<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 24, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number - 333-56097
---------------
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 [_] No [X]
The number of shares of Common Stock, $0.01 par value, outstanding (the
only class of common stock of the Company outstanding) was 10,044,291 on October
31, 1999.
================================================================================
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
Quarter Ended September 24, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of December 25, 1998 and
September 24, 1999.............................................................. 1
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 25, 1998 and September 24, 1999................. 3
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 25, 1998 and September 24, 1999................................. 4
Notes to Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 16
Item 3. Qualitative and Quantitative Disclosures About Market Risk....................... 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................................... 23
Item 6. Exhibits and Reports on Form 8-K................................................ 23
SIGNATURE........................................................................................... 24
</TABLE>
i
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................. $ 507 $ 8,448
Accounts receivable, less allowance for doubtful accounts of $635
and $412 at December 25, 1998 and September 24, 1999,
respectively................................................... 25,829 25,689
Inventories...................................................... 18,024 24,268
Other current assets............................................. 716 1,630
-------- --------
Total current assets........................................... 45,076 60,035
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net.................................. 32,732 36,993
-------- --------
OTHER ASSETS:
Deferred tax asset............................................... 70,329 69,609
Deferred financing costs, net.................................... 11,917 11,651
Intangible assets, net........................................... 4,955 50,514
Other assets..................................................... 312 821
-------- --------
Total other assets............................................. 87,513 132,595
-------- --------
$165,321 $229,623
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
1
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks............................................ $ 3,000 $ 8,256
Accounts payable.................................................. 6,324 2,991
Note payable to affiliate......................................... -- 22,000
Accrued liabilities............................................... 6,219 14,997
--------- ---------
Total current liabilities....................................... 15,543 48,244
SENIOR SUBORDINATED NOTES PAYABLE.................................... 115,000 115,000
NOTES PAYABLE TO BANKS, net of current portion....................... 41,000 44,079
Other non-current liabilities........................................ -- 1,210
--------- ---------
Total liabilities............................................... 171,543 208,533
--------- ---------
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value:
Authorized--1,800 shares; issued and outstanding--318 and
336 shares at December 25, 1998 and September 24, 1999; liquidation
preference: $33,625............................................... 30,802 32,625
Accrued preferred stock dividend, payable in kind.................. 711 1,755
--------- ---------
31,513 34,380
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value:
Authorized--15,000 shares, issued and
outstanding--7,812 and 10,044 at December 25, 1998
and September 24, 1999, respectively............................. 63,535 92,158
Cumulative translation adjustment.................................. (464) (828)
Accumulated deficit................................................ (100,806) (104,620)
--------- ---------
(37,735) (13,290)
--------- ---------
$ 165,321 $ 229,623
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -----------------------------
Sept. 25,
1998
Sept. 25, Sept. 24, (as restated, Sept. 24,
1998 1999 see Note 6) 1999
--------- --------- -------------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES........................................................ $22,130 $30,827 $ 68,828 $ 85,270
COST OF SALES.................................................... 11,548 17,953 36,691 48,006
------- ------- -------- --------
Gross Profit.................................................. 10,582 12,874 32,137 37,264
------- ------- -------- --------
OPERATING EXPENSES:
Selling, distribution, general and administrative............. 6,512 9,266 19,657 23,793
Research and development...................................... 475 882 1,415 1,993
------- ------- -------- --------
6,987 10,148 21,072 25,786
------- ------- -------- --------
PROVISION FOR EQUITY PARTICIPATION PLAN.......................... -- -- 63,939 --
PROVISION FOR RETENTION PAYMENTS................................. -- -- 4,754 --
------- ------- -------- --------
Income (loss) from operations................................. 3,595 2,726 (57,628) 11,478
------- ------- -------- --------
INTEREST EXPENSE................................................. (4,001) (4,342) (7,791) (12,140)
------- ------- -------- --------
Loss before (benefit) provision for income taxes.............. (406) (1,616) (65,419) (662)
(BENEFIT) PROVISION FOR INCOME TAXES (Note 5).................... (163) (62) (76) 284
------- ------- -------- --------
Loss before extraordinary item................................ (243) (1,554) (65,343) (946)
EXTRAORDINARY ITEM--loss on extinguishment of debt............... -- -- 104 --
------- ------- -------- --------
Net loss...................................................... (243) (1,554) (65,447) (946)
Preferred stock dividends........................................ 872 978 1,648 2,868
------- ------- -------- --------
Net loss available to common shareholders........................ $(1,115) $(2,532) $(67,095) $ (3,814)
======= ======= ======== ========
Pro forma net loss available to common shareholders assuming
C corporation status for income tax purposes (Note 5)........... $(1,115) $(2,532) $(41,000) $ (3,814)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
Sept. 25, Sept. 24,
1998 1999
---------- ---------
<S> <C> <C>
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (65,447) $ (946)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities--
Depreciation and amortization............................................... 4,869 5,817
Write-off of deferred financing fees........................................ 104 --
Amortization of deferred financing costs.................................... -- 1,024
Gain on disposal of equipment............................................... (28) --
Deferred taxes.............................................................. (3,345) 720
Increase in equity participation plan (EPP)................................. 63,939 --
Decrease in accounts receivable............................................. 2,319 1,964
Decrease (increase) in inventories.......................................... 72 (3,936)
Decrease (increase) in other current assets................................. 250 (213)
(Increase) decrease in other assets......................................... 215 (508)
Increase (decrease) in accounts payable..................................... 1,522 (3,918)
