<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 June 25, 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 - 333-56097
--------------------------
HUDSON RESPIRATORY CARE INC.
(Exact name of registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C>
California 95-1867330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27711 Diaz Road, P.O. Box 9020 92589
Temecula, California (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(909) 676-5611
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares of Common Stock, $0.01 par value, outstanding (the
only class of common stock of the Company outstanding) was 7,812,500 on July 30,
1999.
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<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
Quarter Ended June 25, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 25,
1998 and June 25, 1999.................................. 1
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 26, 1998 and
June 25, 1999........................................... 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 26, 1998 and June 25, 1999........ 4
Notes to Condensed Consolidated Financial Statements.... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 14
SIGNATURE................................................................... 15
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, June 25,
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................... $ 507 $ 778
Accounts receivable, less allowance for doubtful accounts of $635
and $901 at December 25, 1998 and June 25, 1999, respectively.......... 25,829 20,555
Inventories.............................................................. 18,024 19,577
Other current assets..................................................... 716 715
--------- ---------
Total current assets................................................... 45,076 41,625
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net.......................................... 32,732 34,208
--------- ---------
OTHER ASSETS:
Deferred tax asset....................................................... 70,329 69,869
Deferred financing costs, net............................................ 11,917 11,426
Intangible assets, net................................................... 4,955 4,329
Other assets............................................................. 312 434
--------- ---------
87,513 86,058
--------- ---------
$ 165,321 $ 161,891
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
1
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, June 25,
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank................................................... $ 3,000 $ 4,000
Accounts payable........................................................ 6,324 2,393
Accrued liabilities..................................................... 6,219 6,719
--------- ---------
Total current liabilities.............................................. 15,543 13,112
SENIOR SUBORDINATED NOTES PAYABLE......................................... 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion............................. 41,000 40,000
--------- ---------
Total liabilities...................................................... 171,543 168,112
--------- ---------
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par
value: Authorized--1,800,000 shares; issued and outstanding--
318,014 and 336,250 shares at December 25, 1998 and June 25, 1999;
liquidation preference: $33,625........................................ 30,802 32,625
Accrued preferred stock dividend, payable in kind....................... 711 778
--------- ---------
31,513 33,403
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized--15,000,000 shares, issued and
outstanding--7,812,500................................................. 63,535 63,535
Cumulative translation adjustment........................................ (464) (1,070)
Accumulated deficit....................................................... (100,806) (102,089)
--------- ---------
(37,735) (39,624)
--------- ---------
$ 165,321 $ 161,891
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ----------------------------
June 26, June 25, June 26, June 25,
1998 1999 1998 1999
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES........................................................ $ 22,432 $27,274 $ 46,697 $ 54,443
COST OF SALES.................................................... 12,116 15,178 25,142 30,053
-------- ------- -------- --------
Gross Profit..................................................... 10,316 12,096 21,555 24,390
-------- ------- -------- --------
OPERATING EXPENSES:
Selling........................................................ 2,373 2,677 4,691 5,112
Distribution................................................... 1,249 1,372 2,698 3,081
General and administrative..................................... 2,603 3,005 5,676 6,334
Research and development....................................... 466 600 940 1,110
-------- ------- -------- --------
6,691 7,654 14,005 15,637
-------- ------- -------- --------
PROVISION FOR EQUITY PARTICIPATION PLAN.......................... 61,965 -- 63,939 --
PROVISION FOR RETENTION PAYMENTS................................. 4,754 -- 4,754 --
-------- ------- -------- --------
Income (loss) from operations.................................. (63,094) 4,442 (61,143) 8,753
-------- ------- -------- --------
OTHER (INCOME) AND EXPENSES:
Interest expense............................................... (3,627) (3,973) (3,640) (7,843)
Other, net..................................................... 161 17 (254) 44
-------- ------- -------- --------
(3,466) (3,956) (3,894) (7,799)
-------- ------- -------- --------
Income (loss) before provision (benefit) for income taxes..... (66,560) 486 (65,037) 954
PROVISION (BENEFIT) FOR INCOME TAXES (Note 5).................... (77,001) 159 (76,978) 346
-------- ------- -------- --------
Income before extraordinary item............................... 10,441 327 11,941 608
