<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 March 31, 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)
--------------
<TABLE>
<S> <C>
California 95-1867330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27711 Diaz Road, P.O. Box 9020 92589
Temecula, California (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(909) 676-5611
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] 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 May 15,
2000.
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<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000 (unaudited)......................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 26, 1999 and March 31, 2000............................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 26, 1999 and March 31, 2000............................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 15
Item 2. Changes in Securities.............................................................. 15
Item 3. Defaults Upon Senior Securities.................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Item 5. Other Information.................................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................................... 15
SIGNATURE.............................................................................................. 16
</TABLE>
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................ $ 2,917 $ 3,634
Accounts receivable, less allowance for doubtful accounts of $973
and $1,026 at December 31, 1999 and March 31, 2000,
respectively....................................................... 30,425 32,784
Inventories......................................................... 24,043 25,333
Other current assets................................................ 4,612 2,008
-------- --------
Total current assets.............................................. 61,997 63,759
PROPERTY, PLANT AND EQUIPMENT, NET.................................... 42,476 44,504
OTHER ASSETS:
Intangible assets, net.............................................. 66,970 66,102
Deferred financing costs, net....................................... 11,134 10,588
Deferred tax asset, net............................................. 68,943 68,406
Other assets........................................................ 299 778
-------- --------
Total other assets................................................ 147,346 145,874
-------- --------
Total assets................................................... $251,819 $254,137
======== ========
</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, March 31,
1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks................................................... $ 6,673 $ 7,158
Accounts payable......................................................... 6,168 7,287
Accrued liabilities...................................................... 11,700 14,672
Other current liabilities................................................ 1,485 1,347
--------- ---------
Total current liabilities.............................................. 26,026 30,464
NOTE PAYABLE TO AFFILIATE................................................. 7,508 7,508
NOTES PAYABLE TO BANKS, net of current portion............................ 82,513 78,588
SENIOR SUBORDINATED NOTES PAYABLE......................................... 115,000 115,000
--------- ---------
Total liabilities...................................................... 231,047 231,560
--------- ---------
MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value:
authorized--1,800 shares; issued and outstanding--356 shares;
liquidation preference: $35,558......................................... 34,558 34,558
Accrued preferred stock dividend, payable in kind........................ 863 1,897
--------- ---------
35,421 36,455
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value: authorized--15,000 shares; issued and
outstanding--10,044..................................................... 92,158 92,158
Cumulative translation adjustment........................................ (862) (656)
Accumulated deficit...................................................... (105,945) (105,380)
--------- ---------
Total stockholders' equity (deficit)................................... (14,649) (13,878)
--------- ---------
Total liabilities, mandatorily-redeemable preferred stock and
stockholders' equity (deficit)....................................... $ 251,819 $ 254,137
========= =========
</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 Ended
----------------------
March 26, March 31,
1999 2000
--------- ----------
<S> <C> <C>
NET SALES............................................... $27,169 $40,807
COST OF SALES........................................... 15,781 22,503
------- -------
Gross profit......................................... 11,388 18,304
OPERATING EXPENSES:
Selling, distribution, general and administrative.... 6,827 8,699
Amortization of goodwill............................. 61 833
Research and development............................. 290 620
------- -------
7,178 10,152
------- -------
Income from operations............................... 4,210 8,152
INTEREST AND OTHER EXPENSE.............................. 3,742 5,337
------- -------
Net income before provision for income taxes......... 468 2,815
PROVISION FOR INCOME TAXES.............................. 187 1,216
------- -------
Net income........................................... 281 1,599
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain (loss)............. (401) 206
------- -------
Comprehensive income (loss)....................... $ (120) $ 1,805
======= =======
</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>
Three Months Ended
----------------------------------
March 26, March 31,
1999 2000
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 281 $ 1,599
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization......................................... 1,441 2,598
Amortization of deferred financing costs.............................. 319 490
Deferred taxes........................................................ 112 536
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable............................ 2,677 (2,359)
Increase in inventories............................................... (1,067) (1,290)
Increase in other current assets...................................... (54) (479)
(Increase) decrease in other assets................................... (134) 2,604
Increase (decrease) in accounts payable............................... (3,982) 1,119
Increase in accrued liabilities....................................... 3,402 2,974
Decrease in other current liabilities................................. -- (138)
------- -------
Net cash provided by operating activities........................... 2,995 7,654
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................... (1,391) (3,702)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable to banks................................. (1,000) (3,441)
------- -------
Effect of exchange rate changes on cash................................... (401) 206
------- -------
NET INCREASE IN CASH...................................................... 203 717
CASH, beginning of period................................................. 507 2,917
------- -------
CASH, end of period....................................................... $ 710 $ 3,634
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................. $ 898 $ 2,312
======= =======
Income taxes......................................................... $ -- $ 6
======= =======
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind.............................. $ 925 $ 1,034
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated statements.
