<PAGE>
================================================================================
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 September 24, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number - 333-56135
-----------------
RIVER HOLDING CORP.
(Exact name of registrant as specified in its charter)
-----------------
Delaware 95-4674065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
599 Lexington Avenue 10022
18th Floor (Zip Code)
New York, New York
(Address of Principal Executive Offices)
(212) 958-2555
(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 8,544,291 on October
31, 1999.
================================================================================
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
Quarter Ended September 24, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of River Holding Corp. (Unaudited):
Condensed Consolidated Balance Sheets as of December 25, 1998 and
September 24, 1999.......................................................................... 1
Condensed Consolidated Statements of Operations for the Three
Months Ended September 25, 1998 and September 24, 1999, the Period
from April 7, 1998 (Inception) to September 25, 1998 and the
Nine Months Ended September 24, 1999........................................................ 3
Condensed Consolidated Statements of Cash Flows for the Period
from April 7, 1999 (Inception) to September 25, 1998 and the Nine Months
Ended September 24, 1999.................................................................... 4
Notes to Condensed Consolidated Financial Statements........................................ 6
Condensed Consolidated Financial Statements of Hudson Respiratory
Care Inc. (Unaudited):
Condensed Consolidated Balance Sheets as of December 25, 1998 and
September 24, 1999.......................................................................... 10
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 25, 1998 and September 24, 1999............................. 12
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 25, 1998 and September 24, 1999............................................. 13
Notes to Condensed Consolidated Financial Statements........................................ 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................. 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 32
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................................... 32
Item 6. Exhibits and Reports on Form 8-K.................................................................. 33
SIGNATURE............................................................................................................. 34
</TABLE>
i
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................................. $ 507 $ 8,448
Accounts receivable, less allowance for doubtful accounts of $635
and $412 at December 25, 1998 and September 24, 1999,
respectively.......................................................... 25,829 25,689
Inventories........................................................... 18,024 24,268
Other current assets.................................................. 1,049 1,964
--------- ---------
Total current assets............................................... 45,409 60,369
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net....................................... 46,857 49,423
--------- ---------
OTHER ASSETS:
Deferred tax asset.................................................... 9,634 11,117
Deferred financing costs, net......................................... 11,917 12,427
Goodwill, net......................................................... 148,657 189,630
Other assets.......................................................... 235 743
--------- ---------
170,443 213,917
--------- ---------
$ 262,709 $ 323,709
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
1
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank....................................................... $ 3,000 $ 8,256
Note payable to affiliate................................................... -- 22,000
Accounts payable............................................................ 6,324 2,991
Accrued liabilities......................................................... 6,219 14,997
--------- ---------
Total current liabilities.................................................. 15,543 48,244
SENIOR SUBORDINATED NOTES PAYABLE............................................. 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion................................. 41,000 44,080
--------- ---------
Total liabilities.......................................................... 171,543 208,533
--------- ---------
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par
value: Authorized--1,800 shares; issued and outstanding--318 and
336 shares at December 25, 1998 and September 24, 1999; liquidation
preference: $33,625........................................................ 30,802 32,625
Accrued preferred stock dividend, payable in kind........................... 711 1,755
--------- ---------
31,513 34,380
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized--15,000 shares, issued and
outstanding--6,312 and 8,544 December 25, 1998
and September 24, 1999, respectively...................................... 63,125 91,748
Cumulative translation adjustment........................................... -- (364)
Accumulated deficit......................................................... (3,472) (10,588)
--------- ---------
59,653 80,796
--------- ---------
$ 262,709 $ 323,709
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
April 7,
1998 Nine
Three Months Ended (Inception) Months
---------------------- to Ended
Sept. 25, Sept. 24, Sept. 25, Sept. 24,
1998 1999 1998 1999
-------- --------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales.................................... $ 22,130 $ 30,827 $ 44,562 $ 85,270
Cost of sales................................ 12,113 18,518 24,794 49,701
-------- -------- -------- ---------
Gross profit................................. 10,017 12,309 19,768 35,569
-------- -------- -------- ---------
OPERATING EXPENSES:
Selling, distribution, general and
administrative.......................... 6,512 9,266 12,737 23,793
Research and development................... 475 881 941 1,991
Amortization of goodwill................... 1,190 1,270 2,380 3,810
-------- -------- -------- ---------
8,177 11,417 16,058 29,594
-------- -------- -------- ---------
Income from operations....................... 1,840 892 3,710 5,975
-------- -------- -------- ---------
INTEREST EXPENSE............................. (4,001) (4,342) (6,955) (12,141)
-------- -------- -------- ---------
Loss before benefit for income taxes......... (2,161) (3,450) (3,245) (6,166)
-------- -------- -------- ---------
BENEFIT FOR INCOME TAXES (NOTE 4)............ (865) (796) (1,299) (1,918)
-------- -------- -------- ---------
Net loss..................................... (1,296) (2,654) (1,946) (4,248)
Preferred stock dividends.................... 872 978 1,648 2,868
-------- -------- -------- ---------
Net loss available to common shareholders.... $ (2,168) $ (3,632) $ (3,594) $ (7,116)
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
April 7, 1998
(Inception) Nine Months
to Ended
September 25, September 24,
1998 1999
-------------- --------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (1,946) $ (4,248)
Adjustments to reconcile net loss to net cash provided by operating
activities--
Depreciation and amortization....................................... 6,368 12,346
Deferred tax benefit................................................ -- (1,452)
Decrease (increase) in accounts receivable.......................... (222) 1,964
Increase in inventories............................................. (603) (3,936)
Increase (decrease) in other assets................................. 696 (508)
Decrease in other current assets.................................... (507) (213)
Increase (decrease) in accounts payable............................. 2,282 (3,918)
Decrease in other current liabilities............................... -- (1,189)
Increase in other non-current liabilities........................... -- 250
Increase in accrued liabilities..................................... 4,882 5,695
---------- ---------
Net cash provided by operating activities....................... 10,950 4,760
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................... (2,429) (6,876)
Acquisition of Louis Gibeck AB stock, net of cash acquired of $8,208..... -- (38,750)
Acquisition of certain assets of Gibeck, Inc............................. (3,352) --
Increase in intangible assets............................................ (271) --
Acquisition of Hudson Respiratory Care Inc., net of cash acquired of $734 (248,000) --
---------- ---------
Net cash used in investing activities........................... (254,052) (45,626)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank....................................... (2,000) (9,000)
Proceeds from borrowings on bank credit facilities....................... 40,000 14,171
Additions to deferred financing costs.................................... (717) --
Borrowings on notes from affiliates...................................... -- 22,000
Proceeds from senior subordinated debt................................... 115,000 --
Sale of common and preferred stock, net of transaction costs............. 92,125 22,000
---------- ---------
Net cash provided by financing activities...................... 244,408 49,171
---------- ---------
Effect of exchange rate changes on cash.................................... -- (364)
---------- ---------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS............................ 1,306 7,941
CASH AND SHORT-TERM INVESTMENTS, beginning of period....................... -- 507
---------- ---------
CASH AND SHORT-TERM INVESTMENTS, end of period............................. $ 1,306 $ 8,448
========== =========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
April 7, 1998
(Inception) Nine Months
to Ended
September 25, September 24,
1998 1999
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................................. $ 2,377 $ 7,971
========= ========
Income taxes............................................................. $ 1,659 $ 107
========= ========
DETAILS OF ACQUISITIONS:
Acquisition price........................................................ $ 252,086 $ 53,581
Less: cash acquired...................................................... (734) (8,208)
Less: common stock issued for acquisitions............................... -- (6,623)
--------- --------
Net cash paid for acquisitions............................................... $ 251,352 $ 38,750
========= ========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid in kind.............................. $ 1,648 $ 2,868
========= ========
Common stock issued for acquisition...................................... $ -- $ 6,623
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
1. Financial Statements. The condensed consolidated financial statements
--------------------
included herein have been prepared by River Holding Corp. ("Holding") and Hudson
Respiratory Care Inc. (the "Company" or "Hudson RCI"), without audit, and
include all adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial position at September 24 1999, and the
results of operations and cash flows for the three and nine month periods ended
September 24, 1999 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 consolidated balance sheet of Holding as of
December 25, 1998 and with the Company's 1998 audited financial statements and
the notes thereto included in Holding's Form 10-K filed with the SEC. The
results of operations for the periods presented are not necessarily indicative
of the results to be achieved for a full year.
