<PAGE>
--------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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 10,387,148 on
November 14, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 (unaudited).... 1
Unaudited Condensed Consolidated Statements of
Operations for the Three Months Ended September 24,
1999 and September 30, 2000, and the Nine Months Ended
September 24, 1999 and September 30, 2000............... 3
Unaudited Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 24, 1999 and
September 30, 2000...................................... 4
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risks................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 18
Item 2. Changes in Securities................................... 18
Item 3. Defaults Upon Senior Securities......................... 18
Item 4. Submission of Matters to a Vote of Security Holders..... 18
Item 5. Other Information....................................... 18
Item 6. Exhibits and Reports on Form 8-K........................ 18
SIGNATURE................................................................ 19
i
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION> December 31, September 30,
1999 2000
------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................... $ 2,917 $ 1,804
Accounts receivable, less allowance for doubtful
accounts of $973 and $1,281 at December 31, 1999 and
September 30, 2000, respectively........................ 30,425 37,221
Inventories.............................................. 24,043 35,139
Other current assets..................................... 4,612 2,083
---------- ---------
Total current assets.................................. 61,997 76,247
PROPERTY, PLANT AND EQUIPMENT, net........................... 42,476 46,242
OTHER ASSETS:
Intangible assets, net................................... 66,970 60,918
Deferred financing costs, net............................ 11,134 9,729
Deferred tax asset, net.................................. 68,943 68,560
Other assets............................................. 299 154
---------- ---------
Total other assets.................................... 147,346 139,361
---------- ---------
Total assets....................................... $ 251,819 $ 261,849
========== =========
</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, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks.................................... $ 6,673 $ 8,030
Accounts payable.......................................... 6,168 12,279
Accrued liabilities....................................... 11,700 16,665
Other current liabilities................................. 1,485 1,385
--------- ---------
Total current liabilities............................... 26,026 38,359
NOTE PAYABLE TO AFFILIATE.................................. 7,508 8,009
NOTES PAYABLE TO BANKS, net of current portion............. 82,513 78,825
SENIOR SUBORDINATED NOTES PAYABLE.......................... 115,000 115,000
--------- ---------
Total liabilities....................................... 231,047 240,193
--------- ---------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
authorized 1,800 shares; issued and outstanding 356
shares and 376 shares at December 31, 1999 and September
30, 2000, respectively; liquidation preference: $35,558
and $37,603, respectively................................. 34,558 36,603
Accrued preferred stock dividend, payable in kind......... 863 2,041
--------- ---------
35,421 38,644
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value: authorized 15,000 shares;
issued and outstanding--10,044........................... 92,158 92,158
Cumulative translation adjustment......................... (862) (2,854)
Accumulated deficit....................................... (105,945) (106,292)
--------- ---------
Total stockholders' equity (deficit).................... (14,649) (16,988)
--------- ---------
Total liabilities, mandatorily-redeemable preferred
stock and stockholders' equity (deficit)............... $ 251,819 $ 261,849
========= =========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated balance sheets.
2
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
---------------------------- -----------------------------
September 24, September 30, September 24, September 30,
1999 2000 1999 2000
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET SALES................................................. $30,827 $41,111 $ 85,270 $113,729
COST OF SALES............................................. 18,642 19,587 50,283 56,915
------- ------- -------- --------
Gross profit........................................... 12,185 21,524 34,987 56,814
------- ------- -------- --------
OPERATING EXPENSES:
Selling, distribution, general and administrative........ 8,207 11,745 21,490 31,270
Amortization of goodwill................................. 601 767 724 2,387
Research and development................................. 651 533 1,295 1,782
------- ------- -------- --------
9,459 13,045 23,509 35,439
------- ------- -------- --------
Income from operations................................. 2,726 8,479 11,478 21,375
INTEREST AND OTHER EXPENSE................................ (4,342) (5,812) (12,140) (16,279)
------- ------- -------- --------
Net loss before (benefit) provision for income taxes... (1,616) 2,667 (662) 5,096
PROVISION (BENEFIT) FOR INCOME TAXES...................... (62) 1,005 284 2,220
------- ------- -------- --------
Net income (loss)...................................... (1,554) 1,662 (946) 2,876
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation loss........................ (220) (2,299) (364) (1,992)
------- ------- -------- --------
Comprehensive income (loss)............................ $(1,774) $ (637) $ (1,310) $ 884
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of
these unaudited condensed consolidated statements.