EXTRAORDINARY ITEM-- loss on extinguishment of debt.............. 104 -- 104 --
-------- ------- -------- --------
Net income..................................................... 10,337 327 11,837 608
Preferred stock dividends........................................ 776 966 776 1,891
-------- ------- -------- --------
Net income (loss) available to common shareholders............... $ 9,561 $ (639) $ 11,061 $(1,283)
======== ======= ======== ========
Pro forma net loss assuming C corporation status for income
tax purposes (Note 5)........................................... $(40,469) $ (639) $(39,556) $(1,283)
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
June 26, June 25,
1998 1999
--------- -------
<S> <C> <C>
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 11,837 $ 608
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization............................................ 2,962 3,166
Write-off of deferred financing fees..................................... 104 --
Amortization of deferred financing costs................................. 30 201
Gain on disposal of equipment............................................ (54) --
Deferred tax benefit..................................................... (78,450) 460
Increase in equity participation plan (EPP).............................. 63,939 --
Decrease in accounts receivable.......................................... 4,325 5,276
Decrease (increase) in inventories....................................... 1,488 (1,554)
Decrease in other current assets......................................... 195 1
(Increase) decrease in other assets...................................... 221 (122)
Increase (decrease) in accounts payable.................................. 559 (3,932)
Increase in accrued liabilities.......................................... 4,475 499
Payments of EPP liabilities.............................................. (89,642) --
--------- -------
Net cash provided by (used in) operating activities..................... (78,011) 4,603
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................................. (1,646) (3,640)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank.......................................... (43,250) (5,000)
Proceeds from bank borrowings............................................... 61,000 5,000
Additions to deferred financing costs....................................... (11,920) (86)
Redemption of stockholder interest.......................................... (128,321) --
Proceeds from senior subordinated debt...................................... 115,000 --
Sale of common and preferred stock, net of transaction costs................ 92,000 --
--------- -------
Net cash provided by (used in) financing activities..................... 84,509 (86)
--------- -------
Effect of exchange rate changes on cash...................................... 345 (606)
--------- -------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS.............................. 5,197 271
CASH AND SHORT-TERM INVESTMENTS, beginning of period......................... 470 507
--------- -------
CASH AND SHORT-TERM INVESTMENTS, end of period............................... $ 5,667 $ 778
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest................................................................... $ 1,399 $ 6,187
========= =======
Income taxes............................................................... $ 66 $ 4
========= =======
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid in kind................................. $ 776 $ 1,891
========= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 25, 1999
-------------
(unaudited)
1. Financial Statements. The condensed consolidated financial statements
--------------------
included herein have been prepared by the Company, without audit, and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position at June 25, 1999, and the results of
operations and cash flows for the three and six month periods ended June 26,
1998 and June 25, 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 six month periods ended
June 26, 1998 and June 25, 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
percent 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 percent 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 percent 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 and has adopted an
executive stock purchase plan and plans to adopt a stock option plan.
Additionally, the Company's sole shareholder, who owned the remaining 21 percent
of Industrias Hudson, transferred this interest to the Company in consideration
of one dollar. Because of the commonality of ownership, the 21 percent 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.
5
<PAGE>
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, June 25,
1998 1999
------- -------
<S> <C> <C>
Raw materials............ $ 5,127 $ 5,174
Work-in-process.......... 5,926 7,687
Finished goods........... 6,971 6,716
------- -------
$18,024 $19,577
======= =======
</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 income for the three and six month periods
ended June 26, 1998 and June 25, 1999 as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------
June 26, June 25, June 26, June 25,
1998 1999 1998 1999
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net income................................. $10,337 $ 327 $11,837 $ 608
Other comprehensive income:
Foreign currency translation loss.......... -- (205) (119) (606)
------- ----- ------- -----
Comprehensive income....................... $10,337 $ 122 $11,718 $ 2
======= ===== ======= =====
</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. Subsequent Event. 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") for an
aggregate cash purchase price of approximately $44.0 million. In addition, on
August 5, 1999, Steamer acquired additional shares of stock of LGAB from River
Holding Corp., a Delaware corporation and the parent of Steamer and the Company.