Recapitalization. In April 1998, the Company consummated a plan pursuant
----------------
to which a majority interest in the Company was sold in accordance with an
agreement and plan of merger (the "Recapitalization").
Key components of the Recapitalization included:
(1) Common and preferred equity investments by Holding in consideration for
an 80.8% ownership in the Company's common stock and preferred stock
with an initial liquidation preference of $30.0 million;
(2) Issuance of 9-1/8% senior subordinated notes with a par value of $115.0
million, maturing in 2008;
(3) Execution of a new term loan facility and revolving loan facility;
(4) Repayment of existing indebtedness;
(5) Payment of amounts due under the Equity Participation Plan;
(6) Payment for common shares acquired from the existing shareholder; this
shareholder retained a 19.2% interest in the common shares outstanding;
(7) Potential contingent payments based on 1998 performance, payable to the
continuing shareholder and former participants in the Equity
Participation Plan; however, as a result of the Company's 1998
performance, no additional amounts are due.
The Company has terminated the Equity Participation Plan. Additionally, the
Company's sole shareholder, who owned the remaining 21% of Industrias Hudson,
transferred this interest to the Company in consideration of one dollar. Because
of the commonality of ownership, the 21% minority interest has been included in
the financial statements for all periods presented.
On April 7, 1998, Holding acquired a majority interest in Hudson RCI, as
discussed above. The investment in Hudson RCI by Holding was accounted for as a
purchase and the purchase price was allocated as follows based upon management's
estimate of relative fair value of assets and liabilities acquired (amounts in
thousands):
6
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<S> <C>
Assets:
Current assets and other $ 33,044
Property, plant and equipment 47,821
Deferred tax asset 9,020
Deferred financing costs 12,917
Goodwill 152,442
---------
255,244
Less liabilities:
Current liabilities 7,244
---------
Total purchase price paid $ 248,000
=========
</TABLE>
Goodwill is being amortized using a 30-year life.
Holding has no operations apart from those conducted by Hudson RCI. The
accompanying consolidated statements of operations include the results of Hudson
RCI for the periods presented.
The minority interest in the Company was initially recorded at zero and the
Company's income for the periods presented has been solely allocated to Holding.
2. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
December 25, September 24,
1998 1999
------------ -------------
Raw materials.......................... $ 5,127 $ 4,662
Work-in-process........................ 5,926 5,442
Finished goods......................... 6,971 14,164
-------- --------
$ 18,024 $ 24,268
======== ========
3. Comprehensive Income. In June 1997, FASB issued Statement of Financial
--------------------
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that meet the definition of components of
comprehensive income be reported in a financial statement for the period in
which they are recognized. This Statement is effective for fiscal years
beginning after December 15, 1997 and was adopted by Holding.
The Company had comprehensive loss for the three and nine month periods
ended September 25, 1998 and September 24, 1999 as follows (amounts in
thousands):
7
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -----------------------
Sept. 25, Sept. 24, Sept. 25, Sept. 24,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss................................ $ (1,296) $ (2,654) $ (1,946) $ (4,248)
Other comprehensive income:
Foreign currency translation loss....... -- (220) -- (364)
-------- -------- -------- --------
Comprehensive loss...................... $ (1,296) $ (2,874) $ (1,946) $ (4,612)
======== ======== ======== ========
</TABLE>
4. Income Taxes. Holding is a C corporation and the Company became a C
------------
corporation upon consummation of the Recapitalization discussed in Note 1. The
deferred tax asset results from different tax bases for financial reporting and
income tax purposes, primarily arising from the Recapitalization.
The effective income tax rate at 40% for the three and nine month periods
ended September 24, 1999 approximates the effective combined federal and state
statutory rates.
5. Acquisition of Louis Gibeck AB. On July 22, 1999, the Company acquired
------------------------------
substantially all of the outstanding capital stock of Louis Gibeck AB ("LGAB")
and subsidiaries, a Swedish company engaged in the same business as the Company.
The purchase price was approximately $53.6 million, which included cash
consideration of approximately $45.5 million (including approximately $8.2
million of cash acquired), a non-cash contribution of shares of Holding Common
Stock of $6.6 million and transaction expenses of approximately $1.5 million.
The acquisition was funded with (i) a $22.0 million common stock sale to
Holding's existing majority shareholder, (ii) a $22.0 million, 12% per annum
unsecured note payable to an affiliate of the Company's existing majority
shareholder due August 1, 2000 and (iii) a $5.9 million unsecured bank loan
bearing interest at the bank's reference rate plus 1/4% per annum due July 30,
2006.
The acquisition of LGAB was accounted for as a purchase and the purchase
price was preliminarily allocated based upon management's estimate of the assets
acquired and liabilities assumed as follows (unaudited, amounts in thousands):
Cash........................................ $ 8,208
Accounts receivable......................... 1,823
Inventories................................. 5,161
Fixed assets................................ 1,206
Current liabilities......................... (4,856)
Non-current liabilities..................... (4,123)
Other assets/liabilities.................... 1,378
Goodwill.................................... 44,784
--------
Total purchase price....................... $ 53,581
========
The Company is evaluating the status of certain in-process research and
development projects that were acquired with the purchase of LGAB. Accordingly,
a portion of the purchase price may be allocated to in-process
8
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
research and development when the Company has completed this analysis. The
Company is also evaluating other estimates made in conjunction with the purchase
price allocation, which may change in the near term.
Had this acquisition and the acquisition of certain assets of Gibeck,
Inc. occurred at the beginning of the current and prior fiscal years, the
unaudited pro forma net sales, net loss before extraordinary item and net income
(loss) would be as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sept. 25, Sept. 24,
1998 1999
-------- ---------
<S> <C> <C>
Net sales.................................... $ 67,801 $ 93,873
======== ========
Net loss before extraordinary items.......... $ (6,256) $ (3,174)
======== ========
Net loss..................................... $ (6,256) $ (3,174)
======== ========
</TABLE>
6. Subsequent Event--Acquisition of Product Line. On September 30, 1999, the
---------------------------------------------
Company entered into a definitive agreement to acquire certain assets of Tyco
Healthcare Group LP ("Tyco") including Tyco's incentive breathing exerciser and
pulmonary function monitor product lines, for a cash purchase price of
approximately $23.8 million. The Tyco acquisition will be funded principally
with proceeds from the Company's $60.0 million revolving line of credit.
Management expects that the acquisition will be accounted for as purchase and
that the majority of the purchase price will be allocated to goodwill.
