HUDSON RESPIRATORY CARE INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number - 333-56097

HUDSON RESPIRATORY CARE INC.

(Exact name of registrant as specified in its charter)


California		95-1867330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

27711 Diaz Road, P.O. Box 9020 Temecula, California		92589
(Address of Principal Executive Offices)		(Zip Code)

(909) 676-5611

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ Not Applicable x

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

The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,654,293 on May 7, 2004.

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS


			Page
PART I	FINANCIAL INFORMATION

	Item 1.	Unaudited Condensed Consolidated Financial Statements:

		Unaudited Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003	1

		Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and March 31, 2003	3

		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and March 31, 2003	4

		Notes to Unaudited Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risks	16

	Item 4.	Controls and Procedures	16

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	16

	Item 2.	Changes in Securities	16

	Item 3.	Defaults Upon Senior Securities	16

	Item 4.	Submission of Matters to a Vote of Security Holders	16

	Item 5.	Other Information	16

	Item 6.	Exhibits and Reports on Form 8-K	16

SIGNATURE			17

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(amounts in thousands)


	March 31, 2004		December 31, 2003
CURRENT ASSETS:
Cash	$	6,299	$	6,682
Accounts receivable, less allowance for doubtful accounts of $1,217 and $1,156 at March 31, 2004 and December 31, 2003, respectively		27,319		25,107
Inventories, net		24,074		23,829
Other current assets		2,455		2,505

Total current assets		60,147		58,123
PROPERTY, PLANT AND EQUIPMENT, net		37,927		37,477
GOODWILL		39,822		41,410
DEFERRED FINANCING AND OTHER COSTS, net of accumulated amortization of $5,457 and $5,188 at March 31, 2004 and December 31, 2003, respectively		6,169		6,457
OTHER ASSETS		1,288		1,243

Total other assets		47,279		49,110

Total assets	$	145,353	$	144,710

See notes to condensed consolidated statements

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ DEFICIT

(amounts in thousands, except per share amounts)


	March 31, 2004			December 31, 2003
CURRENT LIABILITIES:
Current portion of bank notes payable	$	8,968		$	9,178
Accounts payable		10,652			9,175
Accrued liabilities		17,714			16,973

Total current liabilities		37,334			35,326
INTEREST PAYABLE TO AFFILIATES		11,161			9,760
NOTES PAYABLE TO AFFILIATES		39,317			39,317
BANK NOTES PAYABLE, net of current portion		50,176			54,377
SENIOR SUBORDINATED NOTES PAYABLE		115,000			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 556 shares issued and outstanding at March 31, 2004 and December 31, 2003; liquidation preference, $58,550		55,166			55,147
Accrued preferred stock dividend, payable in kind		2,932			1,333

		58,098			56,480
OTHER NON-CURRENT LIABILITIES		2,286			2,365

Total liabilities		313,372			312,625
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS’ DEFICIT:
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at March 31, 2004 and December 31, 2003		4,076			3,960
Common stock, $0.01 par value; 42,000 shares authorized; 10,654 issued and outstanding at March 31, 2004 and December 31, 2003		98,258			98,258
Additional paid in capital		881			881
Cumulative translation adjustment		5,509			6,848
Accumulated deficit		(276,743	)		(277,862	)

Total stockholders’ deficit		(168,019	)		(167,915	)

Total liabilities and stockholders’ deficit	$	145,353		$	144,710

See notes to condensed consolidated statements

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
	March 31, 2004			March 31, 2003
NET SALES	$	50,183		$	45,879
COST OF SALES		26,230			26,030

Gross Profit		23,953			19,849
OPERATING EXPENSES:
Distribution, selling, general & administrative		14,106			12,757
Research and development		859			640

		14,965			13,397

Income from operations		8,988			6,452
INTEREST EXPENSE AND OTHER, net		7,080			5,261

Net income before provision for income taxes		1,908			1,191
PROVISION FOR INCOME TAXES		674			681

Net income	$	1,234		$	510

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation (loss) gain		(1,339	)		721

Comprehensive (loss) income	$	(105	)	$	1,231

See notes to condensed consolidated statements

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)


	Three Months Ended
	March 31, 2004			March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,234		$	510
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization		2,481			2,405
Amortization of deferred financing costs		269			464
Accrued mandatorily redeemable preferred stock dividends, payable in-kind		1,618			—
Interest payable to affiliates		1,402			1,064
Provision for bad debts		88			197
Loss (gain) on disposal of property, plant and equipment		11			(6	)
Changes in operating assets and liabilities:
Accounts receivable		(2,618	)		342
Inventories		(422	)		1,413
Other current assets		13			(799	)
Other assets		(46	)		(19	)
Accounts payable		1,543			(625	)
Accrued liabilities		885			2,047
Other non-current liabilities		18			12

Net cash provided by operating activities		6,476			7,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(3,024	)		(1,723	)
Proceeds from sales of property, plant and equipment		2			17

Net cash used in investing activities		(3,022	)		(1,706	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank notes payable		(4,317	)		(7,734	)
Proceeds from bank borrowings		408			1,582
Payment of capital lease obligations		(14	)		(13	)

Net cash used in financing activities		(3,923	)		(6,165	)
Effect of exchange rate changes on cash		86			(292	)

NET DECREASE IN CASH		(383	)		(1,158	)
CASH, beginning of period		6,682			6,425

CASH, end of period	$	6,299		$	5,267

See notes to condensed consolidated statements


	Three Months Ended
	March 31, 2004		March 31, 2003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	932	$	1,076

Income taxes (primarily foreign)	$	365	$	1,138

NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind	$	116	$	1,533

See notes to condensed consolidated statements

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Financial Statements. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at March 31, 2004, the results of operations for the three month periods ended March 31, 2004 and March 31, 2003 and statements of cash flows for the three month periods ended March 31, 2004 and March 31, 2003 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 2003 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the results to be achieved for a full year.

Significant Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

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

Stock Based Compensation

The Company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure provisions of Statement Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” No stock-based employee compensation expense is recognized in net income for any of the periods presented. Had compensation expense for the Company’s stock-based compensation awards been recognized based on the fair value recognition provisions of SFAS 123, the Company’s net income would have been adjusted to the pro forma amounts indicated below (amounts in thousands):


	Three Months Ended March 31,
	2004		2003
Net income, as reported	$	1,234	$	510
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards		33		3

Pro forma net income	$	1,201	$	507

Under the fair-value method, compensation expense is measured at the grant date based on the fair value of the award using an option-pricing model. Compensation expense is recognized on a straight-line basis over the

vesting period. The fair value of employee stock options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.00% and 2.83%, respectively; dividend yield of 0% for all years; expected lives of three years and four years, respectively, and volatility of 50% for both years.

Reclassifications

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

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


	March 31, 2004			December 31, 2003
Raw materials	$	4,587		$	4,558
Work-in-process		5,113			4,955
Finished goods		14,374			14,316

	$	24,074	<