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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of 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 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 $44.0 million. In addition, on
August 5, 1999, Steamer acquired an additional 483,750 shares of Class A stock
of LGAB from River Holding Corp., a Delaware corporation and the parent of
Steamer and the Company ("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
95.1% of the capital and 97.7% 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.
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.
7
<PAGE>
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 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 $135,000 in the
second quarter 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 11 1/2%
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
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."
8
<PAGE>
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 Six Months Ended
(unaudited) (unaudited)
---------------------------------------------------
June 26, June 25, June 26, June 25,
1998 1999 1998 1999
-------- ------- -------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales........................................... $ 22,432 $27,274 $ 46,697 $54,443
Cost of sales....................................... 12,116 15,178 25,142 30,053
-------- ------- -------- -------
Gross profit....................................... 10,316 12,096 21,555 24,390
Selling expenses.................................... 2,373 2,677 4,691 5,112
Distribution expenses............................... 1,249 1,372 2,698 3,081
General and administrative expenses................. 2,603 3,005 5,676 6,334
Research and development expenses................... 466 600 940 1,110
Provision for equity participation plan............. 61,965 -- 63,939 --
Provision for retention payments.................... 4,754 -- 4,754 --
-------- ------- -------- -------
Total operating expenses............................ 73,410 7,654 82,698 15,637
-------- ------- -------- -------
Operating income (loss)............................. (63,094) 4,442 (61,143) 8,753
-------- ------- -------- -------
Add back: Provision for equity participation
plan............................................... 61,965 -- 63,939 --
Add back: Provision for retention payments......... 4,754 -- 4,754 --
-------- ------- -------- -------
Operating income before provision for equity
participation plan and provision for retention
payments........................................... $ 3,625 $ 4,442 $ 7,550 $ 8,753
======== ======= ======== =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(unaudited) (unaudited)
-----------------------------------------------------------
June 26, June 25, June June 25,
1998 1999 1998 1999
--------- ----- ------ --------
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 54.0 55.7 53.8 55.2
--------- ----- ------ --------
Gross profit........................... 46.0 44.3 46.2 44.8
Selling expenses........................ 10.6 9.8 10.0 9.4
Distribution expenses................... 5.6 5.0 5.8 5.7
General and administrative expenses..... 11.6 11.0 12.2 11.6
Research and development expenses....... 2.1 2.2 2.0 2.0
Provision for equity participation
plan................................... 276.2 -- 136.9 --
Provision for retention payments........ 21.2 -- 10.2 --
--------- ----- ------ --------
Total operating expenses................ 327.3 28.0 177.1 28.7
--------- ----- ------ --------
Operating income (loss)................. (281.3) 16.3 (130.9) 16.1
--------- ----- ------ --------
Add back: Provision for equity......... 276.2 -- 136.9 --
participation plan
Add back: Provision for retention
payments............................... 21.2 -- 10.2 --
========= ===== ====== ========
Operating income before provisions
for equity participation plan and
provision for retention payments....... 16.1% 16.3% 16.2% 16.1%
</TABLE>
Three Months Ended June 25, 1999 Compared to Three Months Ended June 26, 1998
Net sales, reported net of accrued rebates, were $27.3 million in the
second quarter of 1999 as compared to $22.4 million in the second quarter of
1998. This represents an increase of $4.8 million or 21.6%. Domestic hospital
sales increased $2.6 million, primarily the result of sales of Gibeck products.
Alternate site sales increased by $1.0 million or 26.0% as the Company continued
to focus sales efforts in this growing market. Canadian sales were $0.7
million, an increase of $0.2 million or 32.3% from the second quarter 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 $0.2 million or 33.0% over the second quarter of 1998, primarily
the result of the addition of several OEM relationships. International sales
increased by $0.8 million or 23.9%, primarily the result of strong sales in
Japan and Europe. International gains were partially offset by a decline in the
Far East as a result of the economic crisis in that area.
The Company's gross profit for the second quarter of 1999 was $12.1
million, an increase of $1.8 million or 17.3% over the second quarter of 1998.