4
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 2000, and the results of
operations and cash flows for the three-month periods ended March 26, 1999 and
March 31, 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-month period ended March 31,
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"). The Company is evaluating certain estimates made in connection
with the purchase price allocations, which may change in the near term.
Had the acquisition of LGAB occurred at the beginning of the prior fiscal
year, the unaudited pro forma net sales and net income would be as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 26,
1999
------------------
(unaudited)
<S> <C>
Net sales............................................... $ 37,557
============
Net income.............................................. $ 1,048
============
</TABLE>
3. Inventories. Inventories consisted of the following (amounts in
-----------
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---------------- -------------
(unaudited)
<S> <C> <C>
Raw materials............................................. $ 5,901 $ 5,601
Work-in-process........................................... 5,682 6,082
Finished goods............................................ 12,460 13,650
------- -------
$24,043 $25,333
======= =======
</TABLE>
4. 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):
5
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash..................................... $ 48 $ 3,586 $ -- $ 3,634
Accounts receivable, net................. 28,674 4,110 -- 32,784
Inventories.............................. 23,457 4,081 (2,205) 25,333
Other current assets..................... 3,610 17,080 (18,682) 2,008
--------- ------- --------- --------
Total current assets................... 55,789 28,857 (20,887) 63,759
PROPERTY, PLANT AND EQUIPMENT, NET........ 43,362 1,142 -- 44,504
OTHER ASSETS:
Intangible assets, net................... 22,293 43,809 -- 66,102
Deferred financing costs, net............ 10,423 165 -- 10,588
Deferred tax asset, net.................. 67,992 414 -- 68,406
Investment in non-guarantor subsidiaries. 29,245 -- (29,245) --
Other.................................... 1,061 158 (441) 778
--------- ------- --------- --------
Total other assets..................... 131,014 44,546 (29,686) 145,874
--------- ------- --------- --------
Total assets.......................... $230,165 $74,545 $(50,573) $254,137
========= ======= ========= ========
</TABLE>
6
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks........................... $ 6,000 $ 1,158 $ -- $ 7,158
Accounts payable................................. 5,459 1,707 121 7,287
Accrued liabilities.............................. 11,114 3,558 -- 14,672
Other current liabilities........................ 1,318 20,177 (20,148) 1,347
-------- ------- -------- ---------
Total current liabilities...................... 23,891 26,600 (20,027) 30,464
-------- ------- -------- ---------
OTHER LIABILITIES:
Note payable to affiliate....................... -- 7,508 -- 7,508
Notes payable to banks, net of current portion.. 63,500 15,088 -- 78,588
Senior subordinated notes....................... 115,000 -- -- 115,000
-------- ------- -------- ---------
Total liabilities.............................. 202,391 49,196 (20,027) 231,560
-------- ------- -------- ---------
Mandatorily-redeemable preferred stock............ 36,455 -- -- 36,455
STOCKHOLDERS' EQUITY (DEFICIT).................... (8,681) 25,349 (30,546) (13,878)
-------- ------- -------- ---------
$230,165 $74,545 $(50,573) $ 254,137
======== ======= ======== =========
</TABLE>
7
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS(a)
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
------------------------------------------------------------------------
Guarantor Non-Guarantor Adjustments Total
----------------- ------------------ ---------------- -------------
<S> <C> <C> <C> <C>
NET SALES................................................. $34,272 $8,849 $(2,314) $40,807
COST OF SALES............................................. 20,329 4,288 (2,114) 22,503
------- ------ ------- -------
Gross profit............................................. 13,943 4,562 (200) 18,304
OPERATING EXPENSES:
Selling, distribution, general and administrative........ 6,841 1,858 -- 8,699
Amortization of goodwill................................. 299 534 -- 833
Research and development................................. 282 338 -- 620
------- ------ ------- -------
7,422 2,730 -- 10,152
------- ------ ------- -------
Income from operations................................... 6,521 1,831 (200) 8,152
INTEREST AND OTHER EXPENSE................................ 4,552 785 -- 5,337
------- ------ ------- -------
Income before provision for income taxes................. 1,969 1,046 (200) 2,815
PROVISION FOR INCOME TAXES................................ 824 392 -- 1,216
------- ------ ------- -------
Net income................................................ $ 1,145 $ 654 $ (200) $ 1,599
======= ====== ======= =======
Depreciation and amortization............................. $ 1,957 $ 641 $ -- $ 2,598
======= ====== ======= =======
Adjusted EBITDA(b)........................................ $ 8,478 $2,472 $ (200) $10,750
======= ====== ======= =======
</TABLE>
- --------------------------
(a) All entities included in the March 26, 1999 financial statements were
guarantors of the Company's Senior Subordinated Notes.
(b) 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.
8
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
Non-
Guarantor Guarantor Total
----------- ----------------- -------------
<S> <C> <C> <C>
Net cash provided by operating activities................. $ 5,984 $ 1,670 $ 7,654
Net cash provided by (used in) investing activities....... (4,014) 312 (3,702)
Net cash used in financing activities..................... (2,100) (1,341) (3,441)
Effect of exchange rate changes on cash................... (5) 211 206
------- ------- -------
NET (DECREASE) INCREASE IN CASH........................... (135) 852 717
CASH, beginning of period................................. 183 2,734 2,917
------- ------- -------
CASH, end of period....................................... $ 48 $ 3,586 $ 3,634
======= ======= =======
</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.
9
<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 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 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 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
10
<PAGE>
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 the German market. The German operation had
a negative impact on the Company's results of approximately $0.2 million in the
first quarter of 2000. It is anticipated that the Company's earnings will be
positively impacted 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
(unaudited)
------------------------------------
March 26, March 31,
1999 2000
------------- -------------
(in thousands)
<S> <C> <C>
Net sales............................. $ 27,169 $ 40,807
Cost of sales......................... 15,781 22,503
--------- ----------
Gross profit......................... 11,388 18,304
Selling expenses...................... 2,436 3,819
Distribution expenses................. 1,023 1,472
General and administrative expenses... 3,368 3,408
Amortization of goodwill.............. 61 833
Research and development expenses..... 290 620
--------- ----------
Total operating expenses............. 7,178 10,152
--------- ----------
Operating income..................... $ 4,210 $ 8,152
========= ==========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended
(unaudited)
------------------------------------
March 26, March 31,
1999 2000
------------- -------------
<S> <C> <C>
Net sales............................. 100.0% 100.0%
Cost of sales......................... 58.1 55.1
------ ------
Gross profit......................... 41.9 44.9
Selling expenses...................... 9.0 9.4
Distribution expenses................. 3.8 3.6
General and administrative expenses... 12.4 8.4
Amortization of goodwill.............. 0.2 2.0
Research and development expenses..... 1.1 1.5
------ ------
Total operating expenses............ 26.4 24.9
------ ------
Operating income.................... 15.5% 20.0%
====== ======
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 26, 1999
Net sales, reported net of accrued rebates, were $40.8 million in the first
quarter of 2000 as compared to $27.2 million in the first quarter of 1999. This
represents an increase of $13.6 million or 50.2%. Of the increase,
approximately $5.2 million related to sales generated by the acquired LGAB, $3.8
million related to sales of the acquired Tyco product line and $0.3 million
related to the Medimex acquisition. For the base Hudson RCI business, domestic
hospital sales increased by $1.4 million or 8.6%, due to increased demand at the
hospital level, primarily the result of increased sales through certain GPOs.
Alternate site sales increased by $1.1 million or 22.9% as the Company continued
to focus its efforts on this growing market. International sales increased by
$1.1 million or 27.0%, as growth in sales continued to Japan and Europe. This
growth was partially offset by weakness in South America. Canadian and OEM sales
were unchanged from the first quarter of 1999.
The Company's gross profit for the first quarter of 2000 was $18.3 million,
an increase of $6.9 million or 60.7% over the first quarter of 1999. As a
percentage of sales, the gross profit was 44.9% and 41.9% for the first quarter
of 2000 and 1999, respectively. This increase was primarily due to higher-margin
sales of the LGAB products offset somewhat by an unfavorable mix variance in the
base Hudson RCI product line. This mix variance is expected to continue in the
future if the preference for passive humidification products over higher margin
active humidification products continues.
Selling expenses were $3.8 million for the first quarter of 2000, a $1.4
million increase over the first quarter of 1999. This increase was due
primarily to $0.7 million of costs associated with LGAB and $0.5 million as a
result of the start-up of the German sales operation. In addition, sales and
marketing expenses at Hudson RCI increased by approximately $0.2 million. As a
percentage of net sales, selling expenses were 9.4% in the first quarter of 2000
as compared to 9.0% in the first quarter of 1999.
Distribution expenses were $1.5 million for the first quarter of 2000, an
increase of $0.4 million or 43.9% over the first quarter of 1999. As a
percentage of sales, distribution expenses declined to 3.6% in the first quarter
of 2000 as compared to 3.8% in the first quarter of 1999. The decrease as a
percentage of sales is primarily the result of the decreased cost of freight
between the Company's distribution facilities.
General and administrative expenses were $3.4 million in the first quarter
of 2000, unchanged from the first quarter of 1999. As a percentage of net sales,
general and administrative expenses were 8.4% in the first quarter of 2000 as
compared to 12.4% in the first quarter of 1999.
Amortization of goodwill was $0.8 million in the first quarter of 2000, a
$0.8 million increase over the first quarter of 1999. The increase was due to
the acquisition of LGAB and the Tyco IBE product line.
Research and development expenses were $0.6 million for the first quarter of
2000, an increase of $0.3 million or 113.8% over the first quarter of 1999.
This increase was primarily due to the addition of LGAB research and
12
<PAGE>
development expenses of $0.3 million. Research and development costs for the
base Hudson RCI business were unchanged.
Interest expense was $5.0 million for the first quarter of 2000, as compared
to $3.7 million in the first quarter of 1999. The increase was due to higher
debt levels as a result of the LGAB and Tyco acquisitions.
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 tax basis in assets provided by the Section 338(h)(10)
election made in connection 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
before EPP payments and retention bonuses totaled $3.0 million and $7.7 million
in the first quarter of 1999 and 2000, respectively. The increase from the
first quarter of 1999 to the first quarter of 2000 is primarily attributable to
higher income levels. The Company had operating working capital, excluding cash
and short-term debt, of $39.7 million and $36.8 million as of December 31, 1999
and March 31, 2000, respectively. Inventories were $24.0 million and $25.3
million as of December 31, 1999 and March 31, 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
$32.8 million at December 31, 1999 and March 31, 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 quarter ended March 26, 1999, net cash used in investing
activities was $1.4 million, reflecting purchases of manufacturing equipment.
During the quarter ended March 31, 2000, net cash used in investing activities
was $3.7 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 quarter ended March 26, 1999 and March 31, 2000, net cash used in
financing activities was $1.0 million and $3.4 million, respectively, reflecting
repayment of the Company's borrowings.
The Company has outstanding $208.3 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 $69.5 million under the credit
facility (the "Credit Facility") entered into in April 1998 and $7.5 million in
notes payable to affiliates. In addition, LGAB has $16.2 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.
13
<PAGE>
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 March 31, 2000, $7.5 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 $16.2 million as of March 31, 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 March 31, 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 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 its April 1998
Recapitalization, 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
There have been no material changes in the Company's market risk exposure
from that reported in the Company's 10-K for the fiscal year ended December 31,
1999.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HUDSON RESPIRATORY CARE INC.,
a California corporation
May 15, 2000 By: /s/ Jay R. Ogram
----------------
Jay R. Ogram
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HUDSON
RESPIRATORY CARE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 DEC-26-1998
<PERIOD-END> MAR-31-2000 MAR-26-1999
<CASH> 3,634 710
<SECURITIES> 0 0
<RECEIVABