula, California operates 71 injection molding machines. During the past several years, many of the machines have been replaced with more efficient models, which have increased capacity. Tubing is produced on 11 extrusion lines: six corrugated, four vinyl and one repellitizer/regrinder. The Temecula facility uses approximately 19 million pounds of over 30 different kinds of resin annually; the most prominent are PVC, polyethylene, polypropylene and polystyrene. Sterile prefilled humidification and nebulization products are manufactured using nine blow/fill/seal machines in the Company’s facility in Arlington Heights, Illinois. The Company has planned to purchase an additional three machines to expand the capacity of the Arlington Heights facility.

The Company has completed the relocation of the SHERIDAN^® endotracheal tubes product line from Argyle, New York to Tecate, Mexico. Furthermore, the Voldyne^® IBE product line was moved from Temecula, California to Tecate, Mexico. The Tecate facility currently operates four extrusion lines, four blow molding machines, seven assembly lines and three packaging machines for the endotracheal product line. In addition, Tecate has three IBE work cells that consist of blow molding, assembly and packaging machines.

The Company’s facility located in Ensenada, Mexico is primarily used for the assembly of certain products molded and/or extruded at the Temecula facility. Each of the Tecate and the Ensenada facilities is a maquiladora, and therefore there are minimal tariffs associated with the transport of products and components across the United States-Mexico border. The Company’s facility located in Kuala Lumpur, Malaysia assembles virtually all of the HME and filter products marketed by the Company. The components assembled by the Malaysian operation are generally molded by outside vendors in Malaysia.

The Company monitors the quality of its products at its manufacturing facilities by statistical sampling and visual and dimensional inspection. The Company also inspects incoming raw materials for inconsistencies, rating its

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vendors on quality and delivery time. The Company is routinely audited by the Food and Drug Administration (“FDA”) and has received no significant regulatory actions. The Company is in substantial compliance with the GMP/QSR regulations of the FDA and the United States and Mexico operations have qualified for an “advanced notification” program allowing the Company to be informed of FDA inspections in advance. The Company utilizes outside facilities for sterilization of products produced in Temecula, Arlington Heights, Kuala Lumpur, Tecate and Ensenada. Certain Arlington Heights products are manufactured in a sterile environment and are certified sterile as a result of the production process. The Ensenada, Tecate, Temecula, Sweden and Arlington Heights facilities are certified as ISO 9001 and ISO 13485 compliant and the Kuala Lumpur facility is certified as ISO 9002 compliant.

Suppliers and Raw Materials

The Company’s primary raw materials are various resins, which are formed into the Company’s products. The top 10 purchased products in 2003 were tubing grade PVC, LDPE-EVA, mask grade PVC, polystyrene, polypropylene, clear PVC, manual resuscitators, elastic, bag material and aerosol pocket chambers. The Company believes that it is able to purchase materials at a cost no higher than its competitors. The Company believes that sufficient availability exists for its raw materials, as they consist of mainly readily available plastic resins.

Research and Development

The Company believes product development and innovation are an essential part of its continued success. The Company focuses on developing new products, design enhancements to existing products and process improvements to its manufacturing operations. Manufacturing, sales, marketing and clinical expertise is incorporated into the research and development process. This expertise is expected to continue to be performed by internal staff for the foreseeable future, however external expertise is utilized as necessary.

The Company develops new products to expand its product line in anticipation of changes in demand. Significant advances to humidification products introduced include; CONCHATHERM^® IV Plus heated humidifier for respiratory support, CONCHATHERM^® 2000 heater humidifier for the sleep apnea market, and a first of its kind active humidification system, Humid-Heat^®, which incorporates the desired features of passive and active humidification for respiratory support. Complementing its new active humidifier, the Company recently introduced an enhanced line of heated wire ventilator circuits, a nebulizer adaptor (NebTee) to allow in-line nebulization of medication without contamination, the patient-ventilator system and a series of flexible adaptors and connectors for respiratory care and anesthesia.

As of December 31, 2003, the Company’s research and development department consisted of 20 people including engineers, scientists and technicians. The Company incurred research and development expenses of $3.2 million, $2.6 million and $2.0 million in 2003, 2002 and 2001, respectively.

Competition

The global medical supply industry is highly fragmented and characterized by intense competition. Many of the products manufactured by the Company are available from several sources and many of the Company’s customers have relationships with several manufacturers. Competition in the international market includes both local and global manufacturers. The Company’s primary competitor in the U.S. respiratory care sector is Cardinal Health (formerly, Allegiance Healthcare) and its primary competitors in the anesthesia sector include Tyco, Smiths Industries Medical Systems, Inc. (“SIMS”) and Vital Signs, Inc. The Company competes on the basis of brand name, product design, quality, breadth of product line, service and price.

Patents and Trademarks

The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does seek and obtain intellectual property rights on concepts, processes and trademarks when appropriate. The Company has 17 active utility patents and several design patents in the United States with the majority of the patents maintained in other countries. One patent expires in 2007, three

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expire in 2008 and the remaining patents expire between 2010 and 2019. The Company has over 60 well recognized and accepted registered trademarks in the United States, which are also recognized in other countries in which the Company manufactures, distributes or sells its products.

Government Regulation and Environmental Matters

The Company and its customers and suppliers are subject to extensive federal and state regulation in the United States, as well as regulation by foreign governments. Most of the Company’s products are subject to government regulation in the United States and other countries. In the United States, the Food, Drug and Cosmetic (“FD&C “) Act and other statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, marketing, advertising and promotion of such products. Under the FD&C Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the clearance or approval of Federal and foreign governmental agencies, including the FDA, prior to marketing, distributing and manufacturing certain of those products. The Company may also need to obtain FDA clearance before modifying marketed products or making new promotional claims. Foreign sales are subject to similar requirements.

The Company is required to comply with pertinent sections of the Code of Federal Regulations, 21CFR GMP/QSR, which set forth requirements for, among other things, the Company’s manufacturing process, design control and associated record keeping, including testing and sterility. Further, the Company’s plants and operations are subject to review and inspection by state, Federal and foreign governmental entities. The distribution of the Company’s products may also be subject to state regulation. The impact of FDA regulation on the Company has increased in recent years as the Company has increased its manufacturing operations. The Company’s suppliers, including contract sterilization facilities, are also subject to similar governmental requirements. The FDA also has the authority to issue special controls for devices manufactured by the Company.

The Company is also subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, business licenses, manufacturing practices, fire hazard control and the handling and disposal of hazardous or infectious materials or substances and emissions of air pollutants. The Company owns and leases properties, which are subject to environmental laws and regulations.

Employees

As of March 16, 2004, the Company employed 2,174 employees in the United States and abroad, substantially all of whom were full-time employees. None of the Company’s employees are represented by unions and the Company considers its employee relations to be good.

Where You Can Find More Information

Although the Company is not subject to the reporting requirements of the Securities and Exchange Act of 1934, the Company files periodic reports with the Securities and Exchange Commission (“SEC”). You may read and copy the periodic reports that the Company has filed or may file in the future at the SEC’s public reference facility at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a web site that contains periodic reports and other information regarding the registrants that file electronically with the SEC at http://www.sec.gov.

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Item 2. Properties

The Company owns or leases its manufacturing, office and warehouse facilities. The Company’s major facilities and their primary uses are summarized below:

The Company owns approximately 10 acres of land in Temecula, California on which its headquarters and a manufacturing center are located. The Company owns the Ensenada facility and the underlying land is held in a 30 year trust that expires in August 2019.

The Company believes that its present facilities are suitable and adequate for its current and presently anticipated future needs.

Item 3. Legal Proceedings

Holding or the Company are 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 or the Company’s existing lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of Holding or the Company.

Item 4. Submissions of Matters to a Vote of Security Holders

On October 2, 2003, the holders of a majority of the outstanding 11 ¹/2% Senior PIK Preferred Stock of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding (the “Holding Junior Preferred Stock”) and Common Stock, each class voting separately, by written consent, approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock through and including April 15, 2005. 372,608 shares of Holding Preferred Stock, 2,308 shares of Junior Preferred Stock and 8,121,791 shares of Common Stock consented to the amendment.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

There is no established public trading market for the Holding’s Common Stock. As of March 16, 2004, all of the outstanding Common Stock of Holding is held by 18 holders of record.

In April 2001, Holding issued an aggregate of 10,002 shares of its common stock to certain of its employees under Holding Stock Subscription Plan for an aggregate purchase price of $100,013. Holding relied on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering in issuing the common stock as the purchasers were sophisticated and employees of the Company and Holding.

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In August 2001, Holding issued an aggregate of 3,000 shares of its Holding Junior Preferred Stock to certain of its and the Company’s stockholders for an aggregate purchase price of $3,000,000. Holding relied on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering in issuing the Holding Junior Preferred Stock as the purchasers were sophisticated and shareholders of the Company or Holding.

No underwriters were employed with respect to any sales of securities of Holding in the transactions described above. No commissions or fees were paid with respect to such sales.

Holding has not paid cash dividends to its shareholders in the past two years, and does not intend to pay cash dividends on its Common Stock in the foreseeable future. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of restrictions on Holding’s ability to pay cash dividends.

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters– Equity Compensation Plan Information.”

