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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number - 333-56135
____________________
RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
____________________
Delaware 95-4674065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
599 Lexington Ave, 18/th/ Floor 10022
New York, New York (Zip Code)
(Address of Principal Executive Offices)
(212) 758-2555
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] 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 9,144,293 on June 28,
2002.
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RIVER HOLDING CORP. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements of River Holding Corp.:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 ...................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and March 31, 2001 ................................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and March 31, 2001 ................................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Unaudited Condensed Consolidated Financial Statements of Hudson Respiratory Care Inc.:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 .................................. ................................... 12
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and March 31, 2001 ................................................ 14
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and March 31, 2001 ................................................ 15
Notes to Unaudited Condensed Consolidated Financial Statements ......................... 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risks ............................ 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 32
Item 2. Changes in Securities .................................................................. 32
Item 3. Defaults Upon Senior Securities ........................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders .................................... 32
Item 5. Other Information ...................................................................... 32
Item 6. Exhibits and Reports on Form 8-K ....................................................... 32
SIGNATURE ..................................................................................................... 33
i
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(amounts in thousands)
March 31, December 31,
2002 2001
----------- -----------
CURRENT ASSETS:
Cash .................................................................. $ 6,230 $ 7,085
Accounts receivable, less allowance for doubtful accounts of
$1,951 and $1,801 at March 31, 2002 and December 31, 2001,
respectively ........................................................ 21,399 19,287
Inventories ........................................................... 23,757 25,218
Other current assets .................................................. 2,060 1,265
----------- -----------
Total current assets ............................................... 53,446 52,855
PROPERTY, PLANT AND EQUIPMENT, net ......................................... 51,963 53,613
OTHER ASSETS:
Goodwill, net of accumulated amortization of $18,357 .................. 29,141 28,498
Deferred financing costs, net of accumulated amortization of
$6,417 and $5,984 at March 31, 2002 and December 31, 2001,
respectively ........................................................ 7,880 8,316
Other assets .......................................................... 949 823
----------- -----------
Total other assets ................................................. 37,970 37,637
Total assets .................................................. $ 143,379 $ 144,105
=========== ===========
See notes to unaudited consolidated financial statements
1
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(amounts in thousands, except per share amounts)
March 31, December 31,
2002 2001
----------- ------------
CURRENT LIABILITIES:
Notes payable to bank ................................................. $ 21,306 $ 20,680
Accounts payable ...................................................... 11,149 14,943
Accrued liabilities ................................................... 21,344 17,520
----------- -----------
Total current liabilities ........................................... 53,799 53,143
NOTE PAYABLE TO AFFILIATE, net of current portion ...................... 17,217 17,217
SENIOR SUBORDINATED NOTES PAYABLE ...................................... 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion .......................... 71,450 73,250
OTHER NON-CURRENT LIABILITIES .......................................... 1,370 1,187
----------- -----------
Total liabilities ................................................... 258,836 259,797
----------- -----------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
Authorized- 1,800 shares; issued and outstanding- 445 shares;
liquidation preference: $44,474 .................................. 43,880 43,847
Accrued preferred stock dividend, payable in kind ..................... 2,421 1,142
----------- -----------
46,301 44,989
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized- 15,000 shares, issued and Outstanding- 9,144 .......... 97,848 97,848
Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares
outstanding 3,228 3,137
Cumulative translation adjustment ..................................... 179 (234)
Accumulated deficit ................................................... (263,013) (261,432)
----------- -----------
Total stockholders' deficit ......................................... (161,758) (160,681)
----------- -----------
Total liabilities, mandatorily-redeemable preferred stock
and stockholders' deficit ................................ $ 143,379 $ 144,105
=========== ===========
See notes to unaudited consolidated financial statements
2
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
Three Months Ended
-----------------------------
March 31, March 31,
2002 2001
----------- -----------
NET SALES ................................................................ $ 42,985 $ 37,805
COST OF SALES ............................................................ 25,490 28,595
----------- -----------
Gross Profit ......................................................... 17,495 9,210
OPERATING EXPENSES:
Selling, distribution, general & administrative ....................... 11,822 12,521
Amortization of goodwill .............................................. -- 3,236
Research and development .............................................. 597 464
----------- -----------
12,419 16,221
----------- -----------
Income (loss) from operations ...................................... 5,076 (7,011)
----------- -----------
INTEREST EXPENSE AND OTHER ............................................... 4,863 7,499
----------- -----------
Net income (loss) before provision for income taxes ................ 213 (14,510)
----------- -----------
PROVISION FOR INCOME TAXES ............................................... 424 188
----------- -----------
Net loss ........................................................... $ (211) $ (14,698)
=========== ===========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain .................................... 413 728
----------- -----------
Comprehensive income (loss) ........................................ $ 202 $ (13,970)
=========== ===========
See notes to unaudited consolidated financial statements
3
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in thousands)
Three Months Ended
----------------------------
March 31, March 31,
2002 2001
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (211) $ (14,698)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization ...................................... 2,954 5,877
Amortization of deferred financing costs ........................... 436 235
Provision for bad debts ............................................ 150 --
Loss on disposal of equipment ...................................... 632 --
Change in operating assets and liabilities:
Accounts receivable ................................................ (2,139) 936
Inventories ........................................................ 1,599 8,088
Other current assets ............................................... (263) (1,300)
Other assets ....................................................... (192) (2,307)
Accounts payable ................................................... (4,137) (6,049)
Accrued liabilities ................................................ 2,914 5,382
Other non-current liabilities ...................................... 819 1,009
----------- -----------
Net cash provided by (used in) operating activities ............. 2,562 (2,827)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............................. (1,911) (1,139)
Retirements of intangible assets ........................................ -- 1,957
----------- -----------
Net cash (used in) provided by investing activities ............. (1,911) 818
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank ...................................... (1,546) (1,500)
Proceeds from bank borrowings ........................................... -- 7,736
Additions of deferred financing costs ................................... -- 106
----------- -----------
Net cash (used in) provided by financing activities ............. (1,546) 6,342
Effect of exchange rate changes on cash ................................. 40 729
----------- -----------
NET (DECREASE) INCREASE IN CASH ............................................ (855) 5,062
----------- -----------
CASH, beginning of period .................................................. 7,085 3,530
----------- -----------
CASH, end of period ........................................................ $ 6,230 $ 8,592
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 1,542 $ 2,282
=========== ===========
Income taxes ......................................................... $ 1,580 $ 28
=========== ===========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind .......................... $ 1,267 $ 1,163
=========== ===========
See notes to unaudited consolidated financial statements
4
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
1. Financial Statements. The condensed consolidated financial statements
included herein have been prepared by Holding, without audit, and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position at March 31, 2002, and the results of
operations and cash flows for the three-month periods ended March 31, 2002 and
March 31, 2001 pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although Holding believes that the disclosures in such financial
statements are adequate to make the information presented not misleading, the
accompanying unaudited condensed, consolidated financial statements should be
read in conjunction with the Holding's 2001 audited financial statements and the
notes thereto included in its Form 10-K filed with the SEC. The results of
operations for the three-month period ended March 31, 2002 are not necessarily
indicative of the results to be achieved for a full year.
Recent Accounting Pronouncements
Effective January 1, 2001, Holding adopted Statement of Financial
Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS No.
133, as amended, establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The adoption of this
new standard did not have a material impact on Holding's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes Accounting Principals Board ("APB") Opinion
No. 16, "Business Combinations," and FASB Statement 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.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards 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 will no longer be amortized but will be assessed
at least annually for impairment using a fair value methodology. Holding stopped
amortizing goodwill, effective January 1, 2002, and as a result an equivalent
charge for goodwill amortization will not be made in 2002. Holding is still in
the process of completing its transitional impairment test plan, which is
expected to be completed by the end of the second quarter of 2002. Pro forma net
loss for the three months ended March 31, 2001, excluding amortization of $3.2
million for that period would have been $11,462, compared to $14,698 as
reported. The slight change in goodwill for the three months ended March 31,
2002 stems from changes in foreign currency exchange rates.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is acreted to its present value each period, and
the capitalized cost is depreciated over the useful live 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
5
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 consolidated
financial statements.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of a Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 did not
have a material impact on Holding's consolidated financial statements.
2. Inventories. Inventories consisted of the following (amounts in thousands):
March 31, December 31,
2002 2001
------------- ------------
Raw materials .......................... $ 6,275 $ 7,785
Work-in-process ........................ 6,424 5,476
Finished goods ......................... 13,212 14,481
------------- ------------
25,911 27,250
Provision for obsolescence ............. (2,154) (2,032)
------------- ------------
$ 23,757 $ 25,218
============= ============
6
3. Subsidiaries Guaranteeing Debt and Segment Data. Holding is the majority
owner of certain subsidiaries which do not guarantee the Company's senior
subordinated notes and certain bank debt. The following tables disclose required
consolidating financial information for guarantor, including the Company, and
non-guarantor subsidiaries (amounts in thousands):
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
As of March 31, 2002
------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
--------- --------- ------------ -----------
CURRENT ASSETS:
Cash .............................................. $ 4,084 $ 2,146 $ -- $ 6,230
Accounts receivable ............................... 15,688 5,711 -- 21,399
Receivables from non-guarantor .................... 7,831 -- (7,831) --
Inventories ....................................... 18,730 7,025 (1,998) 23,757
Other current assets .............................. 2,093 11,999 (12,032) 2,060
--------- --------- ------------ -----------
Total current assets ........................... 48,426 26,881 (21,861) 53,446
--------- --------- ------------ -----------
PROPERTY, PLANT
AND EQUIPMENT, NET ................................ 50,833 1,130 -- 51,963
--------- --------- ------------ -----------
OTHER ASSETS:
Goodwill, net ..................................... -- 29,141 -- 29,141
Deferred financing costs, net ..................... 7,880 -- -- 7,880
Investment in non-guarantor subsidiaries .......... 28,623 -- (28,623) --
Other ............................................. 725 224 -- 949
--------- --------- ------------ -----------
Total other assets ............................. 37,228 29,365 (28,623) 37,970
--------- --------- ------------ -----------
$ 136,487 $ 57,376 $ (50,484) $ 143,379
========= ========= ============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank ............................. $ 5,000 $ 16,306 $ -- $ 21,306
Accounts payable .................................. 9,617 1,532 -- 11,149
Payables to guarantor ............................. -- 7,831 (7,831) --
Accrued liabilities ............................... 18,081 12,501 (9,238) 21,344
--------- --------- ------------ -----------
Total current liabilities ...................... 32,698 38,170 (17,069) 53,799
--------- --------- ------------ -----------
OTHER LIABILITIES:
NOTE PAYABLE TO AFFILIATE ......................... 14,951 2,266 -- 17,217
NOTES PAYABLE TO BANK, net of current portion ..... 71,450 -- -- 71,450
SENIOR SUBORDINATED NOTES PAYABLE ................. 115,000 -- -- 115,000
OTHER NON-CURRENT LIABILITIES ..................... 185 1,185 -- 1,370
--------- --------- ------------ -----------
Total liabilities .............................. 234,284 41,621 (17,069) 258,836
--------- --------- ------------ -----------
Mandatorily-redeemable preferred stock ............... 46,301 -- -- 46,301
--------- --------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT) ....................... (144,098) 15,755 (33,415) (161,758)
--------- --------- ------------ -----------
$ 136,487 $ 57,376 $ (50,484) $ 143,379
========= ========= ============ ===========
7
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
As of December 31, 2001
------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
--------- --------- ------------ -----------
CURRENT ASSETS:
Cash .............................................. $ 4,713 $ 2,372 $ -- $ 7,085
Accounts receivable ............................... 13,989 5,298 -- 19,287
Receivables from non-guarantor .................... 6,515 -- (6,515) --
Inventories ....................................... 20,377 7,030 (2,189) 25,218
Other current assets .............................. 2,758 13,553 (15,046) 1,265
--------- --------- ------------ -----------
Total current assets ........................... 48,352 28,253 (23,750) 52,855
--------- --------- ------------ -----------
PROPERTY, PLANT
AND EQUIPMENT, NET ................................ 52,470 1,143 -- 53,613
--------- --------- ------------ -----------
OTHER ASSETS:
Intangible assets, net ............................ -- 28,498 -- 28,498
Deferred financing costs, net ..................... 8,316 -- -- 8,316
Investment in non-guarantor subsidiaries .......... 28,623 -- (28,623) --
Other ............................................. 599 224 -- 823
--------- --------- ------------ -----------
Total other assets ............................. 37,538 28,722 (28,623) 37,637
--------- --------- ------------ -----------
..................................................... $ 138,360 $ 58,118 $ (52,373) $ 144,105
========= ========= ============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank ............................. $ 3,750 $ 16,930 $ -- $ 20,680
Accounts payable .................................. 13,761 1,182 -- 14,943
Payables to guarantor ............................. -- 6,515 (6,515) --
Accrued liabilities ............................... 14,584 15,356 (12,420) 17,520
--------- --------- ------------ -----------
Total current liabilities ...................... 32,095 39,983 (18,935) 53,143
--------- --------- ------------ -----------
OTHER LIABILITIES:
NOTE PAYABLE TO AFFILIATE ......................... 14,951 2,266 -- 17,217
NOTES PAYABLE TO BANK, net of current portion ..... 73,250 -- -- 73,250
SENIOR SUBORDINATED NOTES PAYABLE ................. 115,000 -- -- 115,000
OTHER NON-CURRENT LIABILITIES ..................... 146 1,041 -- 1,187
--------- --------- ------------ -----------
Total liabilities .............................. 235,442 43,290 (18,935) 259,797
--------- --------- ------------ -----------
Mandatorily-redeemable preferred stock ............... 44,989 -- -- 44,989
--------- --------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT) ...................... (142,071) 14,828 (33,438) (160,681)
--------- --------- ------------ -----------
$ 138,360 $ 58,118 $ (52,373) $ 144,105
========= ========= ============ ===========
8
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2002
-------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
----------- --------- ------------ ----------
NET SALES ................................................ $ 37,863 $ 8,554 $ (3,432) $ 42,985
COST OF SALES ............................................ 24,276 4,722 (3,508) 25,490
----------- --------- ---------- ----------
Gross Profit .......................................... 13,587 3,832 76 17,495
----------- --------- ---------- ----------
OPERATING EXPENSES:
Selling, distribution, general and administrative ..... 9,502 2,320 -- 11,822
Goodwill amortization ................................. -- -- -- --
Research and development .............................. 335 262 -- 597
----------- --------- ---------- ----------
9,837 2,582 -- 12,419
----------- --------- ---------- ----------
Income from operations ................................ 3,750 1,250 76 5,076
----------- --------- ---------- ----------
OTHER INCOME AND (EXPENSES):
Interest expense ...................................... 4,458 308 -- 4,766
Other, net ............................................ 76 4 17 97
----------- --------- ---------- ----------
4,534 312 17 4,863
----------- --------- ---------- ----------
(Loss) income before provision for income taxes ....... (784) 938 59 213
----------- --------- ---------- ----------
PROVISION FOR INCOME TAXES ............................... -- 424 -- 424
----------- --------- ---------- ----------
Net Loss ................................................. $ (784) $ 514 $ 59 $ (211)
=========== ========= ========== ==========
Three Months Ended March 31, 2001
-------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
----------- --------- ------------ ----------
NET SALES ................................................ $ 35,192 $ 5,976 $ (3,363) $ 37,805
COST OF SALES ............................................ 27,965 3,201 (2,571) 28,595
----------- --------- ---------- ----------
Gross Profit .......................................... 7,227 2,775 (792) 9,210
----------- --------- ---------- ----------
OPERATING EXPENSES:
Selling, distribution, general and administrative ..... 11,088 1,433 -- 12,521
Goodwill amortization ................................. 1,655 1,581 -- 3,236
Research and development .............................. 215 249 -- 464
----------- --------- ---------- ----------
12,958 3,263 -- 16,221
----------- --------- ---------- ----------
Loss from operations .................................. (5,731) (488) (792) (7,011)
----------- --------- ---------- ----------
OTHER INCOME AND (EXPENSES):
Interest and other expense ............................ 4,471 669 -- 5,140
Other, net ............................................ 165 1,081 1,113 2,359
----------- --------- ---------- ----------
4,636 1,750 1,113 7,499
----------- --------- ---------- ----------
Loss before provision for income taxes ................ (10,367) (2,238) (1,905) (14,510)
----------- --------- ---------- ----------
PROVISION FOR INCOME TAXES ............................... -- 188 -- 188
----------- --------- ---------- ----------
Net Loss ................................................. $ (10,367) $ (2,426) $ (1,905) $ (14,698)
=========== ========= ========== ==========
9
RIVER HOLDING CORP. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002
-------------------------------------
Non-
Guarantor Guarantor Total
--------- --------- ---------
Net cash (used in) provided by operating activities ................... $ 1,734 $ 828 $ 2,562
Net cash provided by (used in) investing activities ................... (1,814) (97) (1,911)
Net cash used in financing activities ................................. (548) (998) (1,546)
Effect of exchange rate changes on cash ............................... -- 40 40
--------- --------- ---------
NET DECREASE IN CASH .................................................. (628) (227) (855)
CASH, beginning of period ............................................. 4,713 2,372 7,085
--------- --------- ---------
CASH, end of period ................................................... $ 4,085 $ 2,145 $ 6,230
========= ========= =========
Three Months Ended March 31, 2001
-------------------------------------
Non-
Guarantor Guarantor Total
--------- --------- ---------
Net cash provided by (used in) operating activities ................... $ 200 $ (3,027) $ (2,827)
Net cash (used in) provided by investing activities ................... (975) 1,793 818
Net cash provided by financing activities ............................. 500 5,842 6,342
Effect of exchange rate changes on cash ............................... -- 729 729
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ....................................... (275) 5,337 5,062
CASH, beginning of period ............................................. 437 3,093 3,530
--------- --------- ---------
CASH, end of period ................................................... $ 162 $ 8,430 $ 8,592
========= ========= =========
Holding and the Company operate in two segments: North American operations
(guarantor) and international operations (non-guarantor).
4. Subsequent Events. As of March 31, 2002, the Company was not in compliance
with certain financial and reporting covenants under agreements governing its
Credit Facility, Bank Notes Payable and Subordinated Notes. On March 31, 2002,
the Company did not make a scheduled amortization payment on the Term Loan
Facility to its senior lenders as required under the Credit Facility and as a
result, was prevented from making a scheduled interest payment due its
Subordinated Note holders on April 15, 2002. Because the Company made the
interest payment due under the Senior Subordinated Notes within the 30-day grace
period, no event of default occurred by reason thereof. The Company is currently
in compliance with the terms and provisions of the Senior Subordinated Notes.
As of March 31, 2002, the Company's wholly-owned Swedish subsidiary, Hudson
RCI AB, was not in compliance with certain financial covenants of the Hudson RCI
AB bank facility. The Company and Hudson RCI AB are currently in discussions
with the lender and expect to receive a waiver curing all defaults. Due to the
uncertainty of receiving this waiver from the lenders, the Company has
classified the entire Hudson RCI AB bank facility as a current liability on the
unaudited condensed consolidated balance sheet. The Credit Facility and Senior
Subordinated notes are not cross-defaulted to the Hudson RCI AB bank facility.
On May 14, 2002, the Company reached an agreement with its senior lenders
to amend the Credit Facility to bring the Company into compliance with all terms
and provisions of this agreement. As part of this amendment, the Company issued
$20 million in new senior term notes with warrants to the Holding's majority
stockholder, $12.0 million of which was exchanged for bank term loans previously
acquired. These notes bear interest at 12% annually with interest and principal
due upon maturity on December 31, 2004. Proceeds from the senior notes were used
to pay interest due under the Subordinated Notes, fund expenses associated with
the amendment and provide funds for ongoing working capital purposes. Under the
terms of the amendment to the Credit Facility, the lenders and the Company
agreed to (i) waive all existing events of default; (ii) extend the final
maturity of the Credit Facility to June 30, 2004; (iii) amend existing
amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in
2004; and (iv) amend future financial covenants. The warrants are exercisable at
the request of the holder for 20 million shares of common stock at
10
$1.00 per share until May 15, 2009. Holding will account for the warrants in
accordance with Accounting Principals Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants."
11
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, December 31,
2002 2001
----------- ------------
CURRENT ASSETS:
Cash .................................................................... $ 6,230 $ 7,085
Accounts receivable, less allowance for doubtful accounts of $1,951
and $1,801 at March 31, 2002 and December 31, 2001, respectively .... 21,399 19,287
Inventories ........................................................... 23,757 25,218
Other current assets .................................................. 1,970 1,483
----------- -----------
Total current assets ............................................... 53,356 53,073
PROPERTY, PLANT AND EQUIPMENT, net ......................................... 45,183 46,268
OTHER ASSETS:
Goodwill, net ......................................................... 29,141 28,498
Deferred financing costs, net ......................................... 7,880 8,316
Other assets .......................................................... 1,026 900
----------- -----------
Total other assets ................................................. 38,047 37,714
Total assets ................................................... $ 136,586 $ 137,055
=========== ===========
See notes to unaudited consolidated financial statements
12
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(amounts in thousands, except per share amounts)
March 31, December 31,
2002 2001
----------- ------------
CURRENT LIABILITIES:
Notes payable to bank ................................................... $ 21,306 $ 20,680
Accounts payable ........................................................ 11,149 15,251
Accrued liabilities ..................................................... 21,068 17,302
----------- -----------
Total current liabilities ............................................. 53,523 53,233
NOTE PAYABLE TO AFFILIATE, net of current portion ........................ 17,217 17,217
SENIOR SUBORDINATED NOTES PAYABLE ........................................ 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion ............................ 71,450 73,250
OTHER NON-CURRENT LIABILITIES ............................................ 1,370 1,187
----------- -----------
Total liabilities ..................................................... 258,560 259,887
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
Authorized- 1,800 shares; issued and outstanding- 445 shares; liquidation
preference: $44,474 .................................................... 43,880 43,847
Accrued preferred stock dividend, payable in kind ....................... 2,421 1,142
----------- -----------
46,301 44,989
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized- 15,000 shares, issued and Outstanding- 10,654 ........... 98,258 98,258
Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares
outstanding 3,228 3,137
Cumulative translation adjustment ....................................... (285) (698)
Accumulated deficit ..................................................... (269,476) (268,518)
----------- -----------
Total stockholders' deficit ........................................... (168,275) (167,821)
----------- -----------
Total liabilities, mandatorily-redeemable preferred stock
and stockholders' deficit .................................. $ 136,586 $ 137,055
=========== ===========
See notes to unaudited consolidated financial statements
13
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, March 31,
2002 2001
----------- -----------
NET SALES .................................................................. $ 42,985 $ 37,805
COST OF SALES .............................................................. 24,925 28,030
----------- -----------
Gross Profit ............................................................ 18,060 9,775
OPERATING EXPENSES:
Selling, distribution, general & administrative ......................... 11,822 12,521
Amortization of goodwill ................................................ -- 1,966
Research and development ................................................ 597 464
----------- -----------
12,419 14,951
----------- -----------
Income (loss) from operations ........................................ 5,641 (5,176)
----------- -----------
INTEREST EXPENSE AND OTHER ................................................. 4,863 7,499
----------- -----------
Net income (loss) before provision for income taxes .................. 778 (12,675)
----------- -----------
PROVISION FOR INCOME TAXES ................................................. 424 188
----------- -----------
Net Income (loss) .................................................... $ 354 $ (12,863)
=========== ===========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain ....................................... 413 728
----------- -----------
Comprehensive income (loss) .......................................... $ 767 $ (12,135)
=========== ===========
See notes to unaudited consolidated financial statements
14
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amount in thousands)
Three Months Ended
-----------------------------
March 31, March 31,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 354 $ (12,863)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization....................................... 2,389 4,043
Amortization of deferred financing costs............................ 436 235
Provision for bad debts............................................. 150 --
Loss on disposal of equipment....................................... 632 --
Change in operating assets and liabilities:
Accounts receivable................................................. (2,139) 936
Inventories......................................................... 1,599 8,088
Other current assets................................................ (263) (1,300)
Other assets........................................................ (192) (2,307)
Accounts payable.................................................... (4,137) (6,049)
Accrued liabilities................................................. 2,914 5,381
Other non-current liabilities....................................... 819 1,009
----------- -----------
Net cash provided by (used in) operating activities.............. 2,562 (2,827)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................... (1,911) (1,139)
Retirements of intangible assets......................................... -- 1,957
----------- -----------
Net cash (used in) provided by investing activities.............. (1,911) 818
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank....................................... (1,546) (1,500)
Proceeds from bank borrowings............................................ -- 7,736
Additions of deferred financing costs.................................... -- 106
----------- -----------
Net cash (used in) provided by financing activities.............. (1,546) 6,342
Effect of exchange rate changes on cash.................................. 40 729
----------- -----------
NET (DECREASE) INCREASE IN CASH............................................. (855) 5,062
----------- -----------
CASH, beginning of period................................................... 7,085 3,530
----------- -----------
CASH, end of period......................................................... $ 6,230 $ 8,592
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 1,542 $ 2,282
=========== ===========
Income taxes.......................................................... $ 1,580 $ 28
=========== ===========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind.............................. $ 1,267 $ 1,163
=========== ===========
See notes to unaudited consolidated financial statements
15
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
(A majority-owned subsidiary of River Holding Corp.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
1. Financial Statements. The condensed consolidated financial statements
included herein have been prepared by the Company, without audit, and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position at March 31, 2002, and the results of
operations and cash flows for the three-month periods ended March 31,2002 and
March 31, 2001 pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading, the accompanying unaudited condensed, consolidated financial
statements should be read in conjunction with the Company's 2001 audited
financial statements and the notes thereto included in its Form 10-K filed with
the SEC. The results of operations for the three-month period ended March 31,
2002 are not necessarily indicative of the results to be achieved for a full
year.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The adoption of this
new standard did not have a material impact on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
Any acquisitions made by the Company after June 2001 will be recorded in
accordance with SFAS 141.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards 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 will no longer be amortized but will be assessed
at least annually for impairment using a fair value methodology. The Company
stopped amortizing goodwill, effective January 1, 2002, and as a result an
equivalent charge for goodwill amortization will not be made in 2002. The
Company is still in the process of completing its transitional impairment test,
which is expected to be completed by the end of the second quarter of 2002. Pro
forma net loss for the three months ended March 31, 2001, excluding amortization
of goodwill would have been $10,135 compared to $12,135. The slight change in
goodwill for the three months ended march 31,2002 stems from changes in foreign
currency exchange rates.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is
16
acreted to its present value each period, and the capitalized cost is
depreciated over the useful live of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs gain or loss upon settlement. SFAS 143 is effective January 1, 2003. The
Company does not expect the adoption of SFAS 143 to have a material impact on
the Company's financial statements.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of a Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 did not
have a material impact on the Company's financial statements.
2. Inventories. Inventories consisted of the following (amounts in
thousands):
March 31, December 31,
2002 2001
------------- ------------
Raw materials .............................. $ 6,275 $ 7,377
Work-in-process ............................ 6,424 5,392
Finished goods ............................. 13,212 14,481
------------- ------------
25,911 27,250
Provision for obsolescence ................. (2,154) (2,032)
------------- ------------
$ 23,757 $ 25,218
============= ============
17
3. Subsidiaries Guaranteeing Debt and Segment Data. The Company is the
100% owner of certain subsidiaries which do not guarantee the Company's senior
subordinated notes and certain bank debt. The following tables disclose required
consolidating financial information for guarantor, including the Company, and
non-guarantor subsidiaries (amounts in thousands):
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
As of March 31, 2002
--------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
----------- ---------- ------------ -----------
CURRENT ASSETS:
Cash ............................................... $ 4,084 $ 2,146 $ -- $ 6,230
Accounts receivable ................................ 15,688 5,711 -- 21,399
Receivables from non-guarantor ..................... 7,831 -- (7,831) --
Inventories ........................................ 18,730 7,025 (1,998) 23,757
Other current assets ............................... 2,003 11,999 (12,032) 1,970
----------- --------- --------- -----------
Total current assets ............................ 48,336 26,881 (21,861) 53,356
----------- --------- --------- -----------
PROPERTY, PLANT
AND EQUIPMENT, NET ................................. 44,053 1,130 -- 45,183
----------- --------- --------- -----------
OTHER ASSETS:
Goodwill, net ...................................... -- 29,141 -- 29,141
Deferred financing costs, net ...................... 7,880 -- -- 7,880
Investment in non-guarantor subsidiaries ........... 28,623 -- (28,623) --
Other .............................................. 802 224 -- 1,026
----------- --------- --------- -----------
Total other assets .............................. 37,305 29,365 (28,623) 38,047
----------- --------- --------- -----------
$ 129,694 $ 57,376 $ (50,484) $ 136,586
=========== ========= ========= ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank .............................. $ 5,000 $ 16,306 $ -- $ 21,306
Accounts payable ................................... 9,617 1,532 -- 11,149
Payables to guarantor .............................. -- 7,831 (7,831) --
Accrued liabilities ................................ 17,805 12,501 (9,238) 21,068
----------- --------- --------- -----------
Total current liabilities ....................... 32,422 38,170 (17,069) 53,523
----------- --------- --------- -----------
OTHER LIABILITIES:
NOTE PAYABLE TO AFFILIATE .......................... 14,951 2,266 -- 17,217
NOTES PAYABLE TO BANK, net of current portion ...... 71,450 -- -- 71,450
SENIOR SUBORDINATED NOTES PAYABLE .................. 115,000 -- -- 115,000
OTHER NON-CURRENT LIABILITIES ...................... 185 1,185 -- 1,370
----------- --------- --------- -----------
Total liabilities ............................... 234,008 41,621 (17,069) 258,560
----------- --------- --------- -----------
Mandatorily-redeemable preferred stock ................ 46,301 -- -- 46,301
----------- --------- --------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) ........................ (150,615) 15,755 (33,415) (168,275)
----------- --------- --------- -----------
$ 129,694 $ 57,376 $ (50,484) $ 136,586
=========== ========= ========= ===========
18
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
ASSETS
As of December 31, 2001
---------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
------------ ---------- ------------ -----------
CURRENT ASSETS:
Cash .............................................. $ 4,713 $ 2,372 $ -- $ 7,085
Accounts receivable ............................... 13,989 5,298 -- 19,287
Receivables from non-guarantor .................... 6,515 -- (6,515) --
Inventories ....................................... 20,377 7,030 (2,189) 25,218
Other current assets .............................. 2,976 13,553 (15,046) 1,483
----------- --------- --------- -----------
Total current assets ........................... 48,570 28,253 (23,750) 53,073
----------- --------- --------- -----------
PROPERTY, PLANT
AND EQUIPMENT, NET ................................ 45,125 1,143 -- 46,268
----------- --------- --------- -----------
OTHER ASSETS:
Intangible assets, net ............................ -- 28,498 -- 28,498
Deferred financing costs, net ..................... 8,316 -- -- 8,316
Investment in non-guarantor subsidiaries .......... 28,623 -- (28,623) --
Other ............................................. 676 224 -- 900
----------- --------- --------- -----------
Total other assets ............................. 37,615 28,722 (28,623) 37,714
----------- --------- --------- -----------
$ 131,310 $ 58,118 $ (52,373) $ 137,055
=========== ========= ========= ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable to bank ............................. $ 3,750 $ 16,930 $ -- $ 20,680
Accounts payable .................................. 14,069 1,182 -- 15,251
Payables to guarantor ............................. -- 6,515 (6,515) --
Accrued liabilities ............................... 14,366 15,356 (12,420) 17,302
----------- --------- --------- -----------
Total current liabilities ...................... 32,185 39,983 (18,935) 53,233
----------- --------- --------- -----------
OTHER LIABILITIES:
NOTE PAYABLE TO AFFILIATE ......................... 14,951 2,266 -- 17,217
NOTES PAYABLE TO BANK, net of current portion ..... 73,250 -- -- 73,250
SENIOR SUBORDINATED NOTES PAYABLE ................. 115,000 -- -- 115,000
OTHER NON-CURRENT LIABILITIES ..................... 146 1,041 -- 1,187
----------- --------- --------- -----------
Total liabilities .............................. 235,532 43,290 (18,935) 259,887
----------- --------- --------- -----------
Mandatorily-redeemable preferred stock ............... 44,989 -- -- 44,989
----------- --------- --------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) ....................... (149,211) 14,828 (33,438) (167,821)
----------- --------- --------- -----------
$ 131,310 $ 58,118 $ (52,373) $ 137,055
=========== ========= ========= ===========
19
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2002
--------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
----------- --------- ------------ -----------
NET SALES ............................................. $ 37,863 $ 8,554 $ (3,432) $ 42,985
COST OF SALES ......................................... 23,711 4,722 (3,508) 24,925
----------- --------- --------- -----------
Gross Profit ....................................... 14,152 3,832 76 18,060
----------- --------- --------- -----------
OPERATING EXPENSES:
Selling, distribution, general and administrative .. 9,502 2,320 -- 11,822
Goodwill amortization .............................. -- -- -- --
Research and development ........................... 335 262 -- 597
----------- --------- --------- -----------
9,837 2,582 -- 12,419
----------- --------- --------- -----------
Income from operations ............................. 4,315 1,250 76 5,641
----------- --------- --------- -----------
OTHER INCOME AND (EXPENSES):
Interest expense ................................... 4,458 308 -- 4,766
Other, net ......................................... 76 4 17 97
----------- --------- --------- -----------
4,534 312 17 4,863
----------- --------- --------- -----------
(Loss) income before provision for income taxes .... (219) 938 59 778
----------- --------- --------- -----------
PROVISION FOR INCOME TAXES ............................ -- 424 -- 424
----------- --------- --------- -----------
Net Loss .............................................. $ (219) $ 514 $ 59 $ 354
=========== ========= ========= ===========
Three Months Ended March 31, 2001
-------------------------------------------------------
Non-
Guarantor Guarantor Eliminations Total
----------- --------- ------------ ------------
NET SALES ............................................. $ 35,192 $ 5,976 $ (3,363) $ 37,805
COST OF SALES ......................................... 27,400 3,201 (2,571) 28,030
----------- --------- --------- -----------
Gross Profit ....................................... 7,792 2,775 (792) 9,775
----------- --------- --------- -----------
OPERATING EXPENSES:
Selling, distribution, general and administrative .. 11,088 1,433 -- 12,521
Goodwill amortization .............................. 385 1,581 -- 1,966
Research and development ........................... 215 249 -- 464
----------- --------- --------- -----------
11,688 3,263 -- 14,951
----------- --------- --------- -----------
Loss from operations ............................... (3,896) (488) (792) (5,176)
----------- --------- --------- -----------
OTHER INCOME AND (EXPENSES):
Interest and other expense ......................... 4,471 669 -- 5,140
Other, net ......................................... 165 1,081 1,113 2,359
----------- --------- --------- -----------
4,636 1,750 1,113 7,499
----------- --------- --------- -----------
Loss before provision for income taxes ............. (8,532) (2,238) (1,905) (12,675)
----------- --------- --------- -----------
PROVISION FOR INCOME TAXES ............................ -- 188 -- 188
----------- --------- --------- -----------
Net Loss .............................................. $ (8,532) $ (2,426) $ (1,905) $ (12,863)
=========== ========= ========= ===========
20
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002
----------------------------------------
Non-
Guarantor Guarantor Total
--------- --------- ------------
Net cash (used in) provided by operating activities ................... $ 1,734 $ 828 $ 2,562
Net cash provided by (used in) investing activities ................... (1,814) (97) (1,911)
Net cash used in financing activities ................................. (548) (998) (1,546)
Effect of exchange rate changes on cash ............................... -- 40 40
-------- --------- ------------
NET DECREASE IN CASH .................................................. (628) (227) (855)
CASH, beginning of period ............................................. 4,713 2,372 7,085
-------- --------- ------------
CASH, end of period ................................................... $ 4,085 $ 2,145 $ 6,230
======== ========= ============
Three Months Ended March 31, 2001
----------------------------------------
Non- Total
Guarantor Guarantor
--------- --------- ------------
Net cash provided by (used in) operating activities ................... $ 200 $ (3,027) $ (2,827)
Net cash (used in) provided by investing activities ................... (975) 1,793 818
Net cash provided by financing activities ............................. 500 5,842 6,342
Effect of exchange rate changes on cash ............................... -- 729 729
-------- --------- ------------
NET (DECREASE) INCREASE IN CASH ....................................... (275) 5,337 5,062
CASH, beginning of period ............................................. 437 3,093 3,530
-------- --------- ------------
CASH, end of period ................................................... $ 162 $ 8,430 $ 8,592
======== ========= ============
The Company operates in two segments: North American operations
(guarantor) and international operations (non-guarantor).
4. Subsequent Events. As of March 31, 2002, the Company was not in
compliance with certain financial and reporting covenants under agreements
governing its Credit Facility, Bank Notes Payable and Subordinated Notes. On
March 31, 2002, the Company did not make a scheduled amortization payment on the
Term Loan Facility to its senior lenders as required under the Credit Facility
and as a result, was prevented from making a scheduled interest payment due its
Subordinated Note holders on April 15, 2002. Because the Company made the
interest payment due under the Senior Subordinated Notes within the 30-day grace
period, no event of default occurred by reason thereof. The Company is currently
in compliance with the terms and provisions of the Senior Subordinated Notes.
As of March 31, 2002, the Company's wholly-owned Swedish subsidiary,
Hudson RCI AB, was not in compliance with certain financial covenants of the
Hudson RCI AB bank facility. The Company and Hudson RCI AB are currently in
discussions with the lender and expect to receive a waiver curing all defaults
(see the "Liquidity and Capital Resources" section of this Item). Due to the
uncertainty of receiving this waiver from the lenders, the Company has
classified the entire Hudson RCI AB bank facility as a current liability on the
consolidated balance sheet. The Credit Facility and Senior Subordinated notes
are not cross-defaulted to the Hudson RCI AB bank facility.
On May 14, 2002, the Company reached an agreement with its senior lenders
to amend the Credit Facility to bring the Company into compliance with all terms
and provisions of this agreement. As part of this amendment, the Company issued
$20 million in new senior term notes with warrants to the Holding's majority
stockholder, $12.0 million of which was exchanged for bank term loans previously
acquired. These notes bear interest at 12% annually with interest and principal
due upon maturity on December 31, 2004. Proceeds from the senior notes were used
to pay interest due under the Subordinated Notes, fund expenses associated with
the amendment and provide funds for ongoing working capital purposes. Under the
terms of the amendment to the Credit Facility, the lenders and the Company
agreed to (i) waive all existing events of default; (ii) extend the final
maturity of the Credit Facility to June 30, 2004; (iii) amend existing
amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in
2004; and (iv) amend future financial covenants. The warrants are exercisable at
the demand of the holder for 20 million shares at $1.00 per share until May 15,
2009. The Company will account for the warrants in accordance with
21
Accounting Principals Board Opinion No. 14, "Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants."
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Because River Holding Corp. ("Holding") is a holding company with no
operations other than those of Hudson Respiratory Care, Inc. (the "Company" or
"Hudson RCI"), the following discussion throughout this section relates
primarily to the Company. The following discussion of Holding and the Company's
consolidated historical results of operations and financial condition should be
read in conjunction with the consolidated financial statements of Holding and
the Company and the notes thereto included elsewhere in this Form 10-Q.
Holding's acquisition of a majority of the Company's stock was accounted
for as a purchase. As a result of Holding's acquisition of the Company, Holding
recorded property, plant and equipment at fair value. Additional expenses
relating to amortization of goodwill $1.3 million in the first quarter of 2001
was recorded and additional depreciation related to the allocation of purchase
price at fair value to depreciable assets of $0.6 million in the first quarter
of 2002 and 2001 was also recorded. As of March 31, 2002, the remaining value of
the step-up in basis to fair value was approximately $6.8 million.
Goodwill, resulting from the acquisition of the Company, was recorded on
the books of Holding and not pushed down to the Company. As result, an
additional $128.4 million of goodwill was recorded at Holding. As a result of
significant losses, both Holding and the Company recorded a goodwill impairment
of $161.6 million and $33.1 million, respectively, in the fourth quarter of
2001.
Holding and the Company also recorded deferred tax assets stemming from
Holding's purchase of the Company. Holding and the Company recorded an $11.2
million and $68.9 million valuation allowance against these assets in the fourth
quarter of 2001, respectively.
There are no other material differences between Holding consolidated and
the Company.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements involving risks and uncertainties that are detailed from time to time
in Holding's Securities and Exchange Commission filings.
General
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a number of factors, including, among others,
the buying patterns of the Company's distributors, group purchasing
organizations ("GPOs") and other purchasers of the Company's products, forecasts
regarding the severity of the annual cold and flu season, announcements of new
product introductions by the Company or its competitors, changes in the
Company's pricing of its products and the prices offered by the Company's
competitors, rate of overhead absorption due to variability in production levels
and variability in the number of shipping days in a given quarter.
Recent Developments
As of March 31, 2002, the Company was not in compliance with certain
financial and reporting covenants under agreements governing its Credit
Facility, Bank Notes Payable and Subordinated Notes. On March 31, 2002, the
Company did not make a scheduled amortization payment of the Term Loan Facility
to its senior lenders as required under the Credit Facility. As a result, in
early April 2002, the lenders under the Credit Facility blocked the Company from
making either the April 15, 2002 interest payment required under the Senior
Subordinated Notes or the April 15, 2002 dividend payment required under the
11-1/2% Senior Exchangeable PIK Preferred Stock due 2010. Because the Company
made the interest payment due under the Senior Subordinated Notes within the
30-day grace period, no event of default occurred by reason thereof. The Company
is currently in compliance with the terms and provisions of the Senior
Subordinated Notes.
23
As of March 31, 2002, the Company's wholly-owned Swedish subsidiary, Hudson
RCI AB, was not in compliance with certain financial covenants of the Hudson RCI
AB bank facility. The Company and Hudson RCI AB are currently in discussions
with the lender and expect to receive a waiver curing all defaults (see the
"Liquidity and Capital Resources" section of this Item). Due to the uncertainty
of receiving this waiver from the lenders, the Company has classified the entire
Hudson RCI AB bank facility as a current liability on the consolidated balance
sheet. The Credit Facility and Senior Subordinated notes are not cross-defaulted
to the Hudson RCI AB bank facility.
On May 14, 2002, the Company reached an agreement with its senior lenders
to amend and restate the Credit Facility to bring the Company into compliance
with all terms and provisions of this agreement. As part of this amendment, the
Company issued $20 million in new senior term notes with warrants to the
Holding's majority stockholder, $12.0 million of which was exchanged for bank
term loans previously acquired. These notes bear interest at 12% annually with
interest and principal due upon maturity on December 31, 2004. Proceeds from the
senior notes were used to pay interest due under the Subordinated Notes, fund
expenses associated with the amendment and provide funds for ongoing working
capital purposes. Under the terms of the amendment to the Credit Facility, the
lenders and the Company agreed to (i) waive all existing events of default; (ii)
extend the final maturity of the Credit Facility to June 30, 2004; (iii) amend
existing amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0
million in 2004; and (iv) amend future financial covenants to include only a
limitation on capital expenditures and a minimum EBITDA test. As a result of the
amendment, the Company is currently in compliance with the terms and provisions
of the Credit Facility. As of June 28, 2002 there is approximately $3.5 million
of availability on the revolving loan facility under the Credit facility.
During 2001, the Company made the decision to close the Argyle, New York
facility and move its operations to a new facility located in Tecate, Mexico,
beginning in 2002. It is anticipated that this move will cost approximately $4.6
million, of which $0.9 million relating to severance costs were recorded in
2001.
24
Results of Operations
The following tables set forth, for the periods indicated, certain income
and expense items expressed in dollars and as a percentage of the Company's net
sales.
Three Month Period Ended
(unaudited)
---------------------------
March 31, March 31,
2002 2001
---------- ----------
(in thousands)
Net sales .......................................................... $ 42,985 $ 37,805
Cost of sales ...................................................... 24,925 28,030
------------ ---------
Gross profit .................................................... 18,060 9,775
------------ ---------
Selling expenses ................................................... 5,021 4,811
Distribution expenses .............................................. 2,312 2,777
General and administrative expenses ................................ 4,489 4,933
Amortization of goodwill ........................................... -- 1,966
Research and development expenses .................................. 597 464
------------ ---------
Total operating expenses ........................................... 12,419 14,951
------------ ---------
Operating income ................................................... $ 5,641 $ (5,176)
============ =========
Three Month Period Ended
(unaudited)
--------------------------
March 31, March 31,
2002 2001
---------- ---------
Net sales .......................................................... 100.0% 100.0%
Cost of sales ...................................................... 58.0 74.1
--------- --------
Gross profit .................................................... 42.0 25.9
--------- --------
Selling expenses ................................................... 11.7 12.7
Distribution expenses .............................................. 5.4 7.3
General and administrative expenses ................................ 10.4 13.0
Amortization of goodwill ........................................... -- 5.2
Research and development expenses .................................. 1.4 1.2
--------- --------
Total operating expenses ........................................... 28.9 39.5
--------- --------
Operating income ................................................... 13.1% (13.7)%
========= ========
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net sales, reported net of accrued rebates, were $43.0 million in the first
quarter of 2002 as compared to $37.8 million in the first quarter of 2001,
representing an increase of $5.2 million or 13.7%. Domestic hospital sales
increased by $2.5 million or 11.3% due to increased demand at the hospital
level, primarily the result of an extremely weak influenza season in 2001.
Alternate site sales increased by $0.4 million or 6.5%, reflecting continued
market growth. International sales increased by $1.9 million or 22.3%, primarily
driven by continued growth in Europe (up $1.1 million over the first quarter of
2001) and the Pacific Rim (up $1.2 million over the first quarter of 2001). OEM
sales increased by $0.4 million due to changes in purchasing patterns from some
of its OEM customers.
The Company's gross profit for the first quarter of 2002 was $18.1 million,
an increase of $8.3 million or 84.8% from the first quarter of 2001. As a
percentage of sales, the gross profit was 42.0% and 25.8% for the first quarter
of 2002 and 2001, respectively. This increase was primarily due to (i) 2001
sales of inventory recorded at a higher net realizable value rather than
manufacturing costs as a result of the SHERIDAN(R) acquisition, (ii) increased
shipping costs in 2001 as a result of shipping difficulties caused by problems
associated with the new management information system, and (iii) underabsorption
in 2001 of manufacturing overhead as a result of an aggressive plan to reduce
inventories by slowing production and an unfavorable mix variance caused by
higher sales of products at lower gross margins.
25
Selling expenses were $5.0 million for the first quarter of 2002,
relatively unchanged from the first quarter of 2001. As a percentage of net
sales, selling expenses were 11.7% in the first quarter of 2002 as compared to
12.7% in the first quarter of 2001.
Distribution expenses were $2.3 million for the first quarter of 2002, a
decrease of $0.5 million or 16.7% from the first quarter of 2001. This decline
is primarily the result of specific programs implemented by management designed
to improve the efficiency of its distribution facilities, including closure of
the Company's Atlanta distribution center in August 2001. As a percentage of
sales, distribution expenses decreased to 5.4% in the first quarter of 2002 as
compared to 7.3% in the first quarter of 2001.
General and administrative expenses were $4.5 million in the first quarter
of 2002, a decrease of $0.4 million or 7.8% from the first quarter of 2001. This
decrease was primarily the result of decreased staffing levels. As a percentage
of net sales, general and administrative expenses were 10.5% in the first
quarter of 2002 as compared to 13.0% in the first quarter of 2001.
Research and development expenses were $0.6 million for the first quarter
of 2002, relatively unchanged from the expense of $0.5 million incurred in the
first quarter 2001.
Amortization of goodwill was $0.0 million in the first quarter for 2002, as
compared to $2.0 million in the first quarter of 2001. This is the result of the
adoption of SFAS 142, under which the Company ceased amortizing goodwill
effective January 1, 2002.
Interest expense was $4.8 million for the first quarter of 2002, as
compared to $5.1 million in the first quarter of 2001. The decrease was due to
lower interest rates.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations,
borrowings under its working capital bank facility and historically, investments
from shareholders. Cash provided by (used in) operations totaled $2.6 million
and $(2.8) million in the first quarter of 2002 and 2001, respectively. The
increase in the first quarter of 2002 as compared to the first quarter of 2001
is primarily attributable to increased operating income and an increase in
accrued liabilities partially offset by a decrease in payables and an increases
in accounts receivable. The Company had operating working capital deficit of
$(0.3) million and $(0.2) million as of the end of the first quarter of 2002 and
2001, respectively. Inventories were $23.7 million and $25.2 million as of the
end of the first quarter of 2002 and December 31, 2001, respectively. In order
to meet the needs of its customers, the Company must maintain inventories
sufficient to permit same-day or next-day filling of most orders. Such
inventories are higher than those that would be required for delayed filling of
orders, thus adversely impacting liquidity. Over time, the Company expects its
level of inventories to increase, as the Company's sales in the international
sales increase. Accounts receivable, net of allowances, were $21.4 million and
$19.3 million at March 31, 2002 and December 31, 2001, respectively. The Company
typically offers 30-day credit terms to its U.S. hospital distributors.
Alternate site and international customers typically receive 60 to 90 day terms
and, as a result, as the Company's alternate site and international sales have
increased, the amount and aging of its accounts receivable have increased. The
Company anticipates that the amount and aging of its accounts receivable will
continue to increase as the alternate site and international markets become a
larger percentage of the Company's overall sales.
During the three months ended March 31, 2002, net cash used investing
activities was $1.9 million, reflecting primarily purchases of manufacturing
equipment and new heater placements. During the three months ended March 31,
2001, net cash used in investing activities was $0.9 million, primarily
reflecting purchases of manufacturing equipment. The Company currently estimates
that capital expenditures will be approximately $8.0 million in each of 2002 and
2003, consisting primarily of additional and replacement manufacturing equipment
and new heater placements.
During the three months ended March 31, 2002 and March 31, 2001, net cash
(used in) provided by financing was $(1.5) million and $6.2 million,
respectively, reflecting repayment of the Company's borrowings in the first
quarter of 2002 and borrowings made through Hudson RCI AB, the Company's Swedish
subsidiary in the first quarter of 2001.
26
As of March 31, 2002, The Company had outstanding $225.0 million of
indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of
$76.5 million under the Company's Credit Facility, $17.2 million in notes
payable to affiliates and $16.3 million in outstanding borrowings under the bank
facility of Hudson RCI AB.
The Credit Facility currently consists of a $40.0 million Term Loan
Facility 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 (the
"Working Capital Portion") may be used for general corporate purposes (other
than acquisitions). The Revolving Loan Facility has a letter of credit sub-limit
of $7.5 million. The Term Loan Facility and Acquisition Facility, amended as
discussed below, matures on June 30, 2004 and requires quarterly principal
installments totaling $3.8 million in 2002, $9.3 million in 2003 and $37.0
million in 2004. The Revolving Loan Facility matures on June 30, 2004.
Total borrowings as of March 31, 2002 was $54.5 million under the Revolving
Loan Facility and $22.0 million under the Term Loan Facility.
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 type of loan as follows:
Margin
------------------------
Period and Loan Type Base Rate Eurodollar
-------------------- --------- ----------
Through June, 2002
Term and Working Capital 3.00% 4.00%
Acquisition 3.25% 4.25%
July, 2002 through March, 2003
Term and Working Capital 3.50% 4.50%
Acquisition 3.75% 4.75%
Thereafter
Term and Working Capital 4.00% 5.00%
Acquisition 4.25% 5.25%
For periods after June 2002, the margins set forth above are subject to
pricing reductions depending on the Company's then existing leverage ratio.
Borrowings under the Credit Facility are required to be prepaid, subject to
certain exceptions, with (i) 75% (or 50% for years when the Company's ratio of
Debt to EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined),
(ii) 50% of the net cash proceeds of an equity issuance by River Holding Corp.,
the Company's parent ("Holding") or the Company in connection with an initial
public offering or 100% of the net cash proceeds of an equity issuance by
Holding. Holding or the Company other than in connection with an initial public
offering (subject in each case to certain exceptions), (iii) 100% of the net
cash proceeds of the sale or other disposition of any properties or assets of
Holding and its subsidiaries (subject to certain exceptions), (iv) 100% of the
net proceeds of certain issuances of debt obligations of the Company and its
subsidiaries and (v) 100% of the net proceeds from insurance recoveries and
condemnations. The Revolving Loan Facility must be repaid upon payment in full
of the Term Loan Facility.
The Credit Facility is guaranteed by Holding and certain of the Company's
subsidiaries. The Credit Facility is secured by a first priority lien in
substantially all of the properties and assets of the Company and the guarantors
now owned or acquired later, including a pledge of all of the capital stock of
the Company owned by Holding and all of the shares held by the Company of its
existing and future subsidiaries, including its Mexican subsidiaries; provided,
that (except for the Mexican subsidiaries) such pledge is limited to 65% of the
shares of any foreign subsidiary to the extent a pledge of a greater percentage
would result in adverse tax consequences to the Company.
The Credit Facility contains covenants restricting the ability of Holding,
the Company and the Company's subsidiaries to, among others, (i) incur
additional debt, (ii) declare dividends or redeem or repurchase capital stock,
(iii)
27
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.
Hudson RCI 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.
The 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. The Subordinated Notes are general unsecured
obligations of the Company. The Subordinated Notes 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 and (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
was prevented from making the April 15, 2002 interest payment to holders of the
Senior Subordinated Notes pending the completion of the amendment to the Credit
facility on May 14, 2002. Because the Company made the interest payment due
under the Senior Subordinated Notes within the 30-day grace period, no event of
default occurred by reason thereof. The Company is currently in compliance with
the terms and provisions of the Senior Subordinated Notes.
As of March 31, 2002, the Company had $13.2 million outstanding pursuant to
unsecured promissory notes payable to affiliates of Freeman Spogli, the
Holding's majority stockholder. The notes bear interest at 10.0% per annum and
mature in March 2005. Interest may be paid or deferred to the due date at the
option of the Company and the notes are convertible to the Company's common
stock at the demand of the holder. The notes are subordinated to borrowings
under the Credit facility and rank pari-passu with the Senior Subordinated
Notes.
The Company, through Hudson RCI AB, has incurred bank debt in Sweden (the
"HRCI AB Facility") that totaled $16.3 million as of March 31, 2001. The HRCI AB
Facility, which is denominated in Swedish krona, bears interest at three-month
STIBOR plus 1.25% to 1.85% (5.14% to 5.74% at March 31, 2002), matures in
December 2003, and is guaranteed by Steamer Holding AB, Hudson RCI AB's parent,
and is secured by the common stock of Hudson RCI AB. As of March 31, 2002,
Hudson RCI AB was not in compliance with certain financial covenants under the
Hudson RCI AB facility. The Company and Hudson RCI AB are currently in
negotiations with the lender concerning an amendment curing these defaults and
expects to receive from the lender a waiver curing all past covenant violations,
but no assurance can be given that such an agreement will be reached.
Accordingly, the entire outstanding balance of the Hudson RCI AB Facility is
classified as current on the consolidated balance sheet. The Company's Credit
Facility and the Senior Subordinated Notes are not cross-defaulted to the Hudson
RCI AB facility. If a waiver of such default is not obtained, the lender may
pursue its remedies under the facility, including, among other things, immediate
acceleration of all borrowings of the facility. In addition, the default
entitles the lender to take control of all the common stock of Hudson RCI AB and
its European parent companies.
Holding issued 300,000 shares of its 11-1/2% Senior Exchangeable PIK
Preferred Stock due 2010 with an aggregate liquidation preference of $30.0
million. At the election of Holding, dividends may be paid in kind until April
15, 2003 and thereafter must be paid in cash.
In August 2001, Holding issued 3,000 shares of 12% Junior Convertible
Cumulative Preferred Stock (the "Junior Preferred Stock, for total cash
consideration to Holding of $3.0 million. Each share of the Junior Preferred
Stock may be redeemed, from time to time, in whole or in part, at the option of
Holding at a redemption price of 100% of the Liquidation Preference of the
Junior Preferred Stock or $1,000 per share plus accumulated and unpaid dividends
that would be payable on such shares of Junior Preferred Stock.
The Company was not in compliance with certain financial covenants of the
Credit Facility as of December 31, 2001 and did not make the scheduled March 31,
2002 amortization payment of the Term Loan Facility on its due date. As a
result, in early April, 2002, the lenders under the Credit Facility blocked the
Company from making either the April 15, 2002 interest payment required under
the Senior Subordinated Notes or the April 15, 2002 dividend payment required
under the 11-1/2% Senior Exchangeable PIK Preferred Stock due 2010. On May 14,
2002, the Company and banks 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
28
Facility amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0
million in 2004, and (iv) amend the financial covenants to include only a
limitation on capital expenditures and a minimum EBITDA test. As a result of the
amendment, the Company is currently in compliance with the terms and provisions
of the Credit Facility. As of May 31, 2002, there was approximately $3.5 million
of availability on the revolving Loan Facility under the Credit Facility.
As part of the May 2002 amendment and restatement of the Credit
Facility discussed above, the Company issued $12.0 million of the senior
unsecured notes in exchange for $12.0 million of bank term loans purchased by
affiliates of Holding's majority stockholder. Additionally, HRC Holding issued
$8.0 million of unsecured senior notes to affiliates of Holding's majority
stockholder. HRC Holding used the proceeds of the notes issued by it to acquire
certain intercompany receivables from the Company. These notes bear interest at
12% annually with interest and principal due upon maturity on December 31, 2004.
Proceeds from these transactions were used to pay the April 2002 interest due
under the Subordinated Notes, fund expenses associated with the Amended and
Restated Credit Facility and provide funds for ongoing general corporate
purposes
Also in May 2002, the Company issued warrants to purchase 20.0 million
shares of the Company's common stock.
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 and restricted
or prohibited under the terms of Hudson RCI's debt instruments, including the
Credit Facility. In addition, Holding is prohibited from paying cash dividends
under the Credit Facility until April 2003, at which time it must pay cash
dividends to the holders of Holding Preferred Stock. Since Hudson RCI is
prohibited from paying cash dividends to Holding, Holding may not be able to pay
cash dividends to the Holders of Holding Preferred Stock when required by the
terms of the Holding Preferred Stock. In the event that Holding is unable to pay
cash dividends to the holders of Holding Preferred Stock for two consecutive
periods, the sole remedy of the holders is the ability to elect two members to
Holding's Board of Directors.
Recent Accounting Pronouncements
Effective January 1, 2001, Holding adopted Statement of Financial
Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS No.
133, as amended, establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The adoption of this
new standard did not have a material impact on Holding's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes Accounting Principals Board ("APB") Opinion
No. 16, "Business Combinations," and FASB Statement 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.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards 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 will no longer be amortized but will be assessed
at least annually for impairment using a fair value methodology. Holding stopped
amortizing goodwill, effective January 1, 2002, and as a result an equivalent
charge for goodwill amortization will not be made in 2002. Holding is still in
the process of completing its transitional impairment test plan, which is
expected to be completed by the end of the second quarter of 2002. Pro forma net
loss for the three months ended March 31, 2001, excluding amortization of $3.2
million for that period would have been $11,462 compared to $14,698 as reported.
The slight change in goodwill for the three months ended March 31, 2002 stems
from changes in foreign currency exchange rates.
29
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is acreted to its present value each period, and
the capitalized cost is depreciated over the useful live 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 consolidated financial statements.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of a Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 did not
have a material impact on Holding's consolidated financial statements.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes in Holding's market risk exposure from
that reported in Holding's 10-K for the fiscal year ended December 31, 2001.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 (1) Amended and restated Credit Agreement dated as of May 14,
2002 among Hudson RCI, Holding, the Lenders party thereto,
and Deutsche bank Trust Americas ("Deutsche Bank"), as
administrative agent and collateral agent
10.2 (1) Form of Amended and Restated Security Agreement dated as
of May 14, 2002 between Hudson RCI and Deutsche Bank.
10.13 (1) Form of Nonrecourse Pledge Agreement dated as of May 14,
2002 among the Pledgor and Deutsche Bank, as collateral
agent for the Lenders.
10.15 (1) Tecate Facility Sub-Lease
10.16 (1) Form of Supplement No. 1 dated as of May 14, 2002, to the
Pledge Agreement.
10.17 (1) Form of Master Assignment and Exchange Agreement dated as
of May 14, 2002 by and among Holding, Hudson RCI, the
financial institutions listed on the signature pages
thereof, Deutsche Bank, as administrative agent for the
Lenders and FSEP IV.
10.18 (1) Letter agreement dated August 17, 2001 between Hudson RCI
and Charles French.
10.19 (1) Form of Stock Option Plan
10.20 (1) Form of Stock Option Agreement
10.21 (1) Receivables Purchase Agreement dated May 14, 2002 by and
between Hudson RCI and HRC Holding.
(b) Reports on Form 8-K
None.
- ---------------------
(1) Incorporated by reference to the exhibit designated by the
same number in the Form 10-K filed by the Hudson
Respiratory Care Inc. for the fiscal year ended December
31, 2001.
32
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
RIVER HOLDING CORP.,
a Delaware corporation
July 10, 2002 By: /s/ Patrick G. Yount
--------------------------------------------
Patrick G. Yount
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
33