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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 333-56135

RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)

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. 

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.

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

          As of March 14, 2003 the number of shares of Common Stock, $.01 par value, outstanding (the only class of common stock of the registrant outstanding) was 9,144,293.  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, 2002

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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. 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, 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 and home health care agencies.  Internationally, the Company sells its products to distributors that market to hospitals and other health care providers.  The Company’s products are sold to over 5,400 distributors and alternate site service providers throughout the United States and in more than 90 countries worldwide.  The Company has supplied the disposable respiratory care market for over 55 years and enjoys strong brand name recognition and leading market positions 

          The Company manufactures and markets approximately 1,650 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”), as large purchasing organizations play an increasingly important role in hospitals’ purchasing decisions.

          The Company maintains three manufacturing facilities and two distribution facilities in the United States, one manufacturing facility and assembly operation in Mexico, an assembly operation 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 four years, the Company has completed a number of strategic acquisitions in order to expand its product line and geographic penetration, most significantly with the July 1999 acquisition of Hudson RCI AB (formerly Louis Gibeck AB), a Swedish company that manufactures and markets medical devices under the Gibeck brand.

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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 worldwide market for disposable respiratory care and anesthesia products consists of the domestic hospital market, the alternate site market and the international market.  Respiratory care and anesthesia principally involve the delivery of oxygen or anesthesia 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 prices. 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, they have 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 from the clinician to the administrator.  As clinicians lose influence and purchasing agents, materials managers and upper level administrative management become more involved in the purchasing decision, a greater emphasis may be placed on price relative to product features and clinical benefits.

          As a result of cost containment, 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 alternate site market is also attributable to advances in technology that have

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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.

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

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Sales, Marketing and Distribution

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

          The Company has sales offices in Temecula, California, Sweden, Germany, France and the United Kingdom and two distribution facilities in the United States and one in Europe.  Additionally, the Company contracts with a third-party distribution facility in Charlotte, North Carolina.  The Company also employs sales representatives in Thailand, China, Mexico, Chile and Australia.  While a majority of the Company’s domestic hospital sales are made to 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 10 to “Item 8. Financial Statements and Supplementary Data” for information with respect to international sales.  The Company’s U.S. sales personnel currently call on approximately 5,900 hospitals and surgery centers, over 50 hospital distributors and over 3,000 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 been moving away from the clinician to include 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 AmeriNet Inc., Broadlane, Consorta, Med Assets, HealthTrust Purchasing Group and Novation LLC. 

          Health care providers have responded to pressures to reduce their costs by merging with other members of their industry.  The acquisition of a customer of the Company often results 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.

          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

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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 amortization of the heater cost under the leases. The net book value of heaters was $6.9 million and $6.0 million at December 31, 2002 and December 31, 2001, respectively.

          The Company utilizes a network of over 50 hospital distributors, as well as over 2,900 alternate site distributors and end-users, to reach its markets.  A number of these distributors carry competing product lines, but many are moving to select single supply sources for particular product groups.  The Company has been selected as the FOCUS preferred vendor of respiratory disposables for Owens & Minor Inc.  Such status gives preference to the shipping of the Company’s products versus competing product lines.  Owens & Minor Inc. is the Company’s largest distributor, accounting for approximately $32.7 million or approximately 19.1% of total fiscal 2002 net sales, $30.4 million or 19.4% of total fiscal 2001 net sales and $32.2 million or 20.2% of total fiscal 2000 net sales. The Company provides a price list to its distributors which details base acquisition prices.  Distributors receive orders from the 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 clinical product group with involvement of the distributor.  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 category or market/country within each market. Customers within Europe, the Middle East and Africa are serviced by the Company’s Sweden office.

Manufacturing and Assembly

          The Company operates three 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 houses 77 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 17 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’s Argyle, New York facility houses two extrusion lines, four blow molding machines and three assembly lines designed to produce the SHERIDAN^® brand of endotracheal tubes.  The SHERIDAN^® product line was acquired in October 2000 from Tyco Healthcare Group LP (“Tyco”).  The Company leases approximately fifty percent of the Argyle facility from Tyco under a three-year lease ending in October 2003. During 2001, the Company made the decision to relocate the Argyle production facility to Tecate, Mexico.  The move began in 2002 and is anticipated to be complete by March 2003.  The Company will close the Argyle facility when the transition to the Tecate facility is completed and as a result, the Company has elected to terminate its lease for the Argyle facility as of March 31, 2003.  The Tecate facility currently houses three extrusion lines and five blow molding machines, which were transferred from the Argyle facility.  Products historically manufactured in the Argyle manufacturing facility are manufactured in the Tecate facility.