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial and operating data as of and for each of the five fiscal years ended December 31, 2003, 2002, 2001, 2000 and 1999. Financial data as of and for each of the five years in the period ended December 31, 2003, were derived from the Company’s audited consolidated financial statements and notes thereto. All the data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Holding’s and the Company’s audited consolidated financial statements and notes thereto included elsewhere in this Report.

River Holding Corp. (consolidated)

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Hudson Respiratory Care Inc.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Because Holding is a holding company with no operations, the following discussion relates primarily to the Company. The following discussion of the Company’s consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K.

Holding’s acquisition of a majority of the Company’s stock was accounted for as a purchase, and as a result, additional expenses relating to amortization of goodwill of $5.0 million in 2001, and additional depreciation related to the allocation of purchase price at fair value to depreciable assets of $2.2 million in 2003, 2002 and 2001.

Goodwill resulting from the acquisition of the Company was recorded on the books of River and not pushed down to the Company, resulting in an additional $128.4 million of goodwill recorded at Holding. As a result of significant losses, both Holding and the Company recorded goodwill impairment in 2001 of $161.6 million and $33.1 million, respectively.

As a result of Holding’s acquisition of the Company, Holding recorded property, plant and equipment at fair value. As of December 31, 2003 the remaining value of the step-up in basis to fair value was approximately $3.7 million.

On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.

There are no other material differences between Holding consolidated and the Company.

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, (i) the buying patterns of the Company’s distributors, GPOs and other purchasers of the Company’s products, (ii) forecasts regarding the severity of the annual cold and flu season, (iii) announcements of new product introductions by the Company or its competitors, (iv) changes in the Company’s pricing of its products and the prices offered by the Company’s competitors, (v) rate of overhead absorption due to variability in production levels and (vi) variability in the number of shipping days in a given quarter.

Recent Developments

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. The Company recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

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As a condition to the extension of credit under the Revolving A Facility and the Term B Facility, on September 30, 2003 the holders of a majority of the outstanding principal amount of the Senior Subordinated Convertible Promissory Notes of the Company and Unsecured Senior Promissory Notes of the Company, shown as “Notes Payable to Affiliates” on the Company’s consolidated balance sheet, agreed to amend their respective notes to extend the maturity to March 31, 2008.

As a condition to the extension of credit under the Revolving A Facility and the Term B Facility, on October 2, 2003, the holders of a majority of the outstanding 11 ¹/2% Senior PIK Preferred Stock of the Company (“Senior Preferred Stock”), 12% Junior Convertible Preferred Stock of the Company (the “Junior Preferred Stock”) and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Determination for the Senior Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Senior Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding Holding Preferred Stock, Holding Junior Convertible Preferred Stock and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank credit facility with a new $19.2 million bank credit facility (the “HRCI AB Facility”). Proceeds from the new facility were used to repay borrowings under the previous arrangement (approximately $13.4 million) with the balance under the new facility available for working capital and general corporate purposes.

Critical Accounting Policies

Revenue Recognition: Holding recognizes revenue net of reserves when product is shipped and title passes to the customer as the earnings process is substantially complete at that time. Holding establishes reserves for sales returns for shipping errors or damaged goods, rebates and other allowances based on historical experience. Holding sells its products to its distributors based on a listed price. Distributors charge the service providers, or the distributor’s end customers, a contract price (which is determined by their group purchasing organization affiliation or individual contract price) plus a service margin. As is customary within the industry, Holding rebates the difference between the list price and the specific contract price to the distributor. Holding records revenue and receivables net of rebatable amounts, based on historical experience. In the event no rebate is payable, the rebate amount is reversed and recognized as revenue.

Accounts Receivable: Management performs various analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Management applies specified percentages to the accounts receivable aging to estimate the amount that will ultimately be uncollectible and, therefore, should be reserved. The percentages are increased as the accounts age.

Management establishes and monitors these percentages through extensive analyses of historical realization data, accounts receivable aging trends, other operating trends, and the extent of contracted business and business combinations. Also considered are relevant business conditions, including general economic factors as they relate to the Holding’s international customers. If indicated by such analyses, management may periodically adjust the uncollectible estimate and corresponding percentages. Further, focused reviews of certain large and/or problematic payors are performed to determine if additional reserves are required.

Inventory: Inventories are stated at the lower of cost (first-in, first-out (“FIFO”) method) or market. Management utilizes various analyses based on forecasts, historical sales and inventory levels to ensure that the current carrying value of inventory accurately reflects the current and expected requirements of Holding within a reasonable timeframe. Management also utilizes the various analyses to determine required reserves for excess and obsolete inventory and makes required adjustments, if necessary.

Impairment of Long-Lived Assets: Holding reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to fair value and an impairment loss will be recognized.