9
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25 September 24
1998 1999
----------- ------------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash....................................................... $ 507 $ 8,448
Accounts receivable, less allowance for doubtful accounts
of $635 and $412 at December 25, 1998 and September 24,
1999, respectively....................................... 25,829 25,689
Inventories............................................... 18,024 24,268
Other current assets...................................... 716 1,630
-------- --------
Total current assets................................... 45,076 60,035
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net........................ 32,732 36,993
-------- --------
OTHER ASSETS:
Deferred tax asset........................................ 70,329 69,609
Deferred financing costs, net............................. 11,917 11,651
Intangible assets, net.................................... 4,955 50,514
Other assets.............................................. 312 821
-------- --------
Total other assets..................................... 87,513 132,595
-------- --------
$165,321 $229,623
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
10
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------- --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks................................... $ 3,000 $ 8,256
Accounts payable........................................ 6,324 2,991
Note payable to affiliate................................ -- 22,000
Accrued liabilities...................................... 6,219 14,997
Total current liabilities............................... 15,543 48,244
SENIOR SUBORDINATED NOTES PAYABLE.......................... 115,000 115,000
NOTES PAYABLE TO BANKS, net of current portion............. 41,000 44,079
Other non-current liabilities.............................. -- 1,210
--------- ---------
Total liabilities..................................... 171,543 208,533
--------- ---------
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value:
Authorized--1,800 shares; issued and outstanding--318 and
336 shares at December 25, 1998 and September 24, 1999;
liquidation preference: $33,625.......................... 30,802 32,625
Accrued preferred stock dividend, payable in kind......... 711 1,755
--------- ---------
31,513 34,380
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized--15,000 shares, issued and
outstanding--7,812 and 10,044 at December 25, 1998
and September 24, 1999, respectively.................... 63,535 92,158
Cumulative translation adjustment......................... (464) (828)
Accumulated deficit....................................... (100,806) (104,620)
--------- ---------
(37,735) (13,290)
--------- ---------
$ 165,321 $ 229,623
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
11
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
Sept. 25,
1998
Sept. 25, Sept. 24, (as restated, Sept. 24,
1998 1999 see Note 6) 1999
--------- -------- ------------ ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES
COST OF SALES......................................... $ 22,130 $ 30,827 $ 68,828 $ 85,270
Gross Profit........................................ 11,548 17,953 36,691 48,006
-------- -------- --------- ---------
10,582 12,874 32,137 37,264
OPERATING EXPENSES:
Selling, distribution, general and administrative.... 6,512 9,266 19,657 23,793
Research and development............................ 475 882 1,415 1,993
-------- -------- --------- ---------
6,987 10,148 21,072 25,786
-------- -------- --------- ---------
PROVISION FOR EQUITY PARTICIPATION PLAN............... -- -- 63,939 --
PROVISION FOR RETENTION PAYMENTS...................... -- -- 4,754 --
-------- -------- --------- ---------
Income (loss) from operations....................... 3,595 2,726 (57,628) 11,478
-------- -------- --------- ---------
INTEREST EXPENSE...................................... (4,001) (4,342) (7,791) (12,140)
-------- -------- --------- ---------
Loss before (benefit) provision for income taxes.... (406) (1,616) (65,419) (662)
(BENEFIT) PROVISION FOR INCOME TAXES (Note 5)......... (163) (62) (1,386) 284
-------- -------- --------- ---------
Loss before extraordinary item...................... (243) (1,554) (65,343) (946)
EXTRAORDINARY ITEM--loss on extinguishment of debt.... -- -- 104 --
-------- -------- --------- ---------
Net loss............................................ (243) (1,554) (65,447) (946)
Preferred stock dividends............................. 872 978 1,648 2,868
-------- -------- --------- ---------
Net loss available to common shareholders............. $ (1,115) $ (2,532) $ (67,095) $ (3,814)
======== ======== ========= =========
Pro forma net loss available to common shareholders
assuming C corporation status for income tax
purposes (Note 5).................................... $ (1,115) $ (2,532) $ (41,000) $ (3,814)
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
12
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
Sept. 25, Sept. 24,
1998 1999
--------- ----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (65,447) $ (946)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities--
Depreciation and amortization............................................... 4,869 5,817
Write-off of deferred financing fees........................................ 104 --
Amortization of deferred financing costs.................................... -- 1,024
Gain on disposal of equipment............................................... (28) --
Deferred taxes.............................................................. (3,345) 720
Increase in equity participation plan (EPP)................................. 63,939 --
Decrease in accounts receivable............................................. 2,319 1,964
Decrease (increase) in inventories.......................................... 72 (3,936)
Decrease (increase) in other current assets................................. 250 (213)
(Increase) decrease in other assets......................................... 215 (508)
Increase (decrease) in accounts payable..................................... 1,522 (3,918)
Increase in accrued liabilities............................................. 7,057 5,695
Decrease in other current liabilities....................................... -- (1,189)
Increase in other non-current liabilities................................... -- 250
Payments of EPP liabilities................................................. (89,642) --
--------- --------
Net cash provided by (used in) operating activities............................ (78,115) 4,760
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (2,730) (6,876)
Acquisition of certain assets of Gibeck, Inc................................... (3,352) --
Acquisition of Louis Gibeck AB stock, net of cash acquired of $8,208........... -- (38,750)
--------- --------
Net cash used in investing activities........................................ (6,082) (45,626)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (43,250) (9,000)
Proceeds from bank borrowings.................................................. 61,000 14,171
Additions to deferred financing costs.......................................... (12,563) --
Redemption of stockholder interest............................................. (127,624) --
Proceeds from senior subordinated debt......................................... 115,000 --
Proceeds from note payable to affiliate........................................ -- 22,000
Sale of common and preferred stock, net of transaction costs................... 92,125 22,000
--------- --------
Net cash provided by financing activities................................. 84,688 49,171
--------- --------
Effect of exchange rate changes on cash......................................... 345 (364)
--------- --------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS................................. 836 7,941
CASH AND SHORT-TERM INVESTMENTS, beginning of period............................ 470 507
--------- --------
CASH AND SHORT-TERM INVESTMENTS, end of period.................................. $ 1,306 $ 8,448
========= ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 25, Sept. 24,
1998 1999
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest..................................................................... $ 2,377 $ 7,971
======= ========
Income taxes................................................................. $ 1,659 $ 107
======= ========
DETAILS OF ACQUISITIONS:
Acquisition price.............................................................. $ 3,352 $ 53,581
Less: cash acquired............................................................ -- (8,208)
Less: common stock issued for acquisitions..................................... -- (6,623)
------- --------
Net cash paid for acquisitions................................................. $ 3,352 $ 38,750
======= ========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid in kind.................................... $ 1,648 $ 2,868
======= ========
Common stock issued for acquisition............................................ $ -- $ 6,623
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
14
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
1. Financial Statements. The condensed consolidated financial statements
--------------------
included herein have been prepared by Hudson Respiratory Care Inc. (the
"Company" or "Hudson RCI") without audit, and include all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position at September 24, 1999, and the results of operations and cash flows for
the three and nine month periods ended September 25, 1998 and September 24, 1999
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 1998 audited financial statements and the notes thereto included
in its Form 10-K filed with the SEC. The results of operations for the three
and nine month periods ended September 25, 1998 and September 24, 1999 are not
necessarily indicative of the results to be achieved for a full year.
Recapitalization. In April 1998, the Company consummated a plan pursuant
----------------
to which a majority interest in the Company was sold in accordance with an
agreement and plan of merger (the "Recapitalization").
Key components of the Recapitalization included:
(1) Common and preferred equity investments in consideration for an 80.8%
ownership in the Company's common stock and preferred stock with an
initial liquidation preference of $30.0 million;
(2) Issuance of 9-1/8% senior subordinated notes with a par value of
$115.0 million, maturing in 2008;
(3) Execution of a new term loan facility and revolving loan facility;
(4) Repayment of existing indebtedness;
(5) Payment of amounts due under the Equity Participation Plan;
(6) Payment for common shares acquired from the existing shareholder; this
shareholder retained a 19.2% interest in the common shares
outstanding;
(7) Potential contingent payments based on 1998 performance, payable to
the continuing shareholder and former participants in the Equity
Participation Plan; however, as a result of the Company's 1998
performance, no additional amounts are due.
The Company has terminated the Equity Participation Plan. Additionally, the
Company's sole shareholder, who owned the remaining 21% of Industrias Hudson,
transferred this interest to the Company in consideration of one dollar. Because
of the commonality of ownership, the 21% minority interest has been included in
the financial statements for all periods presented.
The Company effected a 245:1 stock split concurrent with the
Recapitalization. The stock split has been reflected in the stock amounts shown
herein.
15
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
The Recapitalization resulted in no change to the carrying amounts of the
Company's existing assets and liabilities. The Company has recorded a deferred
tax asset due to the conversion from S to C corporation status and a tax
election to revalue the basis of assets and liabilities for tax purposes.
2. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------ -------------
<S> <C> <C>
Raw materials................................................ $ 5,127 $ 4,662
Work-in-process.............................................. 5,926 5,442
Finished goods............................................... 6,971 14,164
------- -------
$18,024 $24,268
======= =======
</TABLE>
3. Comprehensive Income. In June 1997, FASB issued Statement of Financial
--------------------
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that meet the definition of components of
comprehensive income be reported in a financial statement for the period in
which they are recognized. This Statement was adopted by the Company in the
quarter ended March 27, 1998.
The Company had comprehensive loss for the three and nine month
periods ended September 25, 1998 and September 24, 1999 as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
Sept. 25, Sept. 24, Sept. 25, Sept. 24,
1998 1999 1998 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss......................................... $(243) $(1,554) $(65,447) $ (946)
Other comprehensive income (loss):
Foreign currency translation loss........... -- (220) (21) (364)
------ ------- -------- -------
Comprehensive loss............................... $(243) $(1,774) $(65,468) $(1,310)
====== ======= ======== =======
</TABLE>
4. Foreign Currency Translation. Effective in the first quarter of 1999, the
----------------------------
Company commenced using the Mexican Peso as the functional currency of its
Mexican operations since Mexico is no longer considered a highly inflationary
economy.
5. Income Taxes. The Company became a C corporation upon consummation of the
------------
transaction discussed in Note 1. Accordingly, the Company has presented pro
forma net income (loss) amounts to reflect a provision for income taxes at a
combined effective rate of approximately 40%, after consideration of permanent
differences between financial reporting and income tax amounts.
6. Restatement. The effect of the conversion of the Company to a C
-----------
corporation in connection with the Recapitalization of approximately $77.1
million was previously reflected in operations during the quarter ended June 26,
1998. This amount should have been reflected as a direct credit to retained
earnings during the period. This restatement had no impact on ending retained
earnings for the periods presented. The impact of this restatement on the
accompanying financial statements is as follows:
16
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 25, 1998
----------------------------------------------------
As
Originally As
Reported Adjustments Related
---------- ----------- ---------
<S> <C> <C> <C>
Net loss before (benefit) provision for
income taxes.............................. $(65,419) $ -- $(65,419)
========= ========= =========
Net income (loss) before extraordinary
item...................................... $ 11,721 $(77,064) $(65,343)
========= ========= =========
Net income (loss).......................... $ 11,617 $(77,064) $(65,447)
========= ========= =========
</TABLE>
7. Acquisition of Louis Gibeck AB. On July 22, 1999, the Company acquired
------------------------------
substantially all of the outstanding capital stock of Louis Gibeck AB ("LGAB")
and subsidiaries, a Swedish company engaged in the same business as the Company.
The purchase price was approximately $53.6 million, which included cash
consideration of approximately $45.5 million (including approximately $8.2
million of cash acquired), a non-cash contribution of shares of Common Stock of
River Holding Corp., a Delaware corporation and the Company's parent, of $6.6
million and transaction expenses of approximately $1.5 million.
The acquisition was funded with (i) a $22.0 million common stock sale to
the Company's existing majority shareholder, (ii) a $22.0 million, 12% per annum
unsecured note payable to an affiliate of the Company's existing majority
shareholder due August 1, 2000 and (iii) a $5.9 million unsecured bank loan
bearing interest at the bank's reference rate plus 3% per annum due July 30,
2006.
The acquisition of LGAB was accounted for as a purchase and the purchase
price was preliminarily allocated based upon management's estimate of the
assets acquired and liabilities assumed as follows (unaudited, amounts in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash..................................................... $ 8,208
Accounts receivable...................................... 1,823
Inventories.............................................. 5,161
Fixed assets............................................. 1,206
Current liabilities...................................... (4,856)
Non-current liabilities................................... (4,123)
Other assets/liabilities.................................. 1,378
Goodwill................................................... 44,784
------
Total purchase price....................................... $53,581
======
</TABLE>
The Company is evaluating the status of certain research and development
projects that were acquired with the purchase of LGAB. Accordingly, a portion
of the purchase price may be allocated to research and development when the
Company has completed this analysis. The Company is also evaluating other
estimates made in conjunction with the purchase price allocation, which may
change in the near term.
Had this acquisition and the acquisition of certain assets of Gibeck, Inc.
occurred at the beginning of the current and prior fiscal years, the unaudited
pro forma net sales, net loss before extraordinary item and net loss would be as
follows (in thousands):
17
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 25, Sept. 24,
1998 1999
--------- ---------
<S> <C> <C>
Net sales................................... $ 92,067 $ 93,873
========= ========
Net loss before extraordinary item.......... $ (71,115) $ (2,073)
========= ========
Net loss.................................... $ (71,219) $ (2,073)
========= ========
</TABLE>
8. 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 non-guarantor subsidiaries consist
principally of the assets, liabilities and operations of LGAB and subsidiaries.
The following tables disclose required consolidating financial information for
guarantor, including the Company, and non-guarantor subsidiaries (amounts in
thousands):
18
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 24, 1999
---------------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
-------------- --------------- ------------- ------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and short term investments................... $ -- $ 10,067 $ (1,619) $ 8,448
Accounts receivable............................... 23,124 2,565 -- 25,689
Inventories....................................... 20,496 3,772 -- 24,268
Other current assets.............................. 642 4,655 (3,667) 1,630
-------- -------- -------- --------
Total current assets............................ 44,262 21,059 (5,286) 60,035
-------- -------- -------- --------
PROPERTY, PLANT
AND EQUIPMENT, NET................................ 35,886 1,107 -- 36,993
-------- -------- -------- --------
OTHER ASSETS:
Deferred tax asset................................ 69,525 84 -- 69,609
Deferred financing costs, net..................... 11,101 550 -- 11,651
Intangible assets, net............................ 4,122 42,708 3,684 50,514
Investment in non-guarantor subsidiaries.......... 28,978 -- (28,978) --
Other assets...................................... 554 642 (375) 821
-------- -------- -------- --------
Total other assets.............................. 114,280 43,984 (25,669) 132,595
-------- -------- -------- --------
$194,428 $ 66,150 $(30,955) $229,623
======== ======== ======== ========
</TABLE>
19
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 24, 1999
---------------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
-------------- --------------- ------------- ------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank............................. 4,000 4,256 -- 8,256
Accounts payable.................................. 3,980 630 (1,619) 2,991
Note payable to affiliate......................... -- 22,000 -- 22,000
Accrued liabilities............................... 10,255 4,940 (198) 14,997
-------- -------- -------- --------
Total current liabilities....................... 18,235 31,826 (1,817) 48,244
-------- -------- -------- --------
OTHER LIABILITIES:
Notes payable to bank, net of current portion..... 38,000 6,185 (106) 44,079
Senior subordinated notes......................... 115,000 -- -- 115,000
Other............................................. -- 1,209 1 1,210
-------- -------- -------- --------
Total liabilities........................ 171,235 39,220 (105) 208,533
-------- -------- -------- --------
Manditorily redeemable preferred stock............. 34,380 -- -- 34,380
-------- -------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT)..................... (11,187) 26,930 (29,033) (13,290)
-------- -------- -------- --------
$194,428 $ 66,150 $(30,955) $229,623
======== ======== ======== ========
</TABLE>
20
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 24, 1999
---------------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments (a) Total
----------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
NET SALES......................................... $ 28,145 $ 3,469 $ (787) $ 30,827
COST OF SALES..................................... 15,759 2,355 (161) 17,953
-------- -------- ------ --------
Gross Profit................................... 12,386 1,114 (626 12,874
OPERATING EXPENSES:
Selling, distribution, general and administrative 7,216 2,050 - 9,266
Research and development....................... 557 325 - 882
-------- -------- ------ --------
7,773 2,375 - 10,148
-------- -------- ------ --------
Income (loss) from operations.................. 4,613 (1,261) (626) 2,726
-------- -------- ------ --------
OTHER INCOME AND (EXPENSES):
Interest expense............................... (3,884) (466) - (4,350)
Other, net..................................... 8 - - 8
-------- -------- ------ --------
(3,876) (466) - (4,342)
-------- -------- ------ --------
Income (loss) before provision (benefit) for
income taxes.................................. 737 (1,727) (626) (1,616)
PROVISION (BENEFIT) FOR INCOME TAXES.............. 188 (250) - (62)
-------- -------- ------ --------
NET INCOME (LOSS)................................. $ 549 $ (1,477) $ (626) $ (1,554)
======== ======== ====== ========
Depreciation and amortization..................... $ 1,534
========
EBITDA before EPP and bonuses..................... $ 6,147
========
</TABLE>
(a) Represents elimination of sales of products from LG-AB to the Company which
have not been resold by the Company, i.e., inter-company profit.