3
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amount in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 24, September 30,
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ (946) $ 2,876
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization................................................... 5,817 8,780
Amortization of deferred financing costs........................................ 1,024 620
Deferred taxes.................................................................. 720 383
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable...................................... 1,964 (6,796)
Decrease (increase) in inventories.............................................. (3,936) (11,096)
Decrease (increase) in other current assets..................................... (213) 2,529
(Increase) decrease in other assets............................................. (508) 145
Decrease (increase) in accounts payable......................................... 3,918 6,111
Increase in accrued liabilities................................................. 5,695 4,965
Decrease in other current liabilities........................................... (1,189) (99)
Increase in other non-current liabilities....................................... 250 0
-------- --------
Net cash provided by operating activities..................................... 4,760 8,418
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment......................................... (6,876) (8,356)
Acquisition of Louis Gibeck AB Stock, net of cash acquired of $8,208............... (38,750) 2,648
-------- --------
Net cash used in investing activities.............................................. (45,626) (5,708)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable to banks............................................... (9,000) (7,400)
Proceeds from bank borrowings...................................................... 14,171 5,569
Proceeds from note payable to affiliate............................................ 22,000 --
Sale of common and preferred stock, net of transaction costs....................... 22,000 --
-------- --------
Net cash provided by (used in) financing activities............................. 49,171 (1,831)
-------- --------
Effect of exchange rate changes on cash............................................. (364) (1,992)
-------- --------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.......................... 7,941 (1,113)
CASH AND SHORT-TERM INVESTMENTS, beginning of period................................ 507 2,917
-------- --------
CASH AND SHORT-TERM INVESTMENTS, end of period...................................... $ 8,448 $ 1,804
======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 24, September 30,
1999 2000
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................... $ 7,971 $8,275
======= ======
DETAILS OF ACQUISITIONS:
Acquisition price............................................... $53,581 $ -
Less: cash acquired............................................ (8,208) -
Less: common stock issued for acquisition....................... (6,623) -
------- ------
Net cash paid for acquisition................................... $38,750 $ -
======= ======
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind..................... $ 2,868 $3,223
======= ======
Common stock issued for acquisition............................. $ 6,623 $ -
======= ======
</TABLE>
The accompanying notes are an integral part of
these unaudited condensed consolidated statements.
5
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
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 September 30, 2000, and the results of
operations and cash flows for the three and nine month periods ended September
24, 1999 and September 30, 2000 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 accounting principles
generally accepted in the United States 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 1999
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 24, 1999 and September 30, 2000 are not necessarily
indicative of the results to be achieved for a full year.
2. Acquisitions. During 1999, the Company completed certain business
------------
acquisitions, the most significant of which was the acquisition of Louis Gibeck
AB ("LGAB").
Had the acquisition of LGAB occurred at the beginning of the prior fiscal
year, the unaudited pro forma net sales and net loss would be as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 24,
1999
------------------
(unaudited)
<S> <C>
Net sales............................... $94,704
=======
Net loss................................ $(1,582)
=======
</TABLE>
3. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Raw materials............................. $ 5,901 $ 9,835
Work-in-process........................... 5,682 9,499
Finished goods............................ 12,460 15,805
------- -------
$24,043 $35,139
======= =======
</TABLE>
4. Bank Notes Payable. During the third quarter 2000, certain covenant
------------------
provisions of the existing bank loan agreement were amended.