Increase in accrued liabilities............................................. 7,057 5,695
Decrease in other current liabilities....................................... -- (1,189)
Increase in other non-current liabilities................................... -- 250
Payments of EPP liabilities................................................. (89,642) --
--------- --------
Net cash provided by (used in) operating activities....................... (78,115) 4,760
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (2,730) (6,876)
Acquisition of certain assets of Gibeck, Inc................................... (3,352) --
Acquisition of Louis Gibeck AB stock, net of cash acquired of $8,208........... -- (38,750)
--------- --------
Net cash used in investing activities..................................... (6,082) (45,626)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................................. (43,250) (9,000)
Proceeds from bank borrowings.................................................. 61,000 14,171
Additions to deferred financing costs.......................................... (12,563) --
Redemption of stockholder interest............................................. (127,624) --
Proceeds from senior subordinated debt......................................... 115,000 --
Proceeds from note payable to affiliate........................................ -- 22,000
Sale of common and preferred stock, net of transaction costs................... 92,125 22,000
--------- --------
Net cash provided by financing activities................................. 84,688 49,171
--------- --------
Effect of exchange rate changes on cash.......................................... 345 (364)
--------- --------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS.................................. 836 7,941
CASH AND SHORT-TERM INVESTMENTS, beginning of period............................. 470 507
--------- --------
CASH AND SHORT-TERM INVESTMENTS, end of period................................... $ 1,306 $ 8,448
========= ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
Sept. 25, Sept. 24,
1998 1999
---------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................................... $ 2,377 $ 7,971
========= ========
Income taxes........................................................... $ 1,659 $ 107
========= ========
DETAILS OF ACQUISITIONS:
Acquisition price........................................................ $ 3,352 $ 53,581
Less: cash acquired...................................................... -- (8,208)
Less: common stock issued for acquisition................................ -- (6,623)
--------- --------
Net cash paid for acquisitions.............................................. $ 3,352 $ 38,750
========= ========
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid in kind.............................. $ 1,648 $ 2,868
========= ========
Common stock issued for acquisition...................................... $ -- $ 6,623
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
1. Financial Statements. The condensed consolidated financial statements
--------------------
included herein have been prepared by Hudson Respiratory Care Inc. (the
"Company" or Hudson RCI"), without audit, and include all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position at September 24, 1999, and the results of operations and cash flows for
the three and nine month periods ended September 25, 1998 and September 24, 1999
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures in such financial statements are adequate
to make the information presented not misleading, the accompanying unaudited
condensed, consolidated financial statements should be read in conjunction with
the Company's 1998 audited financial statements and the notes thereto included
in its Form 10-K filed with the SEC. The results of operations for the three and
nine month periods ended September 25, 1998 and September 24, 1999 are not
necessarily indicative of the results to be achieved for a full year.
Recapitalization. In April 1998, the Company consummated a plan pursuant
----------------
to which a majority interest in the Company was sold in accordance with an
agreement and plan of merger (the "Recapitalization").
Key components of the Recapitalization included:
(1) Common and preferred equity investments in consideration for an 80.8%
ownership in the Company's common stock and preferred stock with an
initial liquidation preference of $30.0 million;
(2) Issuance of 9-1/8% senior subordinated notes with a par value of
$115.0 million, maturing in 2008;
(3) Execution of a new term loan facility and revolving loan facility;
(4) Repayment of existing indebtedness;
(5) Payment of amounts due under the Equity Participation Plan;
(6) Payment for common shares acquired from the existing shareholder; this
shareholder retained a 19.2% interest in the common shares
outstanding;
(7) Potential contingent payments based on 1998 performance, payable to
the continuing shareholder and former participants in the Equity
Participation Plan; however, as a result of the Company's 1998
performance, no additional amounts are due.
The Company has terminated the Equity Participation Plan. Additionally, the
Company's sole shareholder, who owned the remaining 21% of Industrias Hudson,
transferred this interest to the Company in consideration of one dollar. Because
of the commonality of ownership, the 21% minority interest has been included in
the financial statements for all periods presented.
The Company effected a 245:1 stock split concurrent with the
Recapitalization. The stock split has been reflected in the stock amounts shown
herein.
6
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
The Recapitalization resulted in no change to the carrying amounts of the
Company's existing assets and liabilities. The Company has recorded a deferred
tax asset due to the conversion from S to C corporation status and a tax
election to revalue the basis of assets and liabilities for tax purposes.
2. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
<TABLE>
<CAPTION>
December 25, September 24,
1998 1999
------------- -------------
<S> <C> <C>
Raw materials..................... $ 5,127 $ 4,662
Work-in-process................... 5,926 5,442
Finished goods.................... 6,971 14,164
------- -------
$18,024 $24,268
======= =======
</TABLE>
3. Comprehensive Income. In June 1997, FASB issued Statement of Financial
--------------------
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that meet the definition of components of
comprehensive income be reported in a financial statement for the period in
which they are recognized. This Statement was adopted by the Company in the
quarter ended March 27, 1998.
The Company had comprehensive loss for the three and nine month periods
ended September 25, 1998 and September 24, 1999 as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -------------------------
Sept. 25, Sept. 24, Sept. 25, Sept. 24,
1998 1999 1998 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss.............................. $(243) $(1,554) $(65,447) $ (946)
Other comprehensive income (loss):
Foreign currency translation loss... -- (220) (21) (364)
----- ------- -------- -------
Comprehensive loss.................... $(243) $(1,774) $(65,468) $(1,310)
===== ======= ======== =======
</TABLE>
4. Foreign Currency Translation. Effective in the first quarter of 1999, the
----------------------------
Company commenced using the Mexican Peso as the functional currency of its
Mexican operations since Mexico is no longer considered a highly inflationary
economy.