21
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 24, 1999
------------------------------------------------------------------
Non-
Guarantor Guarantor Adjustments (a) Total
----------- ----------- ----------------- --------
<S> <C> <C> <C> <C>
NET SALES....................................... $ 82,588 $ 3,469 $ (787) $ 85,270
COST OF SALES................................... 45,812 2,355 (161) 48,006
-------- --------- ------ --------
Gross Profit................................. 36,776 1,114 (626) 37,264
OPERATING EXPENSES:
Selling, distribution, general and administrative 21,743 2,050 - 23,793
Research and development..................... 1,668 325 - 1,993
-------- --------- ------ --------
23,411 2,375 - 25,786
-------- --------- ------ --------
Income (loss) from operations................ 13,365 1,261 (626) 11,478
-------- --------- ------ --------
OTHER INCOME AND (EXPENSES):
Interest expense............................. (11,727) (383) - (12,110)
Other, net................................... 53 (83) - (30)
-------- --------- ------ --------
(11,674) (466) - (12,140)
-------- --------- ------ --------
Income (loss) before provision (benefit) for 1,691 (1,727) (626) (662)
income taxes...............................
PROVISION (BENEFIT) FOR INCOME TAXES............ 533 (250) - 284
-------- --------- ------ --------
NET INCOME (LOSS)............................... $ 1,157 $ (1,477) $ (626) $ (946)
======== ========= ======= ========
Depreciation and amortization................... $ 4,670
========
EBITDA before EPP and bonuses................... $ 18,035
========
</TABLE>
(a) Represents elimination of sales of products from LGAB to the Company which
have not been resold by the Company, i.e., intercompany profit.
22
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 24, 1999
----------------------------------------
Non-
Guarantor Guarantor Total
----------- ---------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities...................................... $ 8,733 $ (3,973) $ 4,760
Net cash used in investing activities............ (28,876) (16,750) (45,626)
Net cash provided by financing activities........ 20,000 29,171 49,171
Effect of exchange rate changes on cash.......... (364) -- (364)
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS..................................... (507) 8,448 7,941
CASH AND SHORT-TERM INVESTMENTS,
beginning of period............................. 507 -- 507
---------- --------- --------
CASH AND SHORT-TERM INVESTMENTS,
end of period................................... $ -- $ 8,448 $ 8,448
========== ========= ========
</TABLE>
As discussed above, the non-guarantor subsidiaries consist principally of
subsidiaries of LGAB and subsidiaries (whose operations are principally
international) the Company operates in two segments: North American operations
and international operations. The financial data of the two segments closely
approximates the guarantor/non-guarantor information set forth above and,
accordingly, separate segment data is not provided.
23
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
9. Subsequent Event--Acquisition of Product Line. On September 30, 1999, the
---------------------------------------------
Company entered into a definitive agreement to acquire certain assets of Tyco
Healthcare Group LP ("Tyco"), including Tyco's incentive breathing exerciser and
pulmonary function monitor product lines, for a cash purchase price of
approximately $23.8 million. The Tyco acquisition will be funded principally
with proceeds from the Company's $60.0 million revolving line of credit.
Management expects that the acquisition will be accounted for as purchase and
that the majority of the purchase price will be allocated to goodwill.
10. Subsequent Event--Principal Payment on Note Payable. In October 1999, the
---------------------------------------------------
Company paid $4.2 million in principal on a note payable to an affiliate.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As River Holding Corp. ("Holding") is a holding company with no operations,
the following discussion relates to Hudson Respiratory Care Inc.'s (the
"Company" or "Hudson RCI") consolidated historical results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto included elsewhere in
this Form 10-Q. The following discussion and analysis covers periods before
completion of the Recapitalization, as described below.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. Such statements
relating to future events and financial performance are forward-looking
statements involving risks and uncertainties that are detailed from time to time
in the Company's Securities and Exchange Commission filings.
General
The Company is a leading manufacturer and marketer of disposable medical
products utilized in the respiratory care and anesthesia segments of the
domestic and international health care markets. The Company's principal
products include oxygen masks, humidification systems, nebulizers, cannulae and
tubing. In the United States, the Company markets its products to a variety of
health care providers, including hospitals and alternate site service providers
such as outpatient surgery centers, long-term care facilities, physician offices
and home health care agencies. Internationally, the Company sells its products
to distributors who market to hospitals and other health care providers.
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
On September 30, 1999, the Company entered into a definitive agreement to
acquire certain assets of Tyco Healthcare Group LP ("Tyco"), including Tyco's
incentive breathing exerciser and pulmonary function monitor product lines, for
a cash purchase price of approximately $23.8 million. The Tyco acquisition will
be funded principally with proceeds from the Company's $60.0 million revolving
line of credit.
On July 22, 1999, the Company, through its indirect, wholly-owned
subsidiary Steamer Holding AB, a company organized under the laws of Sweden
("Steamer"), acquired a majority of the outstanding capital stock of Louis
Gibeck AB, a company organized under the laws of Sweden ("LGAB"). Pursuant to a
series of private purchases and a tender offer consummated pursuant to Swedish
law, Steamer acquired 604,000 shares of Class A stock and 2,452,838 shares of
Class B stock representing approximately 82.0% of the capital and 62.8% of the
voting power of LGAB at a price of 115 Swedish krona (approximately $13.60 at
the July 22 exchange rate) per share of Class A stock and Class B stock for an
aggregate cash purchase price of approximately $45.5 million. In addition, on
August 4, 1999, Steamer acquired an additional 483,750 shares of Class A stock
of LGAB from Holding, which shares Holding acquired in a private transaction in
exchange for 525,042 shares of common stock of Holding ("Holding Common Stock").
The exchange ratio for the Class A stock was the same as the effective price per
share of the shares acquired in the tender offer. After giving effect to this
exchange and the conversion of the Series A stock acquired by Steamer in the
tender offer into Series B stock, Steamer holds approximately 99.0% of the
capital and 100.0% of the voting power of LGAB. The Company intends that
Steamer, through continuing purchases and a statutory freezeout and appraisal
procedure under Swedish law, will acquire the remaining outstanding shares of
LGAB as soon as practicable.
25
<PAGE>
The cash for the purchase price and certain related transaction costs was
funded with (i) $22.0 million in gross proceeds from the sale of Holding Common
Stock to the majority stockholder of Holding, (ii) a $22.0 million loan from the
majority stockholder of Holding to Steamer's parent, HRC Holding Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company, and (iii) the
funding of 50 million Swedish krona (approximately $5.9 million) pursuant to the
terms of a loan facility agreement between Steamer and Svenska Handelsbanken AB.
Founded in 1954, LGAB develops, manufactures and markets medical device
products which humidify, heat and filter a patient's breathing gases during
anesthesia and intensive care. LGAB is a market leader in the area "heat
moisture exchange" ("HME") products, with an approximately 25% share of the
world market. Following completion of the acquisition, the Company intends to
continue LGAB's operations in substantially the same manner as conducted prior
to the acquisition.
In September 1998, the Company acquired certain assets of Gibeck, Inc., a
subsidiary of LGAB, for approximately $3.35 million. Prior to the transaction,
Gibeck, Inc. was engaged primarily in the business of manufacturing, marketing
and selling disposable anesthesia supplies. In conjunction with that
transaction, the Company became the exclusive North American distributor of
LGAB's HME product line. In fiscal year 1997, Gibeck, Inc. reported net sales
of approximately $12.3 million.
The Company established a sales office located in Germany in the second
quarter of 1999. It is anticipated that this operation will better equip the
Company to more aggressively pursue the German market. The German operation had
a negative impact on the Company's results of approximately $400,000 in the
second and third quarters of 1999. It is anticipated that the Company's
earnings will be negatively impacted for the first twelve months of operation.
The Recapitalization
On April 7, 1998, Hudson RCI consummated its recapitalization pursuant to
an Agreement and Plan of Merger pursuant to which River Acquisition Corp., a
wholly-owned subsidiary of Holding merged with and into Hudson RCI, with Hudson
RCI surviving as a majority-owned subsidiary of Holding (the "Merger").
Pursuant to the Recapitalization, Holding contributed approximately $93.0
million in equity capital into Hudson RCI (the "Holding Equity Investment") and
a shareholder of Hudson RCI (the "Continuing Shareholder") retained common stock
of Hudson RCI with a value of approximately $15.0 million (the "Rollover
Equity"), based on the valuation of Hudson RCI used in the Recapitalization. In
the Merger, a portion of the Hudson RCI common stock was converted into the
right to receive approximately $131.1 million in cash, and management received
$88.3 million pursuant to the Company's Equity Participation Plan (the "Equity
Participation Plan" or "EPP"). Following the Holding Equity Investment, Holding
owned 80.8% of the outstanding common stock of Hudson RCI and the Continuing
Shareholder owned 19.2% of the outstanding common stock of Hudson RCI.
The Holding Equity Investment was comprised of $63.0 million of common
equity (the 'Common Stock Investment") and $30.0 million of preferred equity
(the "Preferred Stock Investment"). The Common Stock Investment was funded with
a $55.0 million investment by affiliates of Freeman Spogli & Co. Incorporated
("FS&Co."), and an $8.0 million investment by management of Hudson RCI. The
Preferred Stock Investment was funded with proceeds from the sale of 112% Senior
Exchangeable PIK Preferred Stock due 2010 (the "Holding Preferred Stock") with
an aggregate liquidation preference of $30.0 million offered by Holding (the
"Preferred Stock Offering"). Immediately following consummation of the
Recapitalization, FS&Co. beneficially owned approximately 87.3% of the
outstanding common stock of Holding and management owned the remaining 12.7%.
In connection with the Recapitalization and concurrently with the Preferred
Stock Offering, Hudson RCI offered $115.0 million aggregate principal amount of
9-1/8% Senior Subordinated Notes due 2008 (the "Subordinated Notes")(the
"Subordinated Notes Offering," and together with the Preferred Stock Offering,
the "Offerings").
On April 7, 1998, Hudson RCI entered into an agreement (the "Credit
Facility") providing for a $40.0 million secured term loan facility (the "Term
Loan Facility"), which was funded in connection with the consummation of the
26
<PAGE>
Recapitalization, and a $60.0 million revolving loan facility (the "Revolving
Loan Facility") which will be available for Hudson RCI's future capital
requirements and to finance acquisitions.
The Offerings and the application of the net proceeds therefrom, repayment
of existing Hudson RCI debt payments to the Continuing Shareholder under the
Recapitalization Agreement and to management, the Holding Equity Investment and
the related borrowings under the Credit Facility are collectively referred to
herein as the "Recapitalization."
The Company and the shareholders that received distributions in the
Recapitalization made an election under Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended, to treat the Recapitalization as an asset
purchase for tax purposes, which had the effect of significantly increasing the
basis of the Company's assets, thus increasing depreciation and amortization
expenses and other deductions for tax purposes and reducing the Company's
taxable income in 1998 and subsequent years. The Recapitalization resulted in
no change in the basis of the Company's assets and liabilities for financial
reporting purposes.
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
---------------------------- ----------------------------
Sept. 25, Sept. 24, Sept. 25, Sept. 24,
1998 1999 1998 1999
----------- ------------ ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales $22,130 $30,827 $68,828 $85,270
Cost of sales................................... 11,548 17,953 36,691 48,006
------- ------- ------- -------
Gross profit................................ 10,582 12,874 32,137 37,264
------- ------- ------- -------
Selling expenses................................ 2,489 3,296 7,180 8,408
Distribution expenses........................... 1,251 1,946 3,949 5,027
General and administrative expenses............. 2,772 4,024 8,528 10,358
Research and development expenses............... 475 882 1,415 1,993
Provision for equity participation plan......... -- -- 63,939 --
Provision for retention payments................ -- -- 4,754 --
------- ------- ------- -------
Total operating expenses........................ 6,987 10,148 89,765 25,786
------- ------- ------- -------
Operating income (loss)......................... 3,595 2,726 (57,628) 11,478
------- ------- ------- -------
Add back: Provision for equity participation
plan.......................................... -- -- 63,939 --
Add back: Provision for retention payments..... -- -- 4,754 --
------- ------- ------- -------
Operating income before provision for equity
participation plan and provision for
retention payments............................ $ 3,595 $ 2,726 $ 11,065 $11,478
======= ======= ======= =======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
---------------------------------------- ---------------------------------------
Sept 25, Sept 24, Sept. 25, Sept 24,
1998 1999 1998 1999
------------------ ------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 52.2 58.2 53.3 56.3
----- ----- ----- -----
Gross profit..................................... 47.8 41.8 46.7 43.7
Selling expenses.................................. 11.2 10.7 10.4 9.9
Distribution expenses............................. 5.7 6.3 5.7 5.9
General and administrative expenses............... 12.5 13.1 12.4 12.1
Research and development expenses................. 2.1 2.9 2.1 2.3
Provision for equity participation plan........... -- -- 92.9 --
Provision for retention payments.................. -- -- 6.9 --
----- ----- ----- -----
Total operating expenses.......................... 31.6 32.9 130.4 30.2
----- ----- ----- -----
Operating income (loss)........................... 16.2 8.8 (83.7) 13.5
----- ----- ----- -----
Add back: Provision for equity participation
plan............................................. -- -- 92.9 --
Add back: Provision for retention payments....... -- -- 6.9 --
----- ----- ----- -----
Operating income before provisions for equity
participation plan and provision for retention... 16.2% 8.8% 16.1% 13.5%
payments......................................... ===== ===== ===== =====
</TABLE>
Three Months Ended September 24, 1999 Compared to Three Months Ended September
25, 1998
Net sales, reported net of accrued rebates, were $30.8 million in the
third quarter of 1999 as compared to $22.1 million in the third quarter of 1998.
This represents an increase of $8.7 million or 39.3%. Of this increase,
approximately $2.7 million was the result of the LGAB acquisition. Excluding
LGAB, domestic hospital sales increased $3.4 million, primarily due to sales of
products relating to the September 1998 acquisition of Gibeck, Inc., as well as
increased sales to GPO-affiliated hospitals. Alternate site sales increased by
$1.5 million or 40.6% as the Company continued to focus sales efforts in this
growing market. Canadian sales were $0.4 million, essentially flat with the
third quarter of 1998. House account sales decreased by $0.1 million or 10.0%
from the third quarter of 1998, primarily the result of purchase timing of
several OEM customers. International sales increased by $1.3 million or 32.5%,
primarily the result of strong sales in Japan and Europe. Sales to the Far
East, which had been hampered in 1998 by the economic crisis in that area,
increased $0.1 million over the third quarter of 1998.
The Company's gross profit for the third quarter of 1999 was $12.9
million, an increase of $2.3 million or 21.7% over the third quarter of 1998. Of
this increase, approximately $1.6 million is a direct result of the LGAB
acquisition. As a percentage of sales, gross profit was 41.8% and 47.8% for the
third quarter of 1999 and 1998, respectively. This decline is related primarily
to an unfavorable mix variance as sales of higher margin pre-filled solutions
continues to decline and a $1.0 million charge to cost of sales relating to the
fair value of acquired inventories in the third quarter of 1999. It is
anticipated that substantially all inventories acquired in the LGAB acquisition
will be exhausted by year-end which will result in a remaining charge of $1.6
million in the fourth quarter. No such charges will occur after fiscal 1999.
$0.8 million increase over the third quarter of 1998. This increase was
primarily due to the LGAB acquisition, as well as the start up of the German
operation. As a percentage of net sales, selling expenses were 10.7% in the
third quarter of 1999 as compared to 11.2% in the third quarter of 1998.
Distribution expenses were $1.9 million for the third quarter of 1999,
an increase of $0.7 million or 55.6% over the third quarter of 1998. The
majority of this increase was a result of higher sales volumes both as a result
of internal
28
<PAGE>
sales growth and the LGAB acquisition. As a percentage of net sales,
distribution expenses were 6.3% and 5.7% in the third quarter of 1999 and 1998,
respectively.
General and administrative expenses were $4.0 million in the third
quarter of 1999, an increase of $1.3 million or 45.2% over the third quarter of
1998. This increase was primarily due to the LGAB acquisition during the third
quarter of 1999.
Research and development expenses were $0.9 million for the third
quarter of 1999, an increase of $0.4 million over the third quarter of 1998.
This increase was entirely due to the LGAB acquisition during the third quarter
of 1999.
Interest expense was $4.4 million for the third quarter of 1999, as
compared to $3.5 million in the third quarter of 1998. This increase was due to
higher debt levels in the current quarter as a result of borrowings made to
finance the LGAB acquisition.
Prior to April 7, 1998, the Company provided for state income taxes as
an S corporation and was not subject to federal income tax. The Company now
provides for state and federal income taxes as a C corporation, although actual
tax payments are expected to be substantially less than provided amounts due to
the tax basis in assets provided by the Section 338(h)(10) election made in
connection with the Recapitalization.
Nine Months Ended September 24, 1999 Compared to Nine Months Ended September 25,
1998
Net sales, reported net of accrued rebates, were $85.3 million in the
first nine months of 1999 as compared to $68.8 million for the first nine months
of 1998. This represents an increase of $16.4 million or 23.9%. Of this
increase, approximately $2.8 million is a result of the LGAB acquisition.
Exclusive of the LGAB acquisition, domestic hospital sales increased $7.8
million, primarily due to sales of products relating to the September 1998
acquisition of Gibeck, Inc., as well as increased sales to GPO-affiliated
hospitals. Alternate site sales increased by $3.4 million or 30.0% as the
Company continued to focus sales efforts in this growing market. Canadian sales
were $1.7 million for the first nine months of 1999, an increase of $0.3 million
or 18.6% over the first nine months of 1998, primarily the result of the
addition of a new distributor as well as the award of the Medbuy GPO contract in
the second quarter of 1998. House account sales increased by $0.6 million or
24.7% over the first half of 1998, primarily the result of the addition of
several OEM relationships. International sales increased by $1.6 million or
13.8%, primarily the result of strong sales in Japan and Europe.
The Company's gross profit for the first nine months of 1999 was $37.3
million, an increase of $5.1 million or 16.0% over the first nine months of
1998. As a percentage of sales, the gross profit was 43.7% and 46.7% for the
first nine months of 1999 and 1998, respectively. The decline in the margin is
primarily due to unfavorable mix variance caused by increased sales of lower
margin products, such as the Gibeck line of anesthesia products, as well as a
$1.0 million charge to cost of sales relating to the fair value of acquired
inventories in the third quarter of 1999. It is anticipated that substantially
all inventories acquired in the LGAB acquisition will be exhausted by year-end
which will result in a remaining charge of $1.6 million in the fourth quarter.
No such charges will occur after fiscal 1999.
Selling expenses were $8.4 million for the first nine months of 1999,
a $1.2 million increase over the first nine months of 1998. This increase was
primarily due to the LGAB acquisition, as well as the start up of the German
operation. As a percentage of net sales, selling expenses were 9.9% in the
first nine months of 1999 as compared to 10.4% in the first nine months of 1998.
Distribution expenses were $5.0 million for the first nine months of
1999, an increase of $1.1 million or 27.3% over the first nine months of 1998.
The majority of this increase was a result of higher sales volumes both as a
result of internal sales growth and the LGAB acquisition. As a percentage of
net sales, distribution expenses were 5.9% and 5.7% in the first nine months of
1999 and 1998, respectively.
General and administrative expenses were $10.4 million in the first
nine months of 1999, an increase of $1.8 million or 21.5% over the first nine
months of 1998. This increase was primarily due to the LGAB acquisition
29
<PAGE>
during the third quarter of 1999 as well as payments made to certain outside
consultants during the first nine months of 1999.
Research and development expenses were $2.0 million for the first nine
months of 1999, an increase of $0.6 million over the first nine months of 1998.
This increase was primarily due to the LGAB acquisition during the third quarter
of 1999.
The provision for EPP was terminated upon consummation of the
Recapitalization. As a result, no expense was recorded in the third quarter of
1999. In the first quarter of 1999 certain payments totaling approximately $2.1
million were made to the EPP members and the former shareholder. These payments
had been accrued in fiscal 1998 and therefore had no impact on earnings in
fiscal 1999. It is not anticipated that any additional payments will be made
under the plan.
Interest expense was $12.1 million for the first nine months of 1999,
as compared to $7.1 million in the first nine months of 1998. This increase was
due to higher debt levels in the current quarter as a result of the
recapitalization during the second quarter of 1998 and additional borrowings
made to finance the LGAB acquisition.
Prior to April 7, 1998, the Company provided for state income taxes as
an S corporation and was not subject to federal income tax. The Company now
provides for state and federal income taxes as a C corporation, although actual
tax payments are expected to be substantially less than provided amounts due to
the tax basis in assets provided by the Section 338(h)(10) election made in
connection with the Recapitalization.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from
operations and borrowing under its working capital facility. Cash provided by
operations before EPP payments totaled $11.5 million in the nine months ended
September 25, 1998 and $4.8 million in the nine months ended September 24, 1999.
The Company had operating working capital, excluding cash and short-term debt,
of $31.7 million at September 24, 1999. Inventories were $18.0 million and
$24.3 million at December 25, 1998 and September 24, 1999, 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. Over time,
the Company expects its level of inventories to increase as the Company's sales
in the international market increase. Accounts receivable, net of allowances,
were $25.8 million and $25.7 million at December 25, 1998 and September 24,
1999, respectively. The Company offers 30 day credit terms to its U.S. hospital
distributors. Alternate site and international customers typically receive 60
to 90 day terms and, as a result, as the Company's alternate site and
international sales have increased, the 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. The Company established a
sales office in Germany in the second quarter of 1999. While this will have the
effect of increasing the Company's investment in inventories, management
believes it will also result in improved service to international customers as
well as in lower international accounts receivable than would otherwise be the
case because customers will receive products, and consequently pay for them,
more quickly.
During the nine months ended September 25, 1998, net cash used in
investing activities was $6.1 million, primarily reflecting the acquisition of
assets of Gibeck, Inc. and purchases of manufacturing equipment. During the nine
months ended September 24, 1999, net cash used in investing activities was $45.6
million, reflecting purchases of LGAB stock, manufacturing equipment and
business operating software. The Company currently estimates that annual capital
expenditures will be approximately $7.0 million in both 1999 and 2000,
consisting primarily of additional and replacement manufacturing equipment and
new heater placements.
During the nine months ended September 25, 1998, net cash provided by
financing activities was $84.7 million, consisting primarily of borrowings under
the bank credit facilities used to fund distributions made under the EPP.
During the nine months ended September 24, 1999, net cash provided by financing
activities was $49.2 million, primarily reflecting increased bank loans,
affiliate loans and the issuance of common stock in connection with the LGAB
acquisition.
30
<PAGE>
The Company has outstanding $189.6 million of indebtedness, consisting
of $115.0 million of Subordinated Notes issued in connection with the
Recapitalization, borrowings of $42.0 million under the Credit Facility entered
into in connection with the Recapitalization and other loans described below.
The Credit Facility consists of a $40.0 million Term Loan Facility (all of which
was funded in connection with the Recapitalization) and a $60.0 million
Revolving Loan Facility. The Subordinated Notes bear interest at the rate of 9-
1/8%, payable semiannually, and will require no principal repayments until
maturity. The Term Loan Facility matures on April 7, 2004 and requires principal
repayments of between $3.0 million and $11.5 million each year until maturity,
commencing on June 30, 1999. The Revolving Loan Facility matures on April 7,
2004 and bears interest based on a spread over either a Eurodollar or base rate.
In addition, the Company has a $22.0 million dollar loan payable to FS&Co.
related to the LGAB acquisition bearing interest at the rate of 12% per annum,
with no principal or interest repayments until maturity at August 2000 . The
Company also has loans outstanding to foreign banks in the aggregate amount of
approximately $10.3 million. These loans bear interest at the bank's reference
rate plus 0.25% to 0.75% .
In connection with the Recapitalization, the Company issued to Holding
300,000 shares of its 11-1/2% Senior PIK Preferred Stock due 2010 with an inital
aggregate liquidation preference of $30.0 million (the "Mirror Preferred
Stock"). Dividends are payable semi-annually in arrears on April 15 and October
15 each year. Dividends will be payable in cash, except on dividend payment
dates occurring on or prior to April 15, 2003, for which the Company has the
option to issue additional shares of preferred stock (including fractional
shares) having an aggregate liquidation preference equal to the amount of such
dividends. The preferred stock will rank junior in right of payment to all
obligations of the Company and its subsidiaries. The Company has elected to pay
dividends on the Mirror Preferred Stock in kind, and expects to continue to do
so until it is required to pay such dividends in cash.
Holding is a holding company and will rely on dividends from Hudson
RCI as its primary source of liquidity. Holding does not have and in the future
will not have any assets other than the capital stock of Hudson RCI. The ability
of Hudson RCI to pay cash dividends 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. No assurance can be made that Hudson
RCI will be able to pay cash dividends to Holding when required on the Mirror
Preferred Stock.
The Company believes that after giving effect to the Recapitalization
and the incurrence of indebtedness related thereto, based on current levels of
operations and anticipated growth, its cash from operations, together with other
available sources of liquidity, including borrowings available under the
Revolving Loan Facility, will be sufficient over the next twelve months to fund
anticipated capital expenditures and acquisitions and to make required payments
of principal and interest on its debt, including payments due on the
Subordinated Notes and obligations under the Credit Facility. The Company
intends to selectively pursue strategic acquisitions, both domestically and
internationally, to expand its product line, improve its market share positions
and increase cash flows. Financing for such acquisitions is available, subject
to limitations, under the Credit Facility. Any significant acquisition activity
by the Company in excess of such amounts would require additional capital, which
could be provided through capital contributions or debt financing. The Company
has no commitments for such acquisition financing and to the extent financing is
unavailable, acquisitions may be delayed or not completed.
Year 2000 Compliance
The following discussion about the implementation of the Company's
Year 2000 program, the costs expected to be associated with the program and the
results the Company expect to achieve constitute forward-looking information. As
noted below, there are many uncertainties involved with the Year 2000 issue,
including the extent to which the Company will be able to adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issue as it may affect third parties and the Company's key trading partners.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's results of operations could vary
materially from that stated herein.
A significant percentage of software that runs on most computers
relies on two-digit date codes to perform computations and decision-making
functions. Commencing on January 1, 2000, these computer programs may fail from
an inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. The Company has completed the identification of all
necessary internal software changes to ensure that it does not experience any
loss of
31
<PAGE>
critical business functionality due to the Year 2000 issue. The Company has
already completed an assessment of all internal software, hardware and operating
systems and has made all necessary hardware and software changes as a result of
that assessment. The Company does not believe that its systems will encounter
any material Year 2000 problems. The Company's products are not subject to Year
2000 problems.
The Company also relies, directly and indirectly, on the external
systems of various independent business enterprises, such as its customers,
suppliers, creditors, financial organizations, and of governments, for the
accurate exchange of data and related information. The Company could be
affected as a result of any disruption in the operation of the various third-
party enterprises with which the Company interacts. The Company has contacted
its key trading partners to assess its Year 2000 risk based upon the Year 2000
issues of its partners, and has developed contingency plans for a substantial
number of its key trading partners. These contingency plans include the
establishment of back-up vendors and back-up plans for communications with its
customers. The Company is also developing back-up plans for the procurement of
power and water at its Mexico facilities, which the Company expects to complete
in the fourth quarter of 1999. The Company does not expect the cost of this
program to be material.
The Company believes that the worst case scenario in the event of a
Year 2000 related failure would be its inability to communicate via computer
transmission with its key trading partners. The Company cannot provide any
assurance that any Year 2000 related systems issues of third parties will be
corrected in a timely manner, that the failure of these third parties to
correct these issues would not have a material adverse effect on the Company or
that its contingency plans will be adequate.
The total costs of the Year 2000 program are anticipated to be less
than $100,000, some of which has been expended to date. The costs and time
estimates of the Year 2000 project are based on the Company's best estimates.
There can be no assurance that these estimates will be achieved and that planned
results will be achieved. Risk factors include, but are not limited to, the
retention of internal resources dedicated to the project and the successful
completion of key business partners' Year 2000 projects.
Recent Accounting Pronouncements
Statement of Financial Accountings Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998. Because the Company has no derivative instruments and does not
engage in hedging activities, SFAS No. 133 will not impact the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With the LGAB acquisition, the Company has greater foreign currency
exposure with respect to its international operations. In the past, the
Company's only international exposure was its manufacturing operation in Mexico.
All sales were previously denominated in U.S. dollars. Currently, the Company
has operations in Germany, Sweden, Japan and other countries where sales are
made in local currency. The Company plans to hedge its foreign currency
exposures by attempting to purchase goods and services with the proceeds from
sales in local currencies where possible. The Company will also purchase forward
contracts to hedge receivables denominated in foreign currency that are expected
to be collected and converted into another currency. However, there can be no
assurance that the Company's hedging strategies will allow the Company to
successfully mitigate its foreign exchange exposures.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, 1999, Holding sold (i) 1,706,749 shares of Holding Common
Stock to an existing shareholder for an aggregate cash consideration of
approximately $22.0 million and (ii) 525,042 shares of Holding Common Stock to
Sten Gibeck in exchange for 483,750 shares of Class A stock of LGAB, valued at
approximately $6.6 million. The $22.0 million and 483,750 shares of Class A
stock of LGAB were contributed to the Company in exchange for 2,231,791 shares
of HRCI Common Stock, which the Company used to finance a portion of the LGAB
acquisition.
The sale and issuance of the securities described above was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering. Holding did not engage in any
general solicitation in connection with the issuance of the Holding Common Stock
described above. The purchasers were Holding's controlling shareholder and an
accredited investor, and the securities were acquired for investment only and
not with a view to distribution. Appropriate legends were affixed to the stock
certificates issued in these transactions. All recipients had adequate access
to information about Holding. No underwriter was employed with respect to these
transactions.
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K/A (date of earliest event -- July 22, 1999) relating to the
LGAB transaction.
33
<PAGE>
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
November 8, 1999 By: /s/ Jay R. Ogram
--------------------------------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUN-26-1999 DEC-26-1998
<PERIOD-END> SEP-24-1999 SEP-24-1999
<CASH> 0 8,448
<SECURITIES> 0 0
<RECEIVABLES> 0 25,689
<ALLOWANCES> 0 0
<INVENTORY> 0 24,268
<CURRENT-ASSETS> 0 60,369
<PP&E> 0 49,423
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 323,709
<CURRENT-LIABILITIES> 0 (48,244)
<BONDS> 0 (115,000)
0 (34,380)
0 0
<COMMON> 0 (91,748)
<OTHER-SE> 0 10,952
<TOTAL-LIABILITY-AND-EQUITY> 0 (323,709)
<SALES> (30,827) (85,270)
<TOTAL-REVENUES> (30,827) (85,270)
<CGS> 18,518 49,701
<TOTAL-COSTS> 11,417 29,594
<OTHER-EXPENSES> (8) (53)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,350 12,194
<INCOME-PRETAX> 3,450 6,166
<INCOME-TAX> (796) (1,918)
<INCOME-CONTINUING> 2,654 4,248
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,654 4,248
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
