<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 March 26, 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)
----------------------
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)
(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 April
30, 1999.
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<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
Quarter Ended March 26, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 25, 1998 and
March 26, 1999......................................................................................2
Condensed Consolidated Statements of Operations for the Three Months
Ended March 27, 1998 and March 26, 1999.............................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 27, 1998 and March 26, 1999.............................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................15
Item 2. Changes in Securities..............................................................................15
Item 3. Defaults Upon Senior Securities....................................................................15
Item 4. Submission of Matters to a Vote of Security Holders................................................15
Item 5. Other Information..................................................................................15
Item 6. Exhibits and Reports on Form 8-K...................................................................15
SIGNATURE............................................................................................................16
</TABLE>
1
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, March 26,
1998 1999
-------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................... $ 507 $ 710
Accounts receivable, less allowance for doubtful
accounts of $635 and $842 at December 25, 1998 and
March 26, 1999, respectively............................ 25,829 23,153
Inventories.............................................. 18,024 19,091
Other current assets..................................... 716 769
-------- --------
Total current assets................................... 45,076 43,723
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net........................ 32,732 32,996
-------- --------
OTHER ASSETS:
Deferred tax asset....................................... 70,329 70,217
Deferred financing costs, net............................ 11,917 11,672
Intangible assets, net................................... 4,955 4,568
Other assets............................................. 312 445
-------- --------
87,513 86,902
-------- --------
$165,321 $163,621
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, March 26,
1998 1999
------------ --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank..................................... $ 3,000 $4,000
Accounts payable.......................................... 6,324 2,343
Accrued liabilities....................................... 6,219 9,620
----------- -----------
Total current liabilities............................... 15,543 15,963
SENIOR SUBORDINATED NOTES PAYABLE.......................... 115,000 115,000
NOTES PAYABLE TO BANK, net of current portion.............. 41,000 39,000
----------- -----------
Total liabilities......................................... 171,543 169,963
----------- -----------
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value:
AuthorizedC1,800,000 shares; issued and
outstandingC318,014 shares; liquidation preference:
$31,802................................................... 30,802 30,802
Accrued preferred stock dividend, payable in kind......... 711 1,636
----------- -----------
31,513 32,438
----------- -----------
STOCKHOLDERS= EQUITY (DEFICIT):
Common stock, $0.01 par value:
AuthorizedC15,000,000 shares, issued and
outstandingC7,812,500................................... 63,535 63,535
Cumulative translation adjustment.........................
(464) (865)
Accumulated deficit.......................................
(100,806) (101,450)
----------- -----------
(37,735) (38,780)
----------- -----------
$165,321 $163,621
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------- -----------
March 27, March 26,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
NET SALES.............................................................. $24,265 $27,169
COST OF SALES.......................................................... 13,026 14,875
--------------------------
Gross Profit........................................................... 11,239 12,294
--------------------------
OPERATING EXPENSES:
Selling............................................................... 2,317 2,436
Distribution.......................................................... 1,449 1,709
General and administrative............................................ 3,077 3,328
Research and development.............................................. 474 510
--------------------------
7,317 7,983
--------------------------
PROVISION FOR EQUITY PARTICIPATION PLAN AND BONUSES.................... 1,974 --
--------------------------
Income from operations................................................ 1,948 4,311
--------------------------
OTHER (INCOME) AND EXPENSES:
Interest expense...................................................... 442 3,873
Other, net............................................................ (15) (30)
--------------------------
427 3,843
--------------------------
Income before provision for income taxes.............................. 1,521 468
PROVISION FOR INCOME TAXES (Note 6).................................... 23 187
--------------------------
Net income............................................................ 1,498 281
Preferred stock dividends.............................................. -- (925)
--------------------------
Net income (loss) available to common shareholders..................... $ 1,498 $ (644)
==========================
Pro forma net income (loss) assuming C corporation status for income
tax purposes (Note 6)................................................. $ 913 $ (644)
==========================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Dollar Amount in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 27, March 26,
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 1,498 $ 281
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization............................................... 1,497 1,760
Decrease in deferred tax asset.............................................. -- 112
Increase in equity participation plan (EPP)................................. 1,974 --
Decrease in accounts receivable............................................. 2,541 2,677
(Increase) decrease in inventories.......................................... 675 (1,067)
(Increase) decrease in other current assets................................. 231 (54)
(Increase) decrease in other assets......................................... 43 (134)
Decrease in accounts payable................................................ (1,221) (3,982)
Increase (decrease) in accrued liabilities.................................. (449) 3,402
Payments of EPP liabilities................................................. (20,375) --
-------- -------