As a percentage of sales, gross profit was 44.3% and 46.0% for the second
quarter 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.
Selling expenses were $2.7 million for the second quarter of 1999, a $0.3
million increase over the second quarter of 1998. This increase was primarily
due to the start-up of the German operation as well as increased salaries as a
result of additions to the alternate site sales force. As a percentage of net
sales, selling expenses were 9.8% in the second quarter of 1999 as compared to
10.6% in the second quarter of 1998.
Distribution expenses were $1.4 million for the second quarter of 1999, an
increase of $0.1 million or 9.8% over the second quarter of 1998. The majority
of this increase is due to increased sales volumes over 1998, partially offset
by lower volumes of products shipped between warehouses. As a percentage of
net sales, distribution expenses were 5.0% and 5.6% in the second quarter of
1999 and 1998, respectively.
10
<PAGE>
General and administrative expenses were $3.0 million in the second quarter
of 1999, an increase of $0.4 million or 15.5% over the second quarter of 1998.
This increase was primarily due to payments made to certain outside consultants
during the second quarter of 1999.
Research and development expenses were $0.6 million for the second quarter
of 1999, an increase of $0.1 million over second quarter of 1998.
The provision for equity participation plan consists of accrued expenses
and payments made to executives under the EPP. The EPP was terminated upon
consummation of the Recapitalization and replaced with an executive stock
purchase plan. As a result, no expense was recorded in the second quarter of
1999.
Interest expense was $4.0 million for the second quarter of 1999, as
compared to $3.6 million in the second quarter of 1998. This increase was due
to higher debt levels in the current quarter as a result of borrowings made
under the Revolving Loan Facility.
Income tax provision reflects the termination of the Company's S
corporation status upon the Recapitalization. The Company now provides for state
and federal income taxes as a C corporation. Actual tax payments are expected
to be substantially less than provided amounts due to the increased tax basis in
assets provided by the Section 338(h)(10) election made in connection with the
Recapitalization.
Six Months Ended June 25, 1999 Compared to Six Months Ended June 26, 1998
Net sales, reported net of accrued rebates, were $54.4 million in the first
half of 1999 as compared to $46.7 million in the first half of 1998. This
represents an increase of $7.7 million or 16.6%. Domestic hospital sales
increased $4.4 million, primarily the result of sales of Gibeck products.
Alternate site sales increased by $2.0 million or 25.2% as the Company continued
to focus sales efforts in this growing market. Canadian sales were $1.3 million
in the first half of 1999, an increase of $0.3 million or 30.5% from the first
half 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 $.7 million or 44.8% over the first half of 1998,
primarily the result of the addition of several OEM relationships.
International sales increased by $0.4 million or 4.4%, primarily the result of
strong sales in Japan and Europe. International gains were partially offset by
a decline in the Far East as a result of the economic crisis in that area.
The Company's gross profit for the first half of 1999 was $24.4 million, an
increase of $2.8 million or 13.2% over the first half of 1998. As a percentage
of sales, the gross profit was 44.8% and 46.2% for the first half 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.
Selling expenses were $5.1 million for the first half of 1999, a $0.4
million increase over the first half of 1998. This increase was primarily due to
the start-up of the German operation as well as increased salaries as a result
of additions to the alternate site sales force. As a percentage of net sales,
selling expenses were 9.4% in the first half of 1999 as compared to 10.0% in the
first half of 1998.
Distribution expenses were $3.1 million for the first half of 1999, an
increase of $0.4 million or 14.2% over the first half of 1998. The majority of
this increase is due to increased sales volumes over 1998, partially offset by
lower volumes of products shipped between warehouses. As a percentage of net
sales, distribution expenses were 5.7% and 5.8% in the first half of 1999 and
1998, respectively.
General and administrative expenses were $6.3 million in the first half of
1999, an increase of $0.7 million or 11.4% over the first half of 1998. This
increase was primarily due to payments made to certain outside consultants
during the first half of 1999.
Research and development expenses were $1.1 million for the second quarter
of 1999, an increase of $0.2 million over second quarter of 1998. This increase
was the result of additional personnel added during the first half of 1999.