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Goodwill: Holding periodically reviews the recoverability of the carrying value of goodwill using the methodology prescribed in SFAS 142. Recoverability of goodwill is determined by comparing the fair value of the operating segments to the accounting value of the underlying net assets. If the fair value of the Company is determined to be less than the fair value of the net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the Company and the fair value of all other assets and liabilities.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2003, which note is incorporated herein by this reference.

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.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net sales were $184.6 million in 2003 as compared to $172.0 million in 2002, representing an increase of $12.6 million or 7.3%. This increase was driven by increased volumes in most markets including the U.S. Hospital market where sales increased by $4.7 million or 5.2%; sales into the Pacific Rim which increased by $1.4 million or 11.7%; and sales into the U.S. Alternate Site market which were up $1.1 million or 4.4%. European sales increased by $5.6 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar (an increase to reported sales of $5.1 million). Sales to the Company’s OEM customers grew by $0.3 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar (an increase to reported sales of $0.5 million) offset by a slight decrease of $0.2 million. These gains were partially offset by a decline in sales into Latin America of $0.4 million or 7.6%. Sales into other geographic areas were relatively unchanged representing a decrease of $0.1 million from the prior year.

The Company’s gross profit in 2003 was $82.0 million, an increase of $12.6 million or 18.1% from 2002. As a percentage of sales, gross margin in 2003 increased to 44.4% in 2003 from 40.4% in 2002. The increase in gross profit was primarily attributable to cost reductions of $6.6 million (3.5 margin points), higher overall sales volume primarily in the U.S. Hospital market ($2.3 million) and the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products ($3.7 million or 0.5 margin points). The $6.6 million improvement in gross profit was driven by: (i) cost reductions of $3.3 million for products sold in the U.S. Hospital and Pacific Rim markets (1.7 margin points); (ii) cost reductions and price increases of $1.1 million for products sold into Europe (0.8 margin points); (iii) cost reductions of $0.9 million on the Company’s OEM products (0.4 margin points); and (iv) reduced spending of $1.3 million associated with the completion of the move of the Argyle, New York facility to Tecate, Mexico (0.6 margin points).

Selling expenses were $21.0 million in 2003 as compared to $20.4 million in 2002, representing an increase of $0.6 million or 2.9%. The increase was due to unfavorable changes in exchange rates of $1.1 million, offset by net spending declines of $0.5 million. These declines were attributable to lower expenses associated with changes in Company’s GPO programs (down $0.9 million) and reduced expenses associated with supporting the Company’s dealer base (down $0.6 million), offset by increases in staffing (up $0.7 million) and travel expense (up $0.3 million) both required to support the growth in sales. As a percentage of net sales, selling expenses were 11.4% in 2003 as compared to 11.8% in 2002. While we expect to maintain competitive contract terms and continue to improve selling expenses as a percentage of net sales, declines in expenses associated with the Company’s GPO programs and dealer incentives may not continue.

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Distribution expenses were $10.2 million in 2003 as compared to $9.2 million in 2002, representing an increase of $1.0 million or 10.9%. The increase was primarily attributable to increases in expenses directly associated with greater sales volume including increased intracompany freight charges of $0.4 million, increased cost of shipping supplies of $0.4 million and increased European distribution expenses of $0.3 million. Distribution expense also increased due to unfavorable changes in exchange rates of $0.5 million. These increases were partially offset by decreased labor and overtime of $0.6 million in the domestic operations due to operating efficiencies. As a percentage of sales, distribution expense was 5.5% in 2003 and 5.3% in 2002.

General and administrative expenses, including the provision for bad debts, were $19.4 million in 2003 as compared to $18.5 million in 2002, representing an increase of $0.9 million or 4.5%. This increase was primarily the result of unfavorable changes in exchange rates of $0.7 million, increased incentive compensation of $0.9 million, increased staffing in Europe of $0.5 million, increased compensation and benefit expenses domestically of $0.4 million and increases in other expenses of $0.4 million. These increases were offset in part by the elimination of third party expenses associated with an amendment to the Company’s credit facility in May 2002 ($1.3 million) and reduced bad debt expense of $0.7 million. As a percentage of net sales, general and administrative expenses were 10.4% in 2003 as compared to 10.3% in 2002.

Research and development expenses were $3.2 million in 2003 as compared to $2.6 million in 2002, representing an increase of $0.6 million or 23.1%. This increase was primarily attributable to increases in personnel expense associated with increased product development activities of $0.4 million and unfavorable changes in exchange rates of $0.2 million. As a percentage of net sales, research and development expenses were 1.8% in 2003 as compared to 1.5% in 2002.