Net cash provided by (used in) operating activities....................... (13,586) 2,995
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (701) (1,391)
Additions of intangible assets................................................. (70) --
-------- -------
Net cash used in investing activities (771) (1,391)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (6,250) (1,000)
Proceeds from bank borrowings.................................................. 21,000 --
Shareholder distributions...................................................... (10) --
-------- -------
Net cash provided by (used in) financing activities....................... 14,740 (1,000)
-------- -------
Effect of exchange rate changes on cash......................................... (119) (401)
-------- -------
NET INCREASE IN CASH............................................................ 264 203
CASH, beginning of period....................................................... 470 507
-------- -------
CASH, end of period............................................................. $ 734 $ 710
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest..................................................................... $ 690 $ 898
======== =======
Income taxes................................................................. $ 12 $ --
======== =======
NON-CASH FINANCING ACTIVITIES:
Accrued preferred dividends.................................................... $ -- $ 925
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
March 26, 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 March 26, 1999, and the results of
operations and cash flows for the three-month periods ended March 27, 1998 and
March 26, 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-month periods ended March 27,
1998 and March 26, 1999 are not necessarily indicative of the results to be
achieved for a full year.
2. 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 percent senior subordinated notes with a par value
of $115.0 million, maturing in 2008 (see Note 4);
(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.
3. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
<TABLE>
<CAPTION>
December 25, March 26,
1998 1999
---------------- ---------------
<S> <C> <C>
Raw materials.................................................
$ 5,127 $ 4,906
Work-in-process...............................................
5,926 7,406
Finished goods................................................
6,971 6,779
---------- ----------
$18,024 $19,091
========== ==========
</TABLE>
4. 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.
6
s
<PAGE>
The Company had comprehensive income for the three-month periods ended
March 27, 1998 and March 26, 1999 as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 27, March 26,
1998 1999
------------ ------------
<S> <C> <C>
Net income.................................................... $1,498 $ 281
Other comprehensive income:
Foreign currency translation loss............................ (119) (401)
--------- --------
Comprehensive income.......................................... $1,379 $(120)
========= ========
</TABLE>
5. 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.
6. 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.
7
<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.
During the third quarter of 1998, the Company acquired certain assets of
Gibeck, Inc. ("Gibeck") for approximately $3.35 million. Prior to the
transaction, Gibeck was engaged primarily in the business of manufacturing,
marketing and selling disposable anesthesia supplies. In addition to the sale
of its self-manufactured products, Gibeck was the exclusive North American
distributor of its parent company's, Louis Gibeck, AB ("LGAB"), Heat Moisture
Exchange ("HME") product line. As a result of the transaction, Hudson RCI is
now the exclusive North American distributor for the LGAB HME products. In
fiscal year 1997, Gibeck reported net sales of approximately $12.3 million.
The Company plans to establish 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 this significant market. It is
anticipated, however, the Company's earnings will be negatively impacted for the
first twelve months of operation.
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.
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 River Holding Corp. ("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
8
<PAGE>
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."
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.
9
<PAGE>
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 Month Period Ended
(unaudited)
--------------------------------
March 27, March 27,
1998 1999
-------------- ---------------
(in thousands)
<S> <C> <C>
Net sales..................................................... $24,265 $27,169
Cost of sales................................................. 13,026 14,875
-------- -------
Gross profit................................................. 11,239 12,294
Selling expenses.............................................. 2,317 2,436
Distribution expenses......................................... 1,449 1,709
General and administrative expenses........................... 3,077 3,328
Research and development expenses............................. 474 510
Provision for equity participation plan....................... 1,974 --
-------- -------
Total operating expenses...................................... 9,291 7,983
-------- -------
Operating income.............................................. 1,948 4,311
Add back: Provision for equity participation plan............ 1,974 --
-------- -------
Operating income before provision for equity participation plan $3,922 $4,311
======== =======
<CAPTION>
Three Month Period Ended
(unaudited)
--------------------------------------
March 27, March 26,
1998 1999
-------------- -----------------
<S> <C> <C>
Net sales..................................................... 100.0% 100.0%
Cost of sales................................................. 53.7 54.8
------ ------
Gross profit................................................. 46.3 45.3
Selling expenses.............................................. 9.6 9.0
Distribution expenses......................................... 6.0 6.3
General and administrative expenses........................... 12.7 12.3
Research and development expenses............................. 2.0 1.9
Provision for equity participation plan....................... 8.1 --
------ ------
Total operating expenses...................................... 38.3 29.4
------ ------
Operating income.............................................. 8.0 15.9
Add back: Provision for equity participation plan............ 8.1 --
------ ------
Operating income before provisions for equity participation plan 16.2% 15.9%
====== ======
</TABLE>
Three Months Ended March 26, 1999 Compared to Three Months Ended March 27, 1998
Net sales, reported net of accrued rebates, were $27.2 million in the first
quarter of 1999 as compared to $24.3 million in the first quarter of 1998. This
represents an increase of $2.9 million or 12.0%. Domestic Hospital sales
increased $2.0 million, primarily the result of sales of Gibeck products.
Alternate Site sales increased by $1.0 million or 26.6% increase as the Company
continued to focus sales efforts in this growing market. Canadian sales were
$0.6 million, an increase of $0.1 million or 27% from the first quarter of 1998
as sales to the Medbuy GPO, whose contract was awarded to the Company in the
first quarter of 1998, showed significant increases. House account sales
increased by $262,000 over the first quarter of 1998, primarily the result of
the addition of several OEM relationships. Somewhat
10
<PAGE>
offsetting these increases was a decrease in international sales of $0.5 million
or 11% due primarily to overall weakness in Southeast Asia.
The Company's gross profit for the first quarter of 1999 was $12.3 million,
an increase of $1.1 million or 9.4% over the first quarter of 1998. As a
percentage of sales, the gross profit was 45.3% and 46.3% for the first 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,
primarily the Gibeck line of anesthesia products.
Selling expenses were $2.4 million for the first quarter of 1999, a $0.1
million increase over the first quarter of 1998. This increase was primarily
due to increased salaries as a result of additions to the alternate site sales
force. As a percentage of net sales, selling expenses were 9.0% in the first
quarter of 1999 as compared to 9.6% in the first quarter of 1998.
Distribution expenses were $1.7 million for the first quarter of 1999, an
increase of $0.3 million or 17.9% over the first quarter of 1998. The majority
of this increase is due to increased sales volumes over 1998 in addition to
added freight between distribution warehouses so as to better serve customer
needs. As a percentage of net sales, distribution expenses were 6.3% and 5.9%
in the first quarter of 1999 and 1998, respectively.
General and administrative expenses were $3.3 million in the first quarter
of 1999, an increase of $0.3 million or 8.2% over the first quarter of 1998 and
was primarily due to payments made to certain outside consultants during the
first quarter of 1999.
Research and development expenses were $0.5 million for the first quarter
of 1999, unchanged from 1998.
The provision for equity participation plan consists of accrued expenses
and payments made to executives under the Equity Participation Plan ("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 first 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 $3.6 million for the first quarter of 1999, as
compared to $0.4 million in the first quarter of 1998. This increase was due to
higher debt levels in the current quarter as a result of the Recapitalization.
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 $6.4 million in the three months ended March 27,
1998 and $3.0 million in the three months ended March 26, 1999. The Company had
operating working capital, excluding cash and short-term debt, of $29.4 million
at March 26, 1998. Inventories were $18.0 million and $19.1 million at December
25, 1998 and March 26, 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 $23.2
million at December 25, 1998 and March 26, 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 is planning to establish in the second quarter of 1999
of a distribution warehouse outside of the United States. While this will have
the effect of increasing the Company's investment in inventories, it may also
result in improved service to international
11
<PAGE>
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 three months ended March 27, 1998, net cash used in investing
activities was $0.8 million, primarily reflecting purchases of manufacturing
equipment. During the three months ended March 26, 1999, net cash used in
investing activities was $1.4 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 three months ended March 27, 1998, net cash provided by
financing activities was $14.7 million, consisting primarily of borrowings under
the bank credit facilities used to fund distributions made under the EPP.
During the three months ended March 26, 1999, net cash used by financing was
$1.0 million reflecting repayment of the Company's borrowings.
The Company has outstanding $158.0 million of indebtedness, consisting of
$115.0 million of Subordinated Notes issued in connection with the
Recapitalization and borrowings of $43.0 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.
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. At the election of the Company, dividends may be paid in kind
until April 15, 2003 and thereafter must be paid 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
12
<PAGE>
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 is contacting its key trading partners to assess its Year 2000 risk
based upon the Year 2000 issues of its partners. The Company expects to have
completed this assessment completed by mid-year 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
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. 129, "Disclosure
of Information about Capital Structure" was issued in February 1997 and was
adopted by the Company as of December 26, 1997. SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" were issued in June 1997. The Company
adopted SFAS No. 130 in the first quarter of fiscal 1998. SFAS No. 131 was
adopted in the Company's 1998 year-end financial statements. 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 RISKS
Quantitative Disclosures. The Company is exposed to certain market risks
associated with interest rate fluctuations on its debt. All debt arrangements
are entered into for purposes other than trading. Because the Company's sales
have historically been denominated in U.S.-dollars, the Company has not been
subject to risks from currency rate fluctuations. In addition, the Company does
not utilize hedging contracts or similar instruments with respect to the
commodities it purchases for manufacturing. With the addition of the German
operation in the second quarter of 1999, the Company will denominate German
sales in local currency, and therefore, will be subject to currency rate
fluctuations. The Company's exposure to interest rate risk arises from
financial instruments entered into in the normal course of business that, in
some cases, relate to the Company's acquisitions of related businesses. Certain
of the Company's financial instruments are fixed rate, short-term investments
which are held to maturity. The Company's fixed rate debt consists primarily of
outstanding balances on the Subordinated Notes and its variable rate debt
relates to borrowings under the Credit Facility (see "Item 7. Management's
Discussion and Analysis and Results of Operations--Liquidity and Capital
Resources"). With respect to the Company's fixed rate debt, changes in interest
rates generally affect the fair value of such debt, but do not have an impact on
earnings or cash flows. Because the Company
13
<PAGE>
generally cannot prepay its fixed rate debt prior to maturity, interest rate
risk and changes in fair value should not have a significant impact on this debt
until the Company is required to refinance. With respect to variable rate debt,
changes in interest rates affect earnings and cash flows, but do not impact fair
value. The impact on the Company's interest expense in the upcoming year of a
one-point interest rate change on the outstanding balance of the Company's
variable rate debt would be approximately $440,000. The following table presents
the future principal cash flows and weighted- average interest rates expected on
the Company's existing long-term debt instruments. The fair value of the
Company's fixed rate debt is estimated based on quoted market prices
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal There- Fair
1999 2000 2001 2002 2003 after Total Value
--------- --------- --------- --------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt....... $ -- $ -- $ -- $ -- $ -- $115,000 $115,000 $98,000
Average Interest Rate. -- -- -- -- -- 9.125% -- --
Variable Rate Debt..... $3,000 $4,000 $7,000 $9,000 $11,000 $10,000 $44,000 $44,000
Average Interest Rate 8.06% 7.81% 7.81% 7.81% 7.81%
</TABLE>
Qualitative Disclosures. The Company's primary exposure relates to (1)
interest rate risk on long-term and short-term borrowings, (2) the Company's
ability to pay or refinance long-term borrowings at maturity at market rates,
(3) the impact of interest rate movements on the Company's ability to meet
interest expense requirements and exceed financial covenants and (4) the impact
of interest rate movements on the Company's ability to obtain adequate financing
to fund future acquisitions. The Company manages interest rate risk on its
outstanding long-term and short-term debt through the use of fixed and variable
rate debt. While the Company can not predict or manage its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management evaluates the Company's financial position on an ongoing basis.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<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
May 7, 1999 By: /s/ Jay R. Ogram
-------------------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> MAR-26-1999
<CASH> 710
<SECURITIES> 0
<RECEIVABLES> 23,995
<ALLOWANCES> (842)
<INVENTORY> 19,091
<CURRENT-ASSETS> 43,723
<PP&E> 85,283
<DEPRECIATION> (52,286)
<TOTAL-ASSETS> 163,621
<CURRENT-LIABILITIES> (15,963)
<BONDS> (115,000)
(32,438)
0
<COMMON> (63,535)
<OTHER-SE> 865
<TOTAL-LIABILITY-AND-EQUITY> (163,621)
<SALES> (27,169)
<TOTAL-REVENUES> (27,169)
<CGS> 14,875
<TOTAL-COSTS> 7,983
<OTHER-EXPENSES> (30)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,873
<INCOME-PRETAX> (468)
<INCOME-TAX> 187
<INCOME-CONTINUING> 281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 281
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