11
<PAGE>
The provision for EPP was terminated upon consummation of the
Recapitalization and replaced with an executive stock purchase plan. As a
result, no expense was recorded in the second 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 $7.8 million for the first half of 1999, as compared
to $3.6 million in the first half 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 as well as borrowings made under the Revolving Loan
Facility.
Income tax provision reflects the termination of the Company's S
corporation status upon the Recapitalization. The Company now provides for state
and federal income taxes as a C corporation. Actual tax payments are expected
to be substantially less than provided amounts due to the increased 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 $11.6 million in the six months ended June 26, 1998
and $4.6 million in the six months ended June 25, 1999. The Company had
operating working capital, excluding cash and short-term debt, of $31.7 million
at June 25, 1999. Inventories were $18.0 million and $19.6 million at December
25, 1998 and June 25, 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 $20.6
million at December 25, 1998 and June 25, 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 six months ended June 26, 1998, net cash used in investing
activities was $1.6 million, primarily reflecting purchases of manufacturing
equipment. During the six months ended June 25, 1999, net cash used in
investing activities was $3.6 million, reflecting purchases of manufacturing
equipment. 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 six months ended June 26, 1998, net cash provided by financing
activities was $84.5 million, consisting primarily of borrowings under the bank
credit facilities used to fund distributions made under the EPP. During the six
months ended June 25, 1999, net cash used by financing was $86,000, reflecting
additional deferred financing costs.
The Company has outstanding $159.0 million of indebtedness, consisting of
$115.0 million of Subordinated Notes issued in connection with the
Recapitalization and borrowings of $44.0 million under the Credit Facility
entered into in connection with the Recapitalization. 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.
12
<PAGE>
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
aggregate liquidation preference of $30.0 million. 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 preferred stock
in kind, and expects to continue to do so until it is required to pay such
dividends in cash.
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 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 is in the process of implementing
a program to assess and monitor the progress of these third parties in resolving
Year 2000 issues, and to determine whether any Year 2000 issues encountered by a
third party would pose a business risk to the Company. Towards this goal, the
Company has contacted its key trading partners to assess its Year 2000 risk
based upon the Year 2000 issues of its partners. The Company has completed this
assessment, and has developed contingency plans for a substantial number of its
key trading partners, including 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.
The Company expects to complete its contingency planning in the third quarter of
1999. The Company does not expect the cost of this program to be material.
The Company believed 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 has begun to develop
13
<PAGE>
contingency plans in the event a business interruption caused by Year 2000
problems should occur, including investigating back-up suppliers. The Company
cannot provide any assurance that Year 2000 related systems issues of third
parties will be corrected in a timely manner or that the failure of these third
parties to correct these issues would not have a material adverse effect on the
Company.
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.
PART II. OTHER INFORMATION
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 (date of earliest event --July 22, 1999) relating to LGAB
transaction.
14
<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.
HUDSON RESPIRATORY CARE INC.,
a California corporation
August 6, 1999 By: /s/ Jay R. Ogram
----------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> DEC-26-1998 DEC-26-1998
<PERIOD-END> JUN-25-1999 JUN-25-1999
<CASH> 0 778
<SECURITIES> 0 0
<RECEIVABLES> 0 20,555
<ALLOWANCES> 0 (901)
<INVENTORY> 0 19,577
<CURRENT-ASSETS> 0 41,625
<PP&E> 0 87,533
<DEPRECIATION> 0 (53,325)
<TOTAL-ASSETS> 0 161,891
<CURRENT-LIABILITIES> 0 (13,112)
<BONDS> 0 (115,000)
0 (33,403)
0 0
<COMMON> 0 (63,535)
<OTHER-SE> 0 103,159
<TOTAL-LIABILITY-AND-EQUITY> 0 (161,891)
<SALES> (27,274) (54,443)
<TOTAL-REVENUES> (27,274) (54,443)
<CGS> 15,178 30,053
<TOTAL-COSTS> 7,654 15,637
<OTHER-EXPENSES> (17) (44)
<LOSS-PROVISION> 0 0
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<INCOME-PRETAX> (486) (954)
<INCOME-TAX> 159 346
<INCOME-CONTINUING> (327) (608)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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