5. Income Taxes. The Company became a C corporation upon consummation of the
------------
transaction discussed in Note 1. Accordingly, the Company has presented pro
forma net income (loss) amounts to reflect a provision for income taxes at a
combined effective rate of approximately 40%, after consideration of permanent
differences between financial reporting and income tax amounts.
6. Restatement. The effect of the conversion of the Company to a C
-----------
corporation in connection with the Recapitalization of approximately $77.1
million was previously reflected in operations during the quarter ended June 26,
1998. This amount should have been reflected as a direct credit to retained
earnings during the period. This restatement had no impact on ending retained
earnings for the periods presented. The impact of this restatement on the
accompanying financial statements is as follows:
7
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 25, 1998
------------------------------------
As
Originally As
Reported Adjustments Restated
---------- ----------- --------
<S> <C> <C> <C>
Net loss before (benefit) provision for
income taxes........................ $(65,419) $ -- $(65,419)
======== ======== ========
Net income (loss) before extraordinary
item................................ $ 11,721 $(77,064) $(65,343)
======== ======== ========
Net income (loss)....................... $ 11,617 $(77,064) $(65,447)
======== ======== ========
</TABLE>
7. Acquisition of Louis Gibeck AB. On July 22, 1999, the Company acquired
------------------------------
substantially all of the outstanding capital stock of Louis Gibeck AB ("LGAB")
and subsidiaries, a Swedish company engaged in the same business as the Company.
The purchase price was approximately $53.6 million, which included cash
consideration of approximately $45.5 million (including approximately $8.2
million of cash acquired), a non-cash contribution of shares of Common Stock of
River Holding Corp., a Delaware corporation and the Company's parent, of $6.6
million and transaction expenses of approximately $1.5 million.
The acquisition was funded with (i) a $22.0 million common stock sale to
the Company's existing majority shareholder, (ii) a $22.0 million, 12% per
annum unsecured note payable to an affiliate of the Company's existing majority
shareholder due August 1, 2000 and (iii) a $5.9 million unsecured bank loan
bearing interest at the bank's reference rate plus 1/4% per annum due July 30,
2006.
The acquisition of LGAB was accounted for as a purchase and the purchase
price was preliminarily allocated based upon management's estimate of the assets
acquired and liabilities assumed as follows (unaudited, amounts in thousands):
<TABLE>
<S> <C>
Cash................................................ $ 8,208
Accounts receivable................................. 1,823
Inventories......................................... 5,161
Fixed assets........................................ 1,206
Current liabilities................................. (4,856)
Non-current liabilities............................. (4,123)
Other assets/liabilities............................ 1,378
Goodwill............................................ 44,784
-------
Total purchase price............................... $53,581
=======
</TABLE>
The Company is evaluating the status of certain research and development
projects that were acquired with the purchase of LGAB. Accordingly, a portion
of the purchase price may be allocated to research and development when the
Company has completed this analysis. The Company is also evaluating other
estimates made in conjunction with the purchase price allocation, which may
change in the near term.
Had this acquisition and the acquisition of certain assets of Gibeck, Inc.
occurred at the beginning of the current and prior fiscal years, the unaudited
pro forma net sales, net loss before extraordinary item and net loss would be as
follows (in thousands):
8
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
Sept. 25, Sept. 24,
1998 1999
--------- ---------
<S> <C> <C>
Net sales.............................................. $ 92,067 $93,873
======== =======
Net loss before extraordinary item..................... $(71,115) $(2,073)
======== =======
Net loss............................................... $(71,219) $(2,073)
======== =======
</TABLE>
8. Subsidiaries Guaranteeing Debt and Segment Data. The Company is the 100%
-----------------------------------------------
owner of certain subsidiaries which do not guarantee the Company's senior
subordinated notes and certain bank debt. The non-guarantor subsidiaries consist
principally of the assets, liabilities and operations of LGAB and subsidiaries.