          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 facility and the Ensenada facility 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.

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          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 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, Argyle, 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, Kuala Lumpur, Argyle and Arlington Heights facilities are certified as ISO 9002 compliant and the Temecula and Sweden facilities are certified as ISO 9001 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 2002 were tubing grade PVC, clear PVC, LDPE-EVA, polypropylene, pre-cut elastic, mask grade PVC, acrylic resin, hose-end grade PVC, manual resuscitator assembly, and breathing bag assembly.  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’s research and development department consists of fourteen people, including eight engineers.  The Company’s engineering efforts are split between developing new products and process improvements to its manufacturing operations.  The Company develops new products to expand its product line in anticipation of changes in demand.  Significant products introduced in the last five years include the line of heat-moisture exchangers; the SHERIDAN^® brand of endotracheal tubes, CONCHATHERM® IV heated humidification system, expansion of the Company’s ventilator circuit and nebulizer line, a demand oxygen regulator and CONCHATHERM^® 2000, a heated humidification system for the sleep apnea market.  The Company constantly works to reduce costs through continuous process improvements.  The Company incurred research and development expenses of approximately $2.6 million, $2.0 million and $2.4 million in fiscal 2002, 2001 and 2000, respectively.

Competition

          The U.S. medical supply industry is highly fragmented and characterized by intense competition.  The Company’s primary competitor in the 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.  Many of the products manufactured by the Company are available from several sources, and many of the Company’s customers tend to have relationships with several manufacturers.  The Company competes on the basis of brand name, product design and 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 file patent applications on concepts and processes developed by the Company’s personnel.  The Company has 27 patents in the United States.  Many of the U.S. patents have corresponding patents issued in Canada, Europe and various other countries.

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, and the Company cannot predict the extent to which future

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legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company.  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 Act (“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.  Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution.  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.  Delays in receipt of or failure to receive required approvals or clearances, the loss of previously received approvals or clearances, or failures to comply with existing or future regulatory requirements in the United States or in foreign countries could have a material adverse effect on the Company’s business.  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.  There can be no assurance that changes to current regulations or additional regulations imposed by the FDA will not have an adverse impact on the Company’s business and financial condition in the future. The FDA also has the authority to issue special controls for devices manufactured by the Company.  In the event that such special controls were issued, the Company’s products would be required to conform, which could result in significant additional expenditures for the Company.

          The Company is also subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, 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.  There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company’s business, financial condition or results of operations.  In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company.

Employees

          As of March 14, 2003, the Company employed approximately 1,939 employees, 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 Holding is not subject to the reporting requirements of the Securities and Exchange Act of 1934, Holding files periodic reports with the Securities and Exchange Commission (“SEC”).  You may read and copy the periodic reports that Holding has filed or may file in the future at the SEC’s public reference facility in Room 1024, 450 Fifth Street, N.W., 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 approximately 10 acres of land in Temecula, California on which its headquarters, one of three principal manufacturing centers totaling approximately 100,000 square feet are located.  Plastic and vinyl components and corrugated tubing are manufactured in Temecula and assembled into finished goods at a 77,000 square foot facility in Ensenada, Mexico.  The Company is currently in the process of expanding the Ensenada facility to 100,000 square feet and plans on completing that project in April 2003.  The Company owns the Ensenada facility and the underlying land is held in a 30-year trust that expires in August 2019.  The Company leases an 86,000 square foot manufacturing facility that manufactures prefilled sterile solutions in Arlington Heights, Illinois under a lease that expires in September 2005 with an option to extend an additional five years.  The Company leases a 73,000 square foot distribution warehouse in Elk Grove, Illinois under a lease that expires in May 2010.  The Company leases a 99,100 square foot distribution facility in Temecula, California under a lease that expires in September 2005.  The Company leases the 80,000 square foot warehouse facility adjacent to its headquarters is Temecula, California, which the Company sold in October 2002, under a lease that expires in October 2003. Upon the termination of this lease, the Company believes that it can consolidate operations previously conducted in that building into existing locations.  The Company leases sales and marketing offices in Stockholm, Sweden; Ashby de la Zouch, U.K.; Lyon, France; and Lohmar, Germany under leases that expire in October 2006, May 2006, April 2005 and April 2005, respectively.  The Company leases a 33,260 square foot facility in Kuala Lumpur, Malaysia, under a lease that expires in July 2004.  This facility primarily assembles finished products for the HME and filter product lines.   The Company also leases approximately fifty percent of an 80,218 square foot facility in Argyle, New York under a lease that expires in October 2003.  This facility manufacturers the SHERIDAN^® line of endotracheal tubes.  During 2001, the Company made a decision to relocate the endotracheal product line from its manufacturing plant in Argyle, New York to Tecate, Mexico by March 2003. The Company will close the Argyle facility when the transition to the Tecate facility is completed and as a result has elected to terminate the lease for the Argyle facility as of March 31, 2003.  The Company has acquired an approximately 99,000 square foot facility in Tecate, under a lease that expires in March 2005.  As of March 14, 2003, three of the five extrusion lines and five of the nine blow molding machines have been transferred to the Tecate facility.