Interest and other expense was $24.9 million in 2003 as compared to $18.5 million in 2002, representing an increase of $6.4 million or 34.6%. The increase was primarily due to the treatment of preferred stock dividends as interest expense of $3.1 million during 2003 (due to adoption of SFAS 150) and the increase in interest expense associated with increased debt to affiliates of $1.4 million, offset by lower interest expense of $1.0 million associated with decreased bank borrowings. During the last quarter of 2003, the Company expensed the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003. During the fourth quarter of 2002, the Company recognized a gain of $2.3 million on the sale of facilities in Temecula, California.

Income tax provision was $1.7 million in 2003 as compared to $1.9 million in 2002 and related primarily to foreign income taxes.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net sales on a consolidated basis were $172.0 million in 2002, an increase of $13.9 million or 8.8% from 2001. Sales for the U.S. Hospital market increased by $6.6 million or 6.7%. This increase was primarily the result of a weaker than normal flu season in 2001, the decision not to offer dealers purchase incentives at the end of 2001 and market share growth in 2002 in the Company’s core disposable product categories during 2002. Sales to the U.S. Alternate Site market increased by $0.6 million or 2.0%, primarily the result of overall growth in the marketplace. Sales into Europe increased by $3.1 million or 15.5%, as the Company saw significant growth in sales to end users through its European subsidiaries as well as sales to dealers. Sales to the Pacific Rim increased by $0.7 million or 6.4% primarily due to increased demand for the Company’s SHERIDAN^® endotracheal tube product line. Sales to Latin America, Canada and the Company’s OEM customers were relatively flat, increasing by $0.5 million, $0.3 million and $0.3 million, respectively. Additionally, $1.8 million of the increase in sales is attributable to favorable foreign exchange rates.

The Company’s gross profit for 2002 was $69.4 million, an increase of $20.4 million or 41.6% from 2001. As a percentage of net sales, the Company’s gross margin for 2002 was 40.4% as compared to 31.0% for 2001, an increase of 9.4 margin points. The margin increase was partially due to events in 2001 that had a negative impact on the 2001 margin and did not reoccur in 2002 including: (i) charges in the fourth quarter of 2001 relating to an

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initiative put in place to discontinue and dispose of less profitable products (3.2 margin points); (ii) sale of inventory in 2001 recorded a higher net realizable value rather than manufacturing cost as a result of the SHERIDAN^® acquisition (1.3 margin points) and (iii) higher levels of unabsorbed manufacturing costs in 2001 resulting from lower than expected demand and decreased inventories (0.8 margin points). Additionally, the following items contributed to the improvement of the 2002 margin: (i) cost reduction programs implemented and recognized in 2002 (3.3 margin points); (ii) an improvement in shipping costs in 2002, resulting from specific cost reduction programs put into place (1.1 margin points); (iii) favorable foreign currency exchange rates (0.6 margin points) and (iv) other cost decreases (0.9 margin points). These increases in margin were offset by 2002 transition expenses relating to the relocation of the Argyle facility to Tecate (1.8 margin points).

Selling expenses were $20.4 million for 2002, unchanged from 2001. As a percentage of sales, selling expenses were 11.8% in 2002 as compared to 12.9% in 2001.

Distribution expenses were $9.2 million in 2002, representing a $1.4 million or 13.2% decrease from 2001. As a percentage of sales, distribution expenses were 5.3% in 2002 versus 6.7% in 2001. This decline is primarily the result of specific programs implemented by management designed to improve the efficiency of its distribution facilities, including reductions in labor and overtime, intracompany freight charges and rental expenses from the closure of the Atlanta distribution center in 2001.

General and administrative expenses, including provision for bad debts, were $18.5 million for 2002, a decrease of $8.2 million or 30.6% from 2001. This decrease resulted primarily from the effect of impairment charges recorded in 2001 and severance costs related to the 2001 closure of the Atlanta distribution center. Additionally, the Company made a decision in 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs by $2.2 million in 2001.

No amortization of goodwill was recorded in 2002, while $3.5 million was recorded in 2001. This is the result of the Company’s adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002. As a result of significant losses in 2001, the Company assessed future cash flows and determined that goodwill was not recoverable and recorded a goodwill impairment charge of approximately $33.1 million in 2001. No goodwill impairment charge was recorded in 2002.

As a result of the Company’s analysis of fixed assets in 2001, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, the Company recorded an impairment charge of approximately $4.5 million in 2001. No fixed asset impairment charge was recorded in 2002.

Research and development expenses were $2.6 million in 2002 as compared to $2.0 million in 2001. The increase is primarily the result of increased spending on product development in 2002 through the use of outside consultants.

Interest expense was $20.9 million in 2002; a $0.3 million or 1.6% increase from 2001. This increase was primarily due to increased notes to affiliates, which carry a higher interest rate than bank debt. This was partially offset by a general decrease in bank debt interest rates.

The income tax provision in 2002 was $1.9 million in 2002, as compared to $69.9 million in 2001. As a result of losses in 2001 and cumulative losses in recent years, the Company recorded a full valuation allowance of $68.9 million for deferred tax assets in 2001. The income tax provision in 2002 relates primarily to foreign taxes.

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2001 Fourth Quarter Charges

The following is a summary of the charges incurred by Holding and the Company in the fourth quarter of 2001 (amounts in thousands):

As a result of significant losses in the fourth quarter and cumulative losses in recent years, Holding and the Company have reevaluated their ability to realize the future benefit of its net deferred tax assets held in light of the historical operating losses. Accordingly, Holding and the Company recorded a full valuation allowance against its deferred tax assets of approximately $11.3 Million and $68.9 million, respectively.

As a result of significant losses in the fourth quarter, Holding and the Company have reassessed future cash flows and determined that goodwill was not recoverable. Accordingly, Holding and the Company recorded a goodwill impairment charge of approximately $161.6 million and $33.1 million, respectively.

As a result of the Company’s analysis of fixed assets in the fourth quarter, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, Holding and the Company recorded an impairment charge of approximately $4.7 million and $4.5 million, respectively.

As a result of an analysis of product lines during the fourth quarter of 2001, the Company concluded that it would no longer support a certain number of individual products, resulting in the related inventories of those products no longer having value. The Company recorded charges of $4.6 million related to the destruction of obsolete inventory resulting from this strategic decision.

The Company made a decision in the fourth quarter of 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs based on analysis of those aged customer receivables.

The Company recorded a charge of approximately $0.9 million related to the fourth quarter closure of its Atlanta distribution center. This charge primarily consisted of future rent commitments.

During fiscal 2001, the Company made a decision to relocate from its manufacturing operation in Argyle, New York to Tecate, Mexico. In addition, the Company made a decision to move certain product manufacturing from Temecula, California to Ensenada, Mexico. The Company recorded approximately $0.9 million in severance costs related to the relocations.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations and borrowings under its bank revolving facility and, historically, investments from and loans to its shareholders. Cash provided by operations totaled $18.6 million, $6.3 million and $5.6 million in 2003, 2002 and 2001, respectively. The increase from 2002 to 2003 is attributable to higher profitability offset in part by increases in inventories and decrease in accrued liabilities. The Company had operating working capital of $22.8 million and $13.1 million as of the end of 2003 and 2002, respectively. The increase in working capital was due to the refinancing of the bank revolving facility in 2003. Inventories were $23.8 million and $22.6 million as of the end of 2003 and 2002, respectively. Accounts receivable, net of allowances, were $25.1 million and $24.2 million at the end of 2003 and 2002, respectively. In 2003, 2002 and 2001, the Company recorded bad debt expense of $0.1 million, $0.8 million and $2.8 million, respectively. The average days sales in accounts receivable outstanding was approximately 49 days for 2003, compared to 46 days for

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2002 and 55 days for 2001. The Company 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 Company anticipates that the amount and aging of its accounts receivable will increase gradually over time as alternate site and international sales become a larger percentage of the Company’s total sales.

Net cash used in investing activities was $7.5 million $0.4 million and $9.0 million in 2003, 2002 and 2001, respectively and was used primarily to finance customary purchases of property, plant and equipment. In 2002, the Company sold certain land and buildings at the Temecula location, realizing a $2.3 million gain on the transaction that offset capital expenditures. Capital expenditures, consisting primarily of new manufacturing equipment purchases, computer systems purchases, production of heaters, and expansion of the Ensenada facility, totaled $7.5 million, $7.5 million and $9.0 million in 2003, 2002 and 2001, respectively.

Net cash used in financing was $9.5 million and $5.5 million in 2003 and 2002, respectively, reflecting net pay down of bank debt. Net cash provided by financing activity in 2001 was $7.3 million, reflecting net borrowings by the Company and the issuance of $3.0 million in junior preferred stock and $0.1 million in common stock.

As of December 31, 2003, the Company had outstanding $284.1 million of indebtedness, consisting of $115.0 million of 9 ¹/8% Subordinated Notes due 2008 (the “Senior Subordinated Notes”), mandatorily redeemable preferred stock of $56.5 million, borrowings of $50.3 million under the Company’s Revolving Facility, $9.7 million in interest payable to affiliates, $39.3 million in notes payable to affiliates and $13.3 million in borrowings under the bank facility of Hudson RCI AB, its Swedish subsidiary.

The following is a summary of the Company’s consolidated contractual obligations as of December 31, 2003:

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. The Company recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub-facilities and letters of credit. Sub-facilities under the Revolving A Facility consist of a $5.6 million five-year amortizing real estate loan, a $2.4 million three-year amortizing equipment loan, a $6.0 million amortizing 2.5-year general facility and a $5.0 million letter of credit sub-facility.

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor subsidiaries.

The Term B Facility consists of a $30.0 million non-amortizing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Term B facility is guaranteed jointly and severally by Holding and the guarantor subsidiaries.

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Required reductions in the Revolving Facility are equal to (amounts in thousands):

Interest rates under the Revolving A Facility are based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not the Company obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test. As of December 31, 2003, the Company was in compliance with all terms and conditions of the Revolving Facility.

As of March 16, 2004 borrowings available under the Revolving Facility consisted of $10.8 million.

The Senior Subordinated Notes bear interest at the rate of 9 ¹/8%, payable semiannually on each April 15 and October 15, and will require no principal repayments until maturity in 2008. The Senior Subordinated Notes are general unsecured obligations of the Company and contain covenants that place limitations on, among other things, (i) the ability of the Company, any subsidiary guarantors and other restricted subsidiaries to incur additional debt, (ii) the making of certain restricted payments including investments, (iii) the creation of certain liens, (iv) the issuance and sale of capital stock of restricted subsidiaries, (v) asset sales, (vi) payment restrictions affecting restricted subsidiaries, (vii) transactions with affiliates, (viii) the ability of the Company and any subsidiary guarantor to incur layered debt, (ix) the ability of Holding to engage in any business or activity other than those relating to ownership of capital stock of the Company and (x) certain mergers, consolidations and transfers of assets by or involving the Company. The Company is currently in compliance with the terms and provisions of the Senior Subordinated Notes.

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As of December 31, 2003, the Company and HRC had an aggregate of $39.3 million in notes payable to the majority shareholder of Holding’s, current shareholders of the Company and certain members of management. The following table summarizes these notes (amounts in thousands):

All warrants, including those issued in connection with HRC notes, are for the common stock of Hudson. The notes issued in April and August of 2001 have a conversion provision allowing the holder, at their demand, to exchange the notes for Company common stock at $10.00 per share.

The Notes issued by the Hudson and HRC are unsecured and rank pari passu to the Senior Subordinated Notes.

Accrued interest payable to affiliates totaled $9.8 million and $4.7 million at December 31, 2003 and 2002 respectively. Interest on the notes are not payable until the maturity date.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank Credit Facility with a new $19.2 million bank credit facility (the “HRCI AB Facility”). The total amount outstanding under this facility totaled $13.3 million as of December 31, 2003. The HRCI AB Facility, which is denominated in Swedish Krona, consists of a $9.6 million amortizing term facility, a bank overdraft facility of $6.9 million and revolving credit which provides for additional borrowings up to the total credit limit of $19.2 million, provided, however, that $6.9 million must always fall due within the agreement period of one year. Borrowings may be made in Swedish Krona or other foreign currencies as requested by Hudson AB. The HRCI AB Facility bears interest at a margin of the applicable base (determined by the bank) rate plus 1.65% (4.40 % at December 31, 2003). The HRCI AB Facility is valid for one year periods (initial expiration of September 30, 2004) and renews automatically, provided that either party can terminate with six months prior notice. The HRCI AB Facility is guaranteed by the non-guarantor subsidiaries. The HRCI AB Facility requires Hudson AB to provide periodic reporting of financial results including annual statements as well as to maintain certain convents including a minimum equity to assets ratio and minimum interest coverage ratio. As of March 16, 2004, Hudson AB was in compliance with all terms and conditions of the HRCI AB Facility and had $6.0 million available for borrowings.

In April 1998, the Company issued to Holding 300,000 shares of its Senior Preferred Stock with an aggregate liquidation preference of $30.0 million, which has terms and provisions materially similar to those of the Holding Preferred Stock described below. The Certificate of Determination of the Senior Preferred Stock was amended in October 2003 to change the date after which dividends must be paid in cash from April 15, 2004 to April 15, 2005. The amendment was approved by the required percentage of each class of shareholders required to vote thereon. The Certificate of Designation of the Holding Preferred Stock was amended in the same manner. In August 2001, the Company issued 3,000 shares of Junior Preferred Stock to Holding for cash consideration of $3.0 million. The Company’s Credit Facility prohibits the Company from paying cash dividends on its Senior Preferred Stock.

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The Holding Preferred Stock has an aggregate liquidation preference of $55.6 million at December 31, 2003 and bears interest at 11 ¹/2% per annum. Under the terms of the Holding Preferred Stock, at the election of Holding, dividends may be paid in kind on or before April 15, 2005 and thereafter must be paid in cash. The Company’s Revolving Facility prohibits Holding from paying cash dividends on its Holding Preferred Stock.

The Company believes that its sources of funding, consisting of projected positive cash flow from operating activities, the availability of additional funds under its Revolving Facility and HRCI AB Facility (totaling approximately $16.8 million at March 16, 2004), and its accumulated cash, will be sufficient to meet its current and presently anticipated needs for operating activities, investing activities, and financing activities (primarily consisting of scheduled payments on long-term debt).

RISK FACTORS

Restrictions on Ability to Pay Cash Dividends

As Holding is a holding company, its primary source of liquidity is dividends or other distributions from Hudson RCI. Holding’s only asset is its investment in Hudson RCI. The ability of Hudson RCI to pay cash dividends or make distributions to Holding when required is restricted by law or prohibited under the terms of Hudson RCI’s debt instruments, including the Revolving Facility. In addition, Holding is prohibited from paying cash dividends under the Revovling Facility until April 2005, at which time it must pay cash dividends to holders of the Holding Preferred Stock. No assurance can be made that Hudson RCI will be able to pay cash dividends to Holding when required on the Holding Preferred Stock and, thus, Holding may not be able to make payments of cash dividends to the holders of Holding Preferred Stock when required by the terms of the Holding Preferred Stock. In the event 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.

Substantial Leverage; Shareholders’ Deficit

Because Holding’s only operations are through the Company, there are no risks other than those for the Company. As such, the following discussion relates solely to the Company.

As of December 31, 2003, the Company had $284.1 million of outstanding indebtedness and a shareholders’ deficit of approximately $167.9 million. This level of indebtedness may reduce the flexibility of the Company to respond to changing business and economic conditions. In addition, subject to the restrictions in the Revolving Facility and the indenture governing the Senior Subordinated Notes (the “Indenture”), the Company may incur additional senior or other indebtedness from time to time to finance acquisitions or capital expenditures or for other general corporate purposes. See “—Liquidity and Capital Resources.” The Revolving Facility prohibits the payment of dividends by the Company to Holding to finance the payment of dividends on the Holding Preferred Stock.

The Company’s high degree of leverage may have significant consequences for the Company, including: (i) the ability of the Company to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes, if necessary, may be impaired; (ii) a substantial portion of the Company’s cash flow will be dedicated to the payment of interest and principal on its indebtedness and will not be available to the Company for its operations and future business opportunities; (iii) the covenants contained in the Indenture and the Credit Facility limit the Company’s ability to, among other things, borrow additional funds, dispose of assets or make investments and may affect the Company’s flexibility in planning for, and reacting to, changes in business conditions; (iv) indebtedness under the Credit Facility is at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; and (v) the Company’s high degree of leverage may make it more vulnerable to a downturn in its business or the economy generally or limit its ability to withstand competitive pressures. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such actions could be effected on a timely basis or on satisfactory terms or that these actions would enable the Company to continue to satisfy its capital requirements. The Company’s ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company’s future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. The terms of the Company’s indebtedness, including the Revolving Facility and the Indenture, may also prohibit the Company from taking such actions.

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Medical Cost Containment

In recent years, widespread efforts have been made in both the public and private sectors to control health care costs, including the prices of products such as those sold by the Company, in the United States and abroad. Cost containment measures have resulted in increased customer purchasing power, particularly through the increased presence of GPOs in the marketplace and increased consolidation of distributors. Health care organizations are evaluating ways in which costs can be reduced by decreasing the frequency with which a treatment, device or product is used. Cost containment has also caused a shift in the decision-making function with respect to supply acquisition from the clinician to the administrator, resulting in a greater emphasis being placed on price, as opposed to features and clinical benefits. The Company has encountered significant pricing pressure from customers and believes that it is likely that efforts by governmental and private payers to contain costs through managed care and other efforts and to reform health systems will continue and that such efforts may have an adverse effect on the pricing and demand for the Company’s products. There can be no assurance that current or future reform initiatives will not have a material adverse effect on the Company’s business, financial conditions or results of operations.

The Company’s products are sold principally to a variety of health care providers, including hospitals and alternate site providers, that receive reimbursement for the products and services they provide from various public and private third party payors, including Medicare, Medicaid and private insurance programs. As a result, while the Company does not receive payments directly from such third party payors, the demand for the Company’s products in any specific care setting is dependent in part on the reimbursement policies of the various payors in that setting. In order to be reimbursed, the products generally must be found to be reasonable and necessary for the treatment of medical conditions and must otherwise fall within the payor’s list of covered services. In light of increased controls on Medicare spending, there can be no assurance on the outcome of future coverage or payment decisions for any of the Company’s products by governmental or private payors. If providers, suppliers and other users of the Company’s products are unable to obtain sufficient reimbursement, a material adverse impact on the Company’s business, financial condition or operations may result.

The Company expects that the trend toward cost containment that has impacted the domestic market will also be experienced in international health care markets, impacting the Company’s growth in foreign countries, particularly where health care is socialized.

Industry Consolidation and Customer Concentration