The following tables disclose required consolidating financial information for
guarantor, including the Company, and non-guarantor subsidiaries (amounts in
thousands):
9
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 24, 1999
----------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and short term investments............... $ -- $ 10,067 $ (1,619) $ 8,448
Accounts receivable........................... 23,124 2,565 -- 25,689
Inventories................................... 20,496 3,772 -- 24,268
Other current assets.......................... 642 4,655 (3,667) 1,630
-------- -------- ---------- --------
Total current assets....................... 44,262 21,059 (5,286) 60,035
-------- -------- ---------- --------
PROPERTY, PLANT AND EQUIPMENT, NET............... 35,886 1,107 -- 36,993
-------- -------- ---------- --------
OTHER ASSETS:
Deferred tax asset............................ 69,525 84 -- 69,609
Deferred financing costs, net................. 11,101 550 -- 11,651
Intangible assets, net........................ 4,122 42,708 3,684 50,514
Ivestment in non-guarantor subsidiaries....... 28,978 -- (28,978) --
Other assets.................................. 554 642 (375) 821
-------- -------- ---------- --------
Total other assets......................... 114,280 43,984 (25,669) 132,595
-------- -------- ---------- --------
$194,428 $ 66,150 $ 30,955 $229,623
======== ======== ========== ========
</TABLE>
10
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 24, 1999
----------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank......................... 4,000 4,256 -- 8,256
Accounts payable.............................. 3,980 630 (1,619) 2,991
Note payable to affiliate..................... -- 22,000 -- 22,000
Accrued liabilities..................... 10,255 4,940 (198) 14,997
-------- -------- ---------- --------
Total current liabilities................... 18,235 31,826 (1,817) 48,244
-------- -------- ---------- --------
OTHER LIABILITIES:
Notes payable to bank, net of current portion. 38,000 6,185 (106) 44,079
Senior subordinated notes..................... 115,000 -- -- 115,000
Other......................................... -- 1,209 1 1,210
-------- -------- ---------- --------
Total liabilities........................... 171,235 39,220 (105) 208,533
-------- -------- ---------- --------
Manditorily redeemable preferred stock........... 34,380 -- -- 34,380
-------- -------- ---------- --------
STOCKHOLDERS' EQUITY (DEFICIT)................... (11,187) 26,930 (29,033) (13,290)
-------- -------- ---------- --------
$194,428 $ 66,150 $ (30,955) $229,623
======== ======== ========== ========
</TABLE>
11
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 24, 1999
-------------------------------------------------------
Non-
Guarantor Guarantor Adjustments(a) Total
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
NET SALES..................................................... $28,145 $ 3,469 $(787) $30,827
COST OF SALES................................................. 15,759 2,355 (161) 17,953
------- ------- ----- -------
Gross Profit............................................... 12,386 1,114 (626) 12,874
OPERATING EXPENSES:
Selling, distribution, general and administrative.......... 7,216 2,050 -- 9,266
Research and development................................... 557 325 -- 882
------- ------- ----- -------
7,773 2,375 -- 10,148
------- ------- ----- -------
Income (loss) from operations.............................. 4,613 (1,261) (626) 2,726
------- ------- ----- -------
OTHER INCOME AND (EXPENSES):
Interest expense........................................... (3,884) (466) -- (4,350)
Other, net................................................. 8 -- -- 8
------- ------- ----- -------
(3,876) (466) -- (4,342)
------- ------- ----- -------
Income (loss) before provision (benefit) for income taxes.. 737 (1,727) (626) (1,616)
PROVISION (BENEFIT) FOR INCOME TAXES.......................... 188 (250) -- (62)
------- ------- ----- -------
NET INCOME (LOSS)............................................. $ 549 $(1,477) $(626) $(1,554)
======= ======= ===== =======
Depreciation and amortization................................. $ 1,534
=======
EBITDA before EPP and bonuses................................. $ 6,147
=======
</TABLE>
12
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 24, 1999
-------------------------------------------------------
Non-
Guarantor Guarantor Adjustments(a) Total
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES..................................................... $ 82,588 $ 3,469 $ (787) $ 85,270
COST OF SALES................................................. 45,812 2,355 (161) 48,006
-------- -------- -------- --------
Gross Profit............................................. 36,776 1,114 (626) 37,264
OPERATING EXPENSES:
Selling, distribution, general and administrative.......... 21,743 2,050 -- 23,793
Research and development................................... 1,668 325 -- 1,993
-------- -------- -------- --------
23,411 2,375 -- 25,786
-------- -------- -------- --------
Income (loss) from operations................................. 13,365 1,261 (626) 11,478
-------- -------- -------- --------
OTHER INCOME AND (EXPENSES):
Interest expense........................................... (11,727) (383) -- (12,110)
Other, net................................................. 53 (83) -- (30)
-------- -------- -------- --------
(11,674) (466) -- (12,140)
-------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes.. 1,691 (1,727) (626) (662)
PROVISION (BENEFIT) FOR INCOME TAXES.......................... 534 (250) -- 284
-------- -------- -------- --------
NET INCOME (LOSS)............................................. $ 1,157 $ (1,477) $(626) $ (946)
======== ======== ======== ========
Depreciation and amortization................................. $ 4,670
========
EBITDA before EPP and bonuses................................. $ 18,035
========
</TABLE>
(a) Represents elimination of sales of products from LGAB to the Company which
have not been resold by the Company, i.e., inter-company profit.
13
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 24, 1999
-------------------------------------------------
Non-
Guarantor Guarantor Total
--------- --------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities......................... $ 8,733 $ (3,973) $ 4,760
Net cash used in investing activities....................................... (28,876) (16,750) (45,626)
Net cash provided by from financing activities.............................. 20,000 29,171 49,171
Effect of exchange rate changes on cash..................................... (364) -- (364)
-------- -------- ---------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS................................................................ (507) 8,448 7,941
CASH AND SHORT-TERM INVESTMENTS,
beginning of period........................................................ 507 -- 507
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS,
end of period.............................................................. $ -- $ 8,448 $ 8,448
-------- -------- --------
</TABLE>
As discussed above, the non-guarantor subsidiaries consist principally of
subsidiaries of LGAB and subsidiaries (whose operations are principally
international) the Company operates in two segments: North American operations
and international operations. The financial data of these two segments closely
approximates the guarantor/non-guarantor information set forth above and,
accordingly, separate segment data is not provided.
14
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 24, 1999
------------------
(unaudited)
9. Subsequent Event--Acquisition of Product Line. On September 30, 1999, the
----------------------------------------------
Company entered into a definitive agreement to acquire certain assets of
Tyco Healthcare Group LP ("Tyco"), including Tyco's incentive breathing
exerciser and pulmonary function monitor product lines, for a cash purchase
price of approximately $23.8 million. The Tyco acquisition will be funded
principally with proceeds from the Company's $60.0 million revolving line
of credit. Management expects that the acquisition will be accounted for as
purchase and that the majority of the purchase price will be allocated to
goodwill.
10. Subsequent Event--Principal Payment on Note Payable. In October 1999, the
---------------------------------------------------
Company paid $4.2 million in principal on a note payable to an affiliate.
15
<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 September 30, 1999, the Company entered into a definitive agreement to
acquire certain assets of Tyco Healthcare Group LP ("Tyco"), including Tyco's
incentive breathing exerciser and pulmonary function monitor product lines, for
a cash purchase price of approximately $23.8 million. The Tyco acquisition will
be funded principally with proceeds from the Company's $60.0 million revolving
line of credit.
On July 22, 1999, the Company, through its indirect, wholly-owned
subsidiary Steamer Holding AB, a company organized under the laws of Sweden
("Steamer"), acquired a majority of the outstanding capital stock of Louis
Gibeck AB, a company organized under the laws of Sweden ("LGAB"). Pursuant to a
series of private purchases and a tender offer consummated pursuant to Swedish
law, Steamer acquired 604,000 shares of Class A stock and 2,452,838 shares of
Class B stock representing approximately 82.0% of the capital and 62.8% of the
voting power of LGAB at a price of 115 Swedish krona (approximately $13.60 at
the July 22 exchange rate) per share of Class A stock and Class B stock for an
aggregate cash purchase price of approximately $45.5 million. In addition, on
August 4, 1999, Steamer acquired an additional 483,750 shares of Class A stock
of LGAB from 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
99.0% of the capital and 100.0% of the voting power of LGAB. The Company
intends that Steamer, through continuing purchases and a statutory freezeout and
appraisal procedure under Swedish law, will acquire the remaining outstanding
shares of LGAB as soon as practicable.
16
<PAGE>
The cash for the purchase price and certain related transaction costs was
funded with (i) $22.0 million in gross proceeds from the sale of Holding Common
Stock to the majority stockholder of Holding, (ii) a $22.0 million loan from the
majority stockholder of Holding to Steamer's parent, HRC Holding Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company, and (iii) the
funding of 50 million Swedish krona (approximately $5.9 million) pursuant to the
terms of a loan facility agreement between Steamer and Svenska Handelsbanken AB.
Founded in 1954, LGAB develops, manufactures and markets medical device
products which humidify, heat and filter a patient's breathing gases during
anesthesia and intensive care. LGAB is a market leader in the area "heat
moisture exchange" ("HME") products, with approximately 25% share of the world
market. Following completion of the acquisition, the Company intends to
continue LGAB's operations in substantially the same manner as conducted prior
to the acquisition.
In September 1998, the Company acquired certain assets of Gibeck, Inc., a
subsidiary of LGAB, for approximately $3.35 million. Prior to the transaction,
Gibeck, Inc. was engaged primarily in the business of manufacturing, marketing
and selling disposable anesthesia supplies. In conjunction with that
transaction, the Company became the exclusive North American distributor of
LGAB's HME product line. In fiscal year 1997, Gibeck, Inc. reported net sales
of approximately $12.3 million.
The Company established a sales office located in Germany in the second
quarter of 1999. It is anticipated that this operation will better equip the
Company to more aggressively pursue the German market. The German operation had
a negative impact on the Company's results of approximately $400,000 in the
second and third quarters of 1999. It is anticipated that the Company's
earnings will be negatively impacted for the first twelve months of operation.
The Recapitalization
On April 7, 1998, Hudson RCI consummated its recapitalization pursuant to
an Agreement and Plan of Merger pursuant to which River Acquisition Corp., a
wholly-owned subsidiary of Holding merged with and into Hudson RCI, with Hudson
RCI surviving as a majority-owned subsidiary of Holding (the "Merger").
Pursuant to the Recapitalization, Holding contributed approximately $93.0
million in equity capital into Hudson RCI (the "Holding Equity Investment") and
a shareholder of Hudson RCI (the "Continuing Shareholder") retained common stock
of Hudson RCI ("HCRI Common Stock") 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 HRCI 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 HRCI Common Stock and the
Continuing Shareholder owned the remaining 19.2%.
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 Holding Common Stock 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
17
<PAGE>
Recapitalization, and a $60.0 million revolving loan facility (the "Revolving
Loan Facility") which will be available for Hudson RCI's future capital
requirements and to finance acquisitions.
The Offerings and the application of the net proceeds therefrom, repayment
of existing Hudson RCI debt payments to the Continuing Shareholder under the
Recapitalization Agreement and to management, the Holding Equity Investment and
the related borrowings under the Credit Facility are collectively referred to
herein as the "Recapitalization."
The Company and the shareholders that received distributions in the
Recapitalization made an election under Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended, to treat the Recapitalization as an asset
purchase for tax purposes, which had the effect of significantly increasing the
basis of the Company's assets, thus increasing depreciation and amortization
expenses and other deductions for tax purposes and reducing the Company's
taxable income in 1998 and subsequent years. The Recapitalization resulted in
no change in the basis of the Company's assets and liabilities for financial
reporting purposes.
Results of Operations
The following tables set forth, for the periods indicated, certain income
and expense items expressed in dollars and as a percentage of the Company's net
sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
---------------------------- -----------------------
Sept. 25, Sept. 24 Sept. 25, Sept. 24,
1998 1999 1998 1999
---------- -------- --------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales $22,130 $30,827 $ 68,828 $85,270
Cost of sales 11,548 17,953 36,691 48,006
------- ------- -------- -------
Gross profit 10,582 12,874 32,137 37,264
------- ------- -------- -------
Selling expenses 2,489 3,296 7,180 8,408
Distribution expenses 1,251 1,946 3,949 5,027
General and administrative expenses 2,772 4,024 8,528 10,358
Research and development expenses 475 882 1,415 1,993
Provision for equity participation plan -- -- 63,939 --
Provision for retention payments -- -- 4,754 --
------- ------- -------- -------
Total operating expenses 6,987 10,148 89,765 25,786
------- ------- -------- -------
Operating income (loss) 3,595 2,726 (57,628) 11,478
------- ------- -------- -------
Add back: Provision for equity participation -- -- 63,939 --
plan
Add back: Provision for retention payments -- -- 4,754 --
------- ------- -------- -------
Operating income before provision for equity
participation plan and provision for retention
payments $ 3,595 $ 2,726 $ 11,065 $11,478
======= ======= ======== =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
----------------------------- ------------------------------
Sept. 25, Sept. 24, Sept. 25, Sept. 24
1998 1999 1998 1999
------------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 52.2 58.2 53.3 56.3
------ ------- ------ ------
Gross profit 47.8 41.8 46.7 43.7
Selling expenses 11.2 10.7 10.4 9.9
Distribution expenses 5.7 6.3 5.7 5.9
General and administrative expenses 12.5 13.1 12.4 12.1
Research and development expenses 2.1 2.9 2.1 2.3
Provision for equity participation -- -- 92.9 --
plan
Provision for retention payments -- -- 6.9 --
----- ----- ----- -----
Total operating expenses 31.6 32.9 130.4 30.2
----- ----- ----- -----
Operating income (loss) 16.2 8.8 (83.7) 13.5
----- ----- ----- -----
Add back: Provision for equity
participation plan -- -- 92.9 --
Add back: Provision for retention
payments -- -- 6.9 --
----- ----- ----- -----
Operating income before provisions
for equity participation plan and
provision for retention payments 16.2% 8.8% 16.1% 13.5%
===== ====== ===== =====
</TABLE>
Three Months Ended September 24, 1999 Compared to Three Months Ended September
25, 1998
Net sales, reported net of accrued rebates, were $30.8 million in the third
quarter of 1999 as compared to $22.1 million in the third quarter of 1998. This
represents an increase of $8.7 million or 39.3%. Of this increase,
approximately $2.7 million was the result of the LGAB acquisition. Excluding
LGAB, domestic hospital sales increased $3.4 million, primarily due to sales of
products relating to the September 1998 acquisition of Gibeck, Inc., as well as
increased sales to GPO-affiliated hospitals. Alternate site sales increased by
$1.5 million or 40.6% as the Company continued to focus sales efforts in this
growing market. Canadian sales were $0.4 million, essentially flat with the
third quarter of 1998. House account sales decreased by $0.1 million or 10.0%
from the third quarter of 1998, primarily the result of purchase timing of
several OEM customers. International sales increased by $1.3 million or 32.5%,
primarily the result of strong sales in Japan and Europe. Sales to the Far
East, which had been hampered in 1998 by the economic crisis in that area,
increased $0.1 million over the third quarter of 1998.
The Company's gross profit for the third quarter of 1999 was $12.9 million,
an increase of $2.3 million or 21.7% over the third quarter of 1998. Of this
increase, approximately $1.6 million is a direct result of the LGAB acquisition.
As a percentage of sales, gross profit was 41.8% and 47.8% for the third quarter
of 1999 and 1998, respectively. This decline is related primarily to an
unfavorable mix variance as sales of higher margin pre-filled solutions
continues to decline and a $1.0 million charge to cost of sales relating to the
fair value of acquired inventories in the third quarter of 1999. It is
anticipated that substantially all inventories acquired in the LGAB acquisition
will be exhausted by year-end which will result in a remaining charge of $1.6
million in the fourth quarter. No such charges will occur after fiscal 1999.
Selling expenses were $3.3 million for the third quarter of 1999, a $0.8
million increase over the third quarter of 1998. This increase was primarily
due to the LGAB acquisition, as well as the start up of the German operation.
As a percentage of net sales, selling expenses were 10.7% in the third quarter
of 1999 as compared to 11.2% in the third quarter of 1998.
Distribution expenses were $1.9 million for the third quarter of 1999, an
increase of $0.7 million or 55.6% over the third quarter of 1998. The majority
of this increase was a result of higher sales volumes both as a result of
internal
19
<PAGE>
sales growth and the LGAB acquisition. As a percentage of net sales,
distribution expenses were 6.3% and 5.7% in the third quarter of 1999 and 1998,
respectively.
General and administrative expenses were $4.0 million in the third quarter
of 1999, an increase of $1.3 million or 45.2% over the third quarter of 1998.
This increase was primarily due to the LGAB acquisition during the third quarter
of 1999.
Research and development expenses were $0.9 million for the third quarter
of 1999, an increase of $0.4 million over the third quarter of 1998. This
increase was entirely due to the LGAB acquisition during the third quarter of
1999.
Interest expense was $4.4 million for the third quarter of 1999, as
compared to $3.5 million in the third quarter of 1998. This increase was due to
higher debt levels in the current quarter as a result of borrowings made to
finance the LGAB acquisition.
Prior to April 7, 1998, the Company provided for state income taxes as an S
corporation and was not subject to federal income tax. The Company now provides
for state and federal income taxes as a C corporation, although actual tax
payments are expected to be substantially less than provided amounts due to the
tax basis in assets provided by the Section 338(h)(10) election made in
connection with the Recapitalization.
Nine Months Ended September 24, 1999 Compared to Nine Months Ended September 25,
1998
Net sales, reported net of accrued rebates, were $85.3 million in the first
nine months of 1999 as compared to $68.8 million for the first nine months of
1998. This represents an increase of $16.4 million or 23.9%. Of this increase,
approximately $2.8 million is a result of the LGAB acquisition. Exclusive of
the LGAB acquisition, domestic hospital sales increased $7.8 million, primarily
due to sales of products relating to the September 1998 acquisition of Gibeck,
Inc., as well as increased sales to GPO-affiliated hospitals. Alternate site
sales increased by $3.4 million or 30.0% as the Company continued to focus sales
efforts in this growing market. Canadian sales were $1.7 million for the first
nine months of 1999, an increase of $0.3 million or 18.6% over the first nine
months of 1998, primarily the result of the addition of a new distributor as
well as the award of the Medbuy GPO contract in the second quarter of 1998.
House account sales increased by $0.6 million or 24.7% over the first half of
1998, primarily the result of the addition of several OEM relationships.
International sales increased by $1.6 million or 13.8%, primarily the result of
strong sales in Japan and Europe.
The Company's gross profit for the first nine months of 1999 was $37.3
million, an increase of $5.1 million or 16.0% over the first nine months of
1998. As a percentage of sales, the gross profit was 43.7% and 46.7% for the
first nine months of 1999 and 1998, respectively. The decline in the margin is
primarily due to unfavorable mix variance caused by increased sales of lower
margin products, such as the Gibeck line of anesthesia products, as well as a
$1.0 million charge to cost of sales relating to the fair value of acquired
inventories in the third quarter of 1999. It is anticipated that substantially
all inventories acquired in the LGAB acquisition will be exhausted by year-end
which will result in a remaining charge of $1.6 million in the fourth quarter.
No such charges will occur after fiscal 1999.
Selling expenses were $8.4 million for the first nine months of 1999, a
$1.2 million increase over the first nine months of 1998. This increase was
primarily due to the LGAB acquisition, as well as the start up of the German
operation. As a percentage of net sales, selling expenses were 9.9% in the
first nine months of 1999 as compared to 10.4% in the first nine months of 1998.
Distribution expenses were $5.0 million for the first nine months of 1999,
an increase of $1.1 million or 27.3% over the first nine months of 1998. The
majority of this increase was a result of higher sales volumes both as a result
of internal sales growth and the LGAB acquisition. As a percentage of net
sales, distribution expenses were 5.9% and 5.7% in the first nine months of 1999
and 1998, respectively.
General and administrative expenses were $10.4 million in the first nine
months of 1999, an increase of $1.8 million or 21.5% over the first nine months
of 1998. This increase was primarily due to the LGAB acquisition
20
<PAGE>
during the third quarter of 1999 as well as payments made to certain outside
consultants during the first nine months of 1999.
Research and development expenses were $2.0 million for the first nine
months of 1999, an increase of $0.6 million over the first nine months of 1998.
This increase was primarily due to the LGAB acquisition during the third quarter
of 1999.
The provision for EPP was terminated upon consummation of the
Recapitalization. As a result, no expense was recorded in the third quarter of
1999. In the first quarter of 1999 certain payments totaling approximately $2.1
million were made to the EPP members and the former shareholder. These payments
had been accrued in fiscal 1998 and therefore had no impact on earnings in
fiscal 1999. It is not anticipated that any additional payments will be made
under the plan.
Interest expense was $12.1 million for the first nine months of 1999, as
compared to $7.1 million in the first nine months of 1998. This increase was
due to higher debt levels in the current quarter as a result of the
recapitalization during the second quarter of 1998 and additional borrowings
made to finance the LGAB acquisition.
Prior to April 7, 1998, the Company provided for state income taxes as an S
corporation and was not subject to federal income tax. The Company now provides
for state and federal income taxes as a C corporation, although actual tax
payments are expected to be substantially less than provided amounts due to the
tax basis in assets provided by the Section 338(h)(10) election made in
connection with the Recapitalization.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations
and borrowing under its working capital facility. Cash provided by operations
before EPP payments totaled $11.5 million in the nine months ended September 25,
1998 and $4.8 million in the nine months ended September 24, 1999. The Company
had operating working capital, excluding cash and short-term debt, of $31.7
million at September 24, 1999. Inventories were $18.0 million and $24.3 million
at December 25, 1998 and September 24, 1999, respectively. In order to meet the
needs of its customers, the Company must maintain inventories sufficient to
permit same-day or next-day filling of most orders. Over time, the Company
expects its level of inventories to increase as the Company's sales in the
international market increase. Accounts receivable, net of allowances, were
$25.8 million and $25.7 million at December 25, 1998 and September 24, 1999,
respectively. The Company offers 30 day credit terms to its U.S. hospital
distributors. Alternate site and international customers typically receive 60 to
90 day terms and, as a result, as the Company's alternate site and international
sales have increased, the amount and aging of its accounts receivable have
increased. The Company anticipates that the amount and aging of its accounts
receivable will continue to increase. The Company established a sales office in
Germany in the second quarter of 1999. While this will have the effect of
increasing the Company's investment in inventories, management believes it will
also result in improved service to international customers as well as in lower
international accounts receivable than would otherwise be the case because
customers will receive products, and consequently pay for them, more quickly.
During the nine months ended September 25, 1998, net cash used in investing
activities was $6.1 million, primarily reflecting the acquisition of assets of
Gibeck, Inc. and purchases of manufacturing equipment. During the nine months
ended September 24, 1999, net cash used in investing activities was $45.6
million, reflecting purchases of LGAB stock, manufacturing equipment and
business operating software. The Company currently estimates that annual capital
expenditures will be approximately $7.0 million in both 1999 and 2000,
consisting primarily of additional and replacement manufacturing equipment and
new heater placements.
During the nine months ended September 25, 1998, net cash provided by
financing activities was $84.7 million, consisting primarily of borrowings under
the bank credit facilities used to fund distributions made under the EPP. During
the nine months ended September 24, 1999, net cash provided by financing
activities was $49.2 million, primarily reflecting increased bank loans,
affiliate loans and the issuance of common stock in connection with the LGAB
acquisition.
21
<PAGE>
The Company has outstanding $189.6 million of indebtedness, consisting of
$115.0 million of Subordinated Notes issued in connection with the
Recapitalization, borrowings of $42.0 million under the Credit Facility entered
into in connection with the Recapitalization and other loans described below.
The Credit Facility consists of a $40.0 million Term Loan Facility (all of which
was funded in connection with the Recapitalization) and a $60.0 million
Revolving Loan Facility. The Subordinated Notes bear interest at the rate of 9-
1/8%, payable semiannually, and will require no principal repayments until
maturity. The Term Loan Facility matures on April 7, 2004 and requires principal
repayments of between $3.0 million and $11.5 million each year until maturity,
commencing on June 30, 1999. The Revolving Loan Facility matures on April 7,
2004 and bears interest based on a spread over either a Eurodollar or base rate.
In addition, the Company has a $22.0 million dollar loan payable to FS&Co.
related to the LGAB acquisition bearing interest at the rate of 12% per annum,
with no principal or interest repayments until maturity at August 2000. The
Company also has loans outstanding to foreign banks in the aggregate amount of
approximately $10.3 million. These loans bear interest at the bank's reference
rate plus 0.25% to 0.75%.
In connection with the Recapitalization, the Company issued to Holding
300,000 shares of its 11-1/2% Senior PIK Preferred Stock due 2010 with an
initial 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.
22
<PAGE>
The Company also relies, directly and indirectly, on the external systems
of various independent business enterprises, such as its customers, suppliers,
creditors, financial organizations, and of governments, for the accurate
exchange of data and related information. The Company could be affected as a
result of any disruption in the operation of the various third-party enterprises
with which the Company interacts. The Company has contacted its key trading
partners to assess its Year 2000 risk based upon the Year 2000 issues of its
partners, and has developed contingency plans for a substantial number of its
key trading partners. These contingency plans include the establishment of
back-up vendors and back-up plans for communications with its customers. The
Company is also developing back-up plans for the procurement of power and water
at its Mexico facilities, which the Company expects to complete in the fourth
quarter of 1999. The Company does not expect the cost of this program to be
material.
The Company believes that the worst case scenario in the event of a Year
2000 related failure would be its inability to communicate via computer
transmission with its key trading partners. The Company cannot provide any
assurance that any Year 2000 related systems issues of third parties will be
corrected in a timely manner, that the failure of these third parties to
correct these issues would not have a material adverse effect on the Company or
that its contingency plans will be adequate.
The total costs of the Year 2000 program are anticipated to be less than
$100,000, some of which has been expended to date. The costs and time estimates
of the Year 2000 project are based on the Company's best estimates. There can be
no assurance that these estimates will be achieved and that planned results will
be achieved. Risk factors include, but are not limited to, the retention of
internal resources dedicated to the project and the successful completion of key
business partners' Year 2000 projects.
Recent Accounting Pronouncements
Statement of Financial Accountings Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998.
Because the Company has no derivative instruments and does not engage in hedging
activities, SFAS No. 133 will not impact the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With the LGAB acquisition, the Company has greater foreign currency
exposure with respect to its international operations. In the past, the
Company's only international exposure was its manufacturing operation in Mexico.
All sales were previously denominated in U.S. dollars. Currently, the Company
has operations in Germany, Sweden, Japan and other countries where sales are
made in local currency. The Company plans to hedge its foreign currency
exposures by attempting to purchase goods and services with the proceeds from
sales in local currencies where possible. The Company will also purchase forward
contracts to hedge receivables denominated in foreign currency that are expected
to be collected and converted into another currency. However, there can be no
assurance that the Company's hedging strategies will allow the Company to
successfully mitigate its foreign exchange exposures.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, 1999, the Company sold 2,231,791 shares of HRCI Common Stock
to Holding in exchange for cash consideration of approximately $22.0 million and
483,750 shares of Class A stock of LGAB, valued at approximately $6.6 million.
The $22.0 million and 483,750 shares of Class A stock of LGAB were used to
finance a portion of the LGAB acquisition.
The sale and issuance of the securities described above was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering. The Company did not engage in any
general solicitation in connection with the issuance of the Common Stock
described above, and Holding acquired the securities for investment only and not
with a view to distribution. Appropriate legends were affixed to the stock
certificates issued in these transactions. No underwriter was employed with
respect to these transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K/A (date of earliest event -- July 22, 1999) relating to the
LGAB transaction.
23
<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
November 8, 1999 By: /s/ Jay R. Ogram
----------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
24
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