          The Company believes that its current facilities are adequate for its present level of operations.

Item 3.   Legal Proceedings

          Holding or the Company are not a party to any material lawsuits or other proceedings.  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

None.

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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 14, 2003, all of the outstanding Common Stock of Holding is held by 18 holders of record.

          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.

Item 6.   Selected Financial Data

          The selected fiscal year end historical financial data has been derived from the audited financial statements of Holding and Hudson RCI.  The information contained in this table as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002 should be read in conjunction with “Management Discussion and Analysis and Results of Operations” and Hudson RCI’s and Holding’s audited consolidated financial statements and notes thereto included elsewhere in this report.

River Holding Corp. (consolidated)

continued on following page

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Hudson Respiratory Care Inc.

continued on following page

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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 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, 2002 the remaining value of the step-up in basis to fair value was approximately $5.9 million.

          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, Holding and the Company recorded an impairment charge of approximately $4.5 million and $4.6 million, respectively, in 2001.

          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 May 14, 2002, the Company amended and restated the Credit Facility to (i) waive all existing events of default; (ii) extend the final maturity of the term and revolving facilities under the Credit Facility to June 30, 2004;  (iii) amend existing term loan and acquisition facility amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend financial covenants to include only a limitation on capital expenditures and a minimum EBITDA test.  In connection with this amendment, the Company issued $12.0 million in senior unsecured notes to Holding’s majority stockholder in exchange for assumption of $12.0 million of bank term loans of the Company.  These senior unsecured notes bear interest at 12%, with interest and principal due upon maturity on December 31, 2004.  HRC Holding, Inc., a wholly owned subsidiary of the Company (“HRC Holding”), also issued $8.0 million in senior unsecured notes to Holding’s majority stockholder on similar terms to the notes issued by the Company to Holding’s majority stockholder.  HRC Holding used the proceeds from the issuance of the senior unsecured notes to buy intercompany receivables from the Company.  Proceeds received by the Company were used to pay the April 2002 interest due under the 9 1/8% Senior Subordinated Notes due 2008 issued by the Company (“Senior Subordinated Notes”), fund expenses associated with the Credit Facility and provide funds for ongoing general corporate purposes.

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          As additional consideration for assumption of the bank term loans and with issuance of the senior unsecured notes, the Company issued warrants to purchase 20 million shares of common stock at $1.00 per share to Holding’s majority stockholder.  The warrants will expire on May 15, 2009.

          In October 2002, the Company sold two ten-acre parcels and buildings in Temecula, California for cash consideration of approximately $7.5 million.  The Company will temporarily occupy one of the parcels for up to one year to efficiently transfer its operations out of the facility.  The Company believes that with planned decreases in inventory levels and the transfer of certain production to its Tecate, Mexico facility, the remaining space at its existing locations will be sufficient to support ongoing operations.  Holding and the Company recorded a gain of $2.9 million and $2.3 million, respectively, on this sale.

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

          In February 2003, a portion of the principal amount of the HRC senior unsecured notes issued in October 2002 were exchanged by the shareholders for an equal principal amount of the senior unsecured notes of the Company issued to Holding’s majority stockholder in May 2002.