5. 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. The following tables disclose required consolidating
financial information for guarantor, including the Company, and non-guarantor
subsidiaries (amounts in thousands):
6
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 30, 2000
---------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
--------- ------------- ----------- -----
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash......................................... $ 51 $ 1,753 $ -- $ 1,804
Accounts receivable, net..................... 33,352 5,480 (1,611) 37,221
Inventories.................................. 32,292 3,973 (1,126) 35,139
Other current assets......................... 3,990 20,461 (22,368) 2,083
-------- ------- -------- --------
Total current assets....................... 69,685 31,667 (25,105) 76,247
PROPERTY, PLANT AND EQUIPMENT, NET 45,250 991 -- 46,241
OTHER ASSETS:
Intangible assets, net....................... 21,517 39,401 -- 60,918
Deferred financing costs, net................ 9,729 -- -- 9,729
Deferred tax asset, net...................... 67,925 635 -- 68,560
Investment in non-guarantor subsidiaries..... 29,245 -- (29,245) --
Other........................................ 728 151 (725) 154
-------- ------- -------- --------
Total other assets......................... 129,144 40,187 (29,970) 139,361
-------- ------- -------- --------
Total assets.............................. $244,079 $72,845 $(55,075) $261,849
======== ======= ======== ========
</TABLE>
7
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of September 30, 2000
----------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
---------- ------------- ----------- -----
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks......................... $ 7,000 $ 1,030 $ - $ 8,030
Accounts payable............................... 14,727 3,926 (6,374) 12,279
Accrued liabilities............................ 12,034 4,631 - 16,665
Other current liabilities...................... 1,440 17,827 (17,882) 1,385
-------- -------- --------- --------
Total current liabilities.................... 35,201 27,414 (24,256) 38,359
OTHER LIABILITIES:
Note payable to affiliate...................... - 8,009 - 8,009
Notes payable to banks, net of current portion. 66,000 12,825 - 78,825
Senior subordinated notes...................... 115,000 - - 115,000
-------- -------- --------- --------
Total liabilities............................ 216,201 48,248 (24,256) 240,193
-------- -------- --------- --------
Mandatorily-redeemable preferred stock.......... 38,644 - - 38,644
-------- -------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT).................. (10,765) 24,597 (30,820) (16,988)
-------- -------- --------- --------
244,080 72,845 (55,076) 261,849
======== ======== ========= ========
</TABLE>
8
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
----------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
-------- -------- ----------- -----
<S> <C> <C> <C> <C>
NET SALES................................................... $37,533 $ 7,584 $ (4,006) $ 41,111
COST OF SALES............................................... 21,203 2,390 (4,006) 19,587
------- ------- -------- --------
Gross profit............................................... 16,330 5,194 - 21,524
OPERATING EXPENSES:
Selling, distribution, general and administrative.......... 9,867 1,878 - 11,745
Goodwill amortization...................................... 279 488 - 767
Research and development................................... 217 316 - 533
------- ------- ------- --------
Income from operations..................................... 6,967 2,512 - 8,479
------- ------- ------- --------
INTEREST AND OTHER EXPENSE.................................. (4,804) (1,008) - (5,812)
Income before provision for income taxes................... 1,163 1,504 - 2,667
PROVISION (BENEFIT) FOR INCOME TAXES....................... 453 552 - 1,005
------- ------- ------- --------
Net income ................................................ $ 710 $ 952 $ - $ 1,662
======= ======= ======= ========
Depreciation and amortization............................... $ 2,752 $ 718 $ - $ 3,470
======= ======= ======= ========
Adjusted EBITDA(a).......................................... $ 7998 $ 3,718 $ - $ 12,716
======= ======= ======= ========
</TABLE>
-----------------------
(a) Adjusted EBITDA represents income before depreciation and amortization,
interest expense and income tax expense. Adjusted EBITDA is not a measure
of performance under accounting principles generally accepted in the United
States, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with accounting principles generally accepted in the
United States, or as a measure of profitability or liquidity.