Critical Accounting Policies

          Revenue Recognition: Holding recognizes revenue, net of reserves when product is shipped and title passes to customer, as the earnings process is substantially complete at that time.  Holding establishes reserves for sales returns for shipping errors and damaged goods and other allowances based on historical experience.  Holding sells its products to its distributors without right of return based on a listed price.  Distributors charge the service providers, or the distributor's end customers, a contract price (which is determined by their GPO 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. Reserves for rebates are recorded based on historical experience.  In the event no rebate is payable, the amount is reversed and recognized as revenue.  Management performs extensive analyses on a routine basis utilizing historical data to monitor rebate trends including, dealer and product specific rebate activity, percentage relationships between sales and rebates and rebate processing lags to ensure the adequacy of Holding’s reserve for rebatable amounts.

          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

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inventory.  Management periodically reviews the reserves for excess and obsolete inventory for adequacy and makes required adjustments, if necessary.

          Impairment of Goodwill and Other Intangibles: Holding periodically reviews the recoverability of the carrying value of goodwill, intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of these assets is determined by analysis of the asset’s fair value by comparing the forecasted future net cash flows from the operations to which the assets relate, based on management’s best estimates using the appropriate assumptions and projections at the time, to the carrying amount of the assets.  If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets.  In addition, goodwill is assessed for recoverability at an entity level, based on fair value determined by estimated future cash flows discounted at a rate commensurate with the risk involved.

Recent Accounting Pronouncements

          In June 2001, the FASB issued SFAS No. 141, “Business Combinations” (“SFAS 141”).  This Statement addresses financial accounting and reporting for business combinations and supersedes 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 charges for goodwill amortization are included in the 2002 financial statements. Holding completed its transitional impairment test of goodwill as of June 30, 2002, which indicated no impairment of existing goodwill. Net income and loss for the year ended December 31, 2001, excluding amortization of goodwill would have been (in thousands) $213,663 compared to $222,233.  The change in goodwill for fiscal year ended December 31, 2002 is the result of changes in foreign currency exchange rates.  Holding operates in two reporting units; North American operations (known as the guarantor) and international operations (known as the non-guarantor). These two reporting units are identical to the operating segments described in Note 10 of the “Notes to Consolidated Financial Statements.”

          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 disposal costs 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 disposal 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.

          Effective January 1, 2002, Holding 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 Holding’s financial statements.

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          In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (“SFAS 145”).  SFAS 145 updates and clarifies existing accounting pronouncements related to gains and losses from extinguishment of debt and requires that certain lease modifications be accounted for in the same manner as sale-leaseback transactions.  Holding will adopt the provisions of SFAS 145 as of January 1, 2003.  The adoption of this statement is not expected to have a material impact on Holding’s consolidated 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 EITF 94-3, a liability for an exit cost 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 apply the provisions of SFAS 146 for exit to all disposal activities that are initiated after December 31, 2002.

          In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure requirements for Guarantee, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34.  This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  This interpretation also incorporated, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”, which is being superseded.  Holding will apply the guidance provided in FIN 45 for any guarantees issued after December 31, 2002 and has adopted disclosure requirements for the current reporting period.

          In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (“SFAS 148”), an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”).  SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results.  The interim transition and annual disclosure requirements of SFAS 148 are effective for Holding’s fiscal year 2003.  Holding does not expect SFAS 148 to have a material impact on its consolidated results of operations or financial position.

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          In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51.  FIN 46 requires that a company consolidate variable interest entities if that company is subject to a majority of the risk of loss from the entity’s activities or the company receives a majority of the entity’s residual returns.  FIN 46 also requires certain disclosure about variable interest entities in which the company has a significant interest, regardless of whether consolidation is required.  Holding will adopt the provisions of FIN 46 as of January 1, 2003, while the disclosure provisions will become effective for the interim period ending March 31, 2003.  The adoption of this interpretation is not expected to have a material effect on Holding’s consolidated financial statements.

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Results of Operations

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

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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 Domestic Hospital division 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 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 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 13.4% 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 reassessed 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

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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 $69.8 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 taxes in 2001.  The income tax provision in 2002 relates primarily to foreign taxes.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

          Net sales on a consolidated basis were $158.1 million in 2001, a decrease of $1.2 million or 0.8% from 2000. On a consolidated basis, domestic hospital sales decreased by $4.5 million during 2001, or 4.9% as compared to 2000. The decrease in net sales is attributable to the following:  (i) reduced seasonal demand worldwide for certain products due to mild levels of flu-related illnesses and unusually warm weather in the fourth quarter of 2001; (ii) lower than normal demand from U.S. hospitals following the September 11, 2001 terrorist attacks in New York and Washington as a result of reduced hospital admissions and lower levels of elective surgeries; and (iii) a decision by the Company in 2001 not to offer purchasing incentives at year end to distributors.  Alternate site sales increased by $2.0 million or 8.8% due to market growth and lower prior year sales, which were the result of shipping difficulties encountered in 2000 relating to the implementation of the management information system. Original Equipment Manufacturing (“OEM”) sales decreased by $1.0 million or 16.3% during 2001, primarily due to changes in purchasing patterns from some of its OEM customers and their reduced demand as a result of the weak influenza season.  European sales increased slightly by $0.3 million or 1.5% as compared to 2000 as a result of incremental sales of the SHERIDAN^® product line (acquired in October 2000) as well as increased sales in certain European markets now served on a direct basis through the Company’s European distribution center located in the Netherlands.  Pacific Rim sales increased by $2.0 million or 21.5% as compared to 2000 as a result of incremental sales of the SHERIDAN^® product line and continued growth in the use of the Company’s products in this marketplace.

          The Company’s gross profit for 2001 was $49.1 million, a decrease of $25.3 million or 34.0% from 2000.  As a percentage of net sales, the Company’s gross profit for 2001 was 31.2% as compared to 46.7% for 2000.  This decrease was primarily due to the following: (i) sale of inventory recorded a higher net realizable value rather than manufacturing cost as a result of the SHERIDAN^® acquisition; (ii) increased shipping costs as a result of shipping difficulties caused by problems associated with the new management information system; (iii) an unfavorable mix variance caused by higher sales of products with lower gross margins; (iv) higher level of unabsorbed manufacturing costs resulting from lower than expected demand and decreased inventories and (v) charges in the fourth quarter of 2001 relating to an initiative put in place to discontinue and dispose of less profitable products.

          Selling expenses were $20.3 million for 2001, a $2.1 million or 11.4% increase over 2000.  This increase was primarily driven by additions to the sales and marketing departments to support recently acquired product lines, as well as an increase in fees associated with certain GPO’s.  As a percentage of sales, selling expenses were 12.9% in 2001 as compared to 11.5% in 2000. 

          Distribution expenses were $10.6 million in 2001, which represents a $0.5 million or 4.7% increase over 2000.  As a percentage of sales, distribution expenses were 6.7% in 2001 versus 6.3% in 2000.  This increase was a result of the establishment of the European distribution center in the first quarter of 2001.

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          General and administrative expenses were $23.9 million for 2001, an increase of $3.0 million or 14.3% over 2000.  This increase resulted primarily from increased staffing levels required to maintain acceptable customer service levels and operate the business with the new management information system, expenses related to the closure of the Atlanta distribution center, higher depreciation associated with the new management information system and other professional fees and charges related to implementing the new management information system.

          Amortization of goodwill was $3.5 million in 2001, a $0.2 million or 5.1% increase over 2000.  The increase was the result of a full year of amortization related to the SHERIDAN^® acquisition made during the fourth quarter of 2000.  As a result of significant losses in the fourth quarter, the Company reassessed future cash flows and determined that goodwill was not recoverable.  Accordingly, the Company recorded a goodwill impairment charge of approximately $33.1 million.

          Research and development expenses were $2.0 million in 2001 as compared to $2.4 million in 2000, the result of eliminating several positions in the Company’s facility operated by Hudson RCI AB, the Company’s Swedish subsidiary, during 2001.

          Interest expense was $20.5 million in 2001, a $0.5 million or 2.6% decrease from 2000.  The decrease was primarily due to a general decrease in interest rates.

          Income tax provision was $69.8 million for 2001 as compared to $3.2 million in 2000.  As a result of losses in the fourth quarter of 2001 and cumulative losses in recent years, the Company recorded a full valuation allowance of $68.9 million in 2001.

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

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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.