9
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
--------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
NET SALES................................................. $101,551 $21,256 $(9,078) $113,729
COST OF SALES............................................. 57,166 8,627 (8,878) 56,915
-------- ------- ------- --------
Gross profit............................................. 44,385 12,629 (200) 56,814
OPERATING EXPENSES:
Selling, distribution, general and administrative........ 25,949 5,321 -- 31,270
Goodwill amortization.................................... 877 1,510 -- 2,387
Research and development................................. 729 993 -- 1,782
-------- ------- ------- --------
Income from operations................................... 16,770 4,805 (200) 21,375
-------- ------- ------- --------
INTEREST AND OTHER EXPENSE................................ (13,954) (2,325) -- (16,279)
-------- ------- ------- --------
Income before provision for income taxes................. 2,816 2,480 (200) 5,096
PROVISION FOR INCOME TAXES............................... 1,152 1,068 -- 2,220
-------- ------- ------- --------
Net income............................................... $ 1,664 $ 1,412 $ (200) $ 2,876
======== ======= ======= ========
Depreciation and amortization............................. $ 6,852 $ 1,928 $ -- $ 8,780
======== ======= ======= ========
Adjusted EBITDA(a)........................................ $ 24,429 $ 8,243 $ (200) $ 32,542
======== ======= ======= ========
</TABLE>
_____________________
(a) Adjusted EBITDA represents income before depreciation and amortization,
interest expense and income tax expense. Adjusted EBITDA is not a measure
of performance under accounting principles generally accepted in the United
States, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with accounting principles generally accepted in the
United States, or as a measure of profitability or liquidity.
10
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
-------------------------------------------
Non-
Guarantor Guarantor Total
------------ ------------ -----------
<S> <C> <C> <C>
Net cash provided by operating activities..................... $ 1,413 $ 7,005 $ 8,418
Net cash used in investing activities......................... (2,343) (2,865) (5,708)
Net cash provided by (used in) financing activities........... 1,400 (3,231) (1,831)
Effect of exchange rate changes on cash....................... (117) (1,875) (1,992)
------------ ------------- -----------
NET DECREASE IN CASH.......................................... (147) (966) (1,113)
CASH, beginning of period..................................... 184 2,733 2,917
------------ ------------- -----------
CASH, end of period........................................... $ 37 $ 1,767 $ 1,804
============ ============= ===========
</TABLE>
The Company operates in two segments: North American operations (guarantor) and
international operations (non-guarantor). The financial data of these two
segments closely approximates the guarantor/non-guarantor information set forth
above and, accordingly, segment data is not provided separately.
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 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>
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 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>
13
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------------------
Non-
Guarantor Guarantor Adjustments Total
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 184 $ 2,733 - $ 2,917
Accounts receivable.............................. 28,329 2,096 - 30,425
Inventories...................................... 21,124 4,065 (1,146) 24,043
Other current assets............................. 4,578 16,673 (16,639) 4,612
-------- -------- -------- ---------
Total current assets........................... 54,215 25,567 (17,785) 61,997
PROPERTY, PLANT AND EQUIPMENT, net................ 41,335 1,141 - 42,476
OTHER ASSETS:
Intangible assets, net........................... 22,770 44,200 - 66,970
Deferred financing costs, net.................... 10,749 385 - 11,134
Deferred tax asset............................... 68,600 223 120 68,943
Investment in non-guarantor subsidiaries......... 29,245 - (27,345) -
Other assets..................................... 833 162 (696) 291
-------- -------- -------- ---------
Total other assets............................. 132,197 44,970 (29,821) 147,346
-------- -------- -------- ---------
$227,747 $ 71,678 $(47,606) (251,819)
-------- -------- -------- ---------
LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY DEFICIT
<CAPTION>
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank............................ $ 5,500 $ 1,173 $ - $ 6,673
Accounts payable................................. 6,625 1,550 (2,016) 6,160
Accrued liabilities.............................. 8,344 3,356 - 11,700
Other current liabilities........................ 450 10,876 (9,849) 1,485
-------- -------- -------- ---------
Total current liabilities...................... 20,927 16,964 (11,065) 26,026
NOTE PAYABLE TO AFFILIATE.......................... - 13,906 (6,398) 7,508
NOTES PAYABLE TO BANK, net of current portion...... 66,100 16,413 - 82,513
SENIOR SUBORDINATED NOTES.......................... 115,000 - - 115,000
-------- -------- -------- ---------
Total liabilities.............................. 202,027 47,283 (19,263) 231,047
-------- -------- -------- ---------
Mandatorily-redeemable preferred stock............. 35,421 - - 35,421
STOCKHOLDERS' EQUITY (DEFICIT)..................... (9,701) 24,395 (29,343) (14,640)
-------- -------- -------- ---------
$227,747 $ 71,678 $(47,606) $ 251,019
-------- -------- -------- ---------
</TABLE>
14
<PAGE>
<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........................................................ 16,448 2,355 (161) 18,642
------- -------- ----- -------
Gross Profit...................................................... 11,697 1,114 (626) 12,185
OPERATING EXPENSES:
Selling, distribution, general and administrative................. 6,758 2,050 -- 8,808
Research and development.......................................... 326 325 -- 651
------- -------- ----- -------
7,084 2,375 -- 9,459
------- -------- ----- -------
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) -- (82)
------- -------- ----- -------
NET INCOME (LOSS).................................................... $ 549 $(1,577) $(626) $(1,534)
======= ======= ===== =======
Depreciation and amortization........................................ $ 1,534
=======
EBITDA before EPP and bonuses........................................ $ 6,147
=======
<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........................................................ 48,089 2,355 (161) 50,283
-------- -------- ----- -------
Gross Profit...................................................... 34,499 1,114 (626) 34,987
OPERATING EXPENSES:
Selling, distribution, general and administrative................. 20,164 2,050 -- 22,214
Research and development.......................................... 970 325 -- 1,295
-------- -------- ----- -------
21,134 2,375 -- 23,509
-------- -------- ----- -------
Income (loss) from operations.................................. 13,365 1,261 (626) 11,478
-------- -------- ----- -------
OTHER INCOME AND (EXPENSES):
Interest expense.................................................. (11,727) (303) -- (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........................................ $ 10,035
========
</TABLE>
15
<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.
16
<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.
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 has increased its net sales and improved its position within
the disposable health care products market in recent years by increasing its
respiratory care product offering, introducing disposable products for the
anesthesia health care market, expanding its presence in international markets
and establishing a position in the growing alternate site market.
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 October 28, 2000, the Company acquired certain assets of Tyco Healthcare
LP ("Tyco"), including Tyco's Sheridan line of endotreacheal tubes for a cash
purchase price of approximately $18.0 million. The Tyco acquisition was funded
with proceeds from the Company's $60.0 million revolving line of credit and
additional equity provided by existing shareholders.
On November 8, 1999, the Company acquired 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 was funded principally with proceeds from the
Company's $60.0 million revolving line of credit.
On October 8, 1999, the Company acquired certain assets of Medimex, a
German distribution company that had previously distributed products for both
the Company and Louis Gibeck AB ("LGAB"), for a cash purchase price of $2.2
million. The assets were acquired through the Company's wholly-owned, non-
guarantor subsidiary, HRCDAC Inc., and was funded with cash on hand.
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 HUDSON RCI
AB, formerly Louis Gibeck, AB (LGAB), LGAB, a company organized under the laws
of Sweden. 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
17
<PAGE>
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.
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 of "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 sales in the German market. The German
operation had a negative impact on the Company's results of approximately $1.0
million in the first nine months of 2000. It is anticipated that the Company's
earnings will be positively impacted by the German operation for the remainder
of fiscal 2000 and beyond.
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 Nine Month Period Ended
(unaudited) (unaudited)
----------------------------------------------------------------------------
September 24, September 30, September 24, September 30,
1999 2000 1999 2000
----------------------------------------------------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales.............................................. $30,827 $41,111 $85,270 $113,729
Cost of sales.......................................... 18,642 19,587 50,283 56,915
------- ------- ------- --------
Gross profit.......................................... 12,185 21,524 34,987 56,814
Selling expenses....................................... 3,296 4,098 8,408 11,813
Distribution expenses.................................. 1,488 3,102 3,448 6,565
General and administrative expenses.................... 3,423 4,545 9,634 12,892
Amortization of goodwill............................... 601 767 724 2,387
Research and development expenses...................... 651 533 1,295 1,782
------- ------- ------- --------
Total operating expenses.............................. 9,459 13,045 23,509 35,439
------- ------- ------- --------
Operating income...................................... $ 2,726 $ 8,479 $11,478 $ 21,375
======= ======= ======= ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
(unaudited) (Unaudited)
------------------------------- -------------------------------
September 24, September 30, September 24, September 30,
1999 2000 1999 2000
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 60.5 47.6 59.0 50.0
------ ------ ------ ------
Gross profit....................................... 39.5 52.4 41.0 50.0
Selling expenses.................................... 10.7 10.0 9.9 10.4
Distribution expenses............................... 4.8 7.5 4.0 5.8
General and administrative expenses................. 11.1 11.1 11.3 11.3
Amortization of goodwill............................ 1.9 1.9 0.8 2.1
Research and development expenses................... 2.2 1.3 1.5 1.6
------ ------ ------ ------
Total operating expenses........................... 30.7 31.8 27.5 31.2
------ ------ ------ ------
Operating income................................... 8.8% 20.6% 13.5% 18.8%
====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
24, 1999
Net sales, reported net of accrued rebates, were $41.1 million in the third
quarter of 2000 as compared to $30.8 million in the third quarter of 1999, an
increase of $10.3 million or 33.4%. Sales by the acquired Hudson RCI AB
increased approximately $0.6 million, $3.5 million related to the acquired Tyco
IBE product line and $0.4 million related to the acquired Medimex product line.
For the base Hudson product line, Domestic Hospital sales increased by $2.0
million, primarily due to increased demand by GPO customers. Alternate Site
sales increased by $0.7 million, as market share continues to grow in this
market. Canadian sales increased by $0.3 million. International sales
increased by $1.8 million, due to growth in the Germany and the Far East. OEM
sales increased by $1.0 million, due to sales of the Tyco IBE product.
The Company's gross profit for the third quarter of 2000 was $21.5 million,
an increase of $9.3 million or 76.7% over the third quarter of 1999. As a
percentage of sales, the gross profit was 52.3% and 39.5% for the third quarter
of 2000 and 1999, respectively. The higher margin in 2000 was primarily due to
sales of higher-margin Hudson RCI AB product lines as well as the Tyco products.
In addition, the Hudson RCI AB negatively impacted gross margins during the 1999
period.
Selling expenses were $4.1 million for the third quarter of 2000, a $0.8
million increase over the third quarter of 1999. This increase was due
primarily to the start-up of a U.K.-based sales office.
Distribution expenses were $3.1 million for the third quarter of 2000, a
$1.6 million increase over the third quarter of 1999. This increase was
primarily driven by the establishment of an Atlanta distribution facility late
in the third quarter of 1999, the addition of a third shift and overtime at all
warehouses required to meet customer demand.
General and administrative expenses were $4.5 million in the third quarter
of 2000, an increase of $1.1 million or 32.8% over the third quarter of 1999.
This increase was primarily the result of additional expenses associated with
the acquired Hudson RCI AB business, costs associated with a new computer system
implementation and increased staffing levels.
Amortization of goodwill was $0.8 million for the third quarter of 2000, as
compared to $0.6 million in the third quarter of 1999. This increase was
primarily due to the Tyco IBE acquisition, completed in the fourth quarter of
1999.
Research & development costs were $0.5 million in the third quarter of 2000,
as compared to $0.7 million in the third quarter of 1999. This increase was
primarily due to expenses of the acquired Hudson RCI AB.
Interest expense and other was $5.8 million in the third quarter of 2000, as
compared to $4.0 million in the third quarter of 1999. This increase reflects
increased borrowings as a result of the Hudson RCI AB and Tyco acquisitions as
well as increased borrowings on the working capital revolving facility at higher
interest rates.
19
<PAGE>
The Company 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 increase in tax basis of assets provided by the Section
338(h)(10) election made in conjunction with the April 1998 recapitalization.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 24,
1999
Net sales, reported net of accrued rebates, were $113.7 million in the first
nine months of 2000 as compared to $85.3 million in the first nine months of
1999, an increase of $28.4 million or 33.4%. Additional sales by the acquired
Hudson RCI AB were approximately $8.0 million, $9.7 million related to the
acquired Tyco product line and $1.0 million related to the acquired Medimex
product line. For the base Hudson product line, Domestic Hospital sales
increased by $1.8 million, primarily due to increased demand from GPO customers.
Alternate Site sales increased by $2.3 million as focus in this key market
resulted in market share growth. International sales increased by $4.3
million, primarily due to increased sales in the German market and increased
demand in Asia. OEM sales increased by $1.3 million, primarily due to sales of
IBE products. Although demand was strong in all sectors of the business, sales
were negatively impacted by shipping difficulties associated with the
implementation of a new computer system during the second quarter.
The Company's gross profit for the first nine months of 2000 was $56.8
million, an increase of $21.8 million or 62.3% over the first nine months of
1999. As a percentage of sales, the gross profit was 50.0% and 41.0% for the
fist nine months of 2000 and 1999, respectively. The improved margin was
primarily due to higher-margin sales of the Hudson RCI AB product as well as the
acquired Tyco products. In addition, due to the shipping difficulties associated
with the computer system implementation, production levels significantly
exceeded sales levels, causing a fixed overhead to be absorbed into inventory at
a higher than normal rate. In addition, sales of the acquired Hudson RCI AB
products negatively impacted margins in 1999.
Selling expenses were $11.8 million for the first nine months of 2000, a
$3.4 million increase over the first nine months of 1999. This increase was due
primarily to costs related to the acquired Hudson RCI AB and to the start-up
German and U.K. operations. Additionally, sales representatives were added in
the Alternate Site market to service the growing demand.
Distribution expenses were $6.6 million for the first nine months of 2000, a
$3.1 million increase over the first nine months of 1999. This increase was
primarily driven by the establishment of an Atlanta distribution facility late
in the third quarter of 1999, the addition of a third shift and overtime at all
warehouses required to meet customer demand.
General and administrative expenses were $12.9 million in the first nine
months of 2000, an increase of $3.3 million or 33.8% over the first nine months
of 1999. This increase was primarily the result of additional expenses
associated with the acquired Hudson RCI AB business, the German start-up
operation, training costs associated with the computer system implementation and
increased staffing levels.
Amortization of goodwill was $2.4 million for the first nine months of 2000,
as compared to $0.7 million in the first nine months of 1999. This increase was
primarily due to the Tyco and Hudson RCI AB acquisitions in late 1999.
Research & development costs were $1.8 million in the first nine months of
2000, as compared to $1.3 million in the first nine months of 1999. This
increase was primarily due to expenses of the acquired Hudson RCI AB.
Interest expense and other was $16.2 million in the first nine months of
2000, as compared to $12.1 million in the first nine months of 1999. This
increase reflects increased borrowings as a result of the Hudson RCI AB and Tyco
acquisitions as well as increased borrowings under on the working capital
revolving facility at higher interest rates.
The Company 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 increase in tax basis of assets provided by the Section
338(h)(10) election made in conjunction with the April 1998 recapitalization.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations and
borrowings under its working capital bank facility. Cash provided by operations
totaled $4.8 million and $8.4 million in the first nine months of
20
<PAGE>
1999 and 2000, respectively. The increase from the first nine months of 1999 to
the first nine months of 2000 is primarily attributable to increased income
partially offset by higher working capital levels. The Company had operating
working capital, excluding cash and short-term debt, of $39.7 million and $43.9
million as of December 31, 1999 and September 30, 2000, respectively.
Inventories were $24.0 million and $35.1 million as of December 31, 1999 and
September 30, 2000, respectively. In order to meet the needs of its customers,
the Company must maintain inventories sufficient to permit same-day or next-day
filling of most orders. Such inventories are higher than those that would be
required for delayed filling of orders, thus adversely impacting liquidity. Over
time, the Company expects its level of inventories to increase as the Company's
sales in the international market increase. Accounts receivable, net of
allowances, were $30.4 million and $37.2 million at December 31, 1999 and
September 30, 2000, 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 that 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 24, 1999, net cash used in investing
activities was $45.6 million, reflecting purchases of computer software
manufacturing equipment and the acquisition of Louis Gibeck, AB. During the nine
months ended September 30, 2000, net cash used in investing activities was $5.7
million, primarily reflecting purchases of manufacturing equipment and
implementation of a new enterprise resource planning software program. The
Company currently estimates that capital expenditures will be approximately $8.0
million in each of 2000 and 2001, consisting primarily of additional and
replacement manufacturing equipment and new heater placements.
During the nine months ended September 24, 1999 and September 30, 2000, net
cash (used in) provided by financing activities was $49.1 million and $(1.8)
million, respectively, reflecting the acquisition of Louis Gibeck, AB in 1999 as
well as repayment and borrowings of the Company's credit facility in 1999 and
2000.
The Company has outstanding $209.9 million of indebtedness, consisting of
$115.0 million of 9-1/8% Senior Subordinated Notes due 2008 (the "Subordinated
Notes") issued in April 1998, borrowings of $75.5 million under the credit
facility (the "Credit Facility") entered into in April 1998 and $8.0 million
in notes payable to affiliates. In addition, LGAB has $14.4 million in
outstanding borrowings under its bank facility. The Credit Facility consists of
a $40.0 million term loan facility (the "Term Loan Facility") (all of which
was funded in connection with the Company's April 1998 Recapitalization) and a
$60.0 million revolving loan facility (the "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 LGAB acquisition, the Company borrowed $22.0 million
pursuant to an unsecured promissory note payable to Freeman Spogli. The note
bears interest at 12.0% per annum, matures in August 2006, and requires
semiannual interest payments. As of September 30, 2000, $8.0 million remained
outstanding on the note.
In connection with the LGAB acquisition, the Company assumed debt owed by
LGAB under its bank facility (the "LGAB Facility"), which was refinanced during
1999 and totaled $14.4 million as of September 30, 2000. The LGAB Facility,
which is denominated in Swedish krona, bears interest at three-month STIBOR (the
interest rate at or about 11:00 a.m. Stockholm time, two banking days before a
draw-down date or the relevant interest period, quoted for deposits in krona)
plus 0.75% to 1.75% (4.365% to 5.365% at September 30, 2000), matures in
December 2003, and is secured by the common stock of LGAB.
In connection with the Company's April 1998 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 are 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 ranks junior in right of payment to all obligations of the
Company and
21
<PAGE>
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 1999 acquisitions 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137, which is effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value, and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Management has not yet determined the impact that adoption of this standard will
have on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has significant operations in Sweden that is denominated in
Swedish Krona. Due to the devaluation of the Krona against the U.S. dollar of
approximately 20% during the third quarter of 2000, the company recognized an
exchange loss of approximately $20 million.
22
<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.
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 14, 2000 By: /s/ Jay R. Ogram
----------------------------------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
24