          During the fourth quarter of 2000, the Company embarked on a detailed review of the accounts receivable.  Upon completion of such analysis, the Company recorded an additional $2.3 million of provision for bad debts to recognize certain accounts receivable, which became uncollectible in the fourth quarter.

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Liquidity and Capital Resources

          Management undertook numerous actions during 2002 to improve the liquidity and improve the operating performance of Holding, including:  (i) eliminating a distribution warehouse; (ii) eliminating non-essential management personnel; (iii) reducing inventory levels; (iv) aggressive collection of accounts receivable and (v) other cost reduction measures, as management deemed necessary to fund the operations of Holding, meet anticipated capital expenditures and make required payments of principal and interest on its debt.  Based on these actions, management believes it will have sufficient sources of liquidity to meet its obligations for the remainder of 2003.  If Holding does not generate sufficient cash flow from operations in line with its forecasts, Holding would have to initiate measures to raise cash through asset sales, additional debt or equity issuances and/or curtail operations.  Holding currently has no commitments for additional debt or equity and no assurance can be given as to whether, or on what terms, additional debt or equity investments could be secured 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.

          The Company’s primary sources of liquidity are cash flow from operations and borrowings under its working capital bank facility and, historically, investments from and loans to its shareholders.  Cash provided by operations totaled $6.3 million, $5.6 million and $10.4 million in 2002, 2001 and 2000, respectively.  The increase from 2001 to 2002 is attributable to higher profitability offset in part by increases in inventories and accounts receivable.  The Company had operating working capital (deficit) of $8.0 million and $(0.2) million as of the end of fiscal 2002 and 2001, respectively.  Inventories were $22.6 million and $25.2 million as of the end of fiscal 2002 and 2001, respectively.  The Company significantly reduced inventory levels in 2002 and 2001, to levels more consistent with the current operating requirements of the Company, but over time, the Company expects its level of inventories to increase as the Company’s sales in the international market increase.  Accounts receivable, net of allowances, were $24.2 million and $19.2 million at the end of fiscal 2002 and 2001, respectively.  In 2002 and 2001, the Company recorded bad debt expense of $0.8 million and $2.8 million, respectively.  The average days sales in accounts receivable outstanding was approximately 46 days for 2002, compared to 55 days for 2001 and 65 days for 2000.  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 $0.4 million, $9.0 million and $26.9 million in 2002, 2001 and 2000, respectively and was used primarily to finance customary purchases of property, plant and equipment in 2002 and 2001 and the SHERIDAN^® endotracheal tube product line acquisition in 2000.  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, $9.0 million and $11.3 million 2002, 2001 and 2000, respectively. The higher levels of spending in 2000 relate to the acquisition and implementation of a new computer system. 

          Net cash used in financing was $5.5 million in 2002, reflecting net pay down of bank debt, which was effected as part of an amendment to the Company’s Credit Facility in May 2002 as described more fully in “Recent Developments”.  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 $100,000 in common stock.  Net cash used in financing was $16.2 million in 2000, reflecting proceeds borrowings on the Credit Facility, notes to affiliates and the issuance of common and preferred stock.

          As of December 31, 2002, the Company had outstanding $223.9 million of indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of $55.6 million under the Company’s Credit Facility, $39.3 million in notes payable to affiliates and $14.0 million in borrowings under the bank facility of Hudson RCI AB, its Swedish subsidiary.

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          The following is a summary of the Company’s consolidated contractual obligations as of December 31, 2002:

          The Credit Facility currently consists of a $40.0 million Term Loan Facility (of which as of December 31, 2002 $6.3 million remains and no further borrowings are available) 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 million (of which $9.3 is outstanding and $4.4 million is available for borrowing) (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, of which $1.3 million is currently utilized. The Term Loan Facility and Acquisition Facility mature on June 30, 2004 and require principal amortization of $9.3 million in 2003 and $37.0 million in 2004.  The Revolving Loan Facility matures on June 30, 2004.

          Total borrowings as of December 31, 2002 and 2001 were $49.3 million and $55.0 million under the Revolving Loan Facility and Acquisition Facility and $6.3 million and $22.0 million under the Term Loan Facility, respectively.

          As of December 31, 2002, the Company had $4.4 million available credit under the Revolving Credit Facility.  No additional borrowing was available under the Term Loan Facility at December 31, 2002.

          The interest rate under the Credit Facility is 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 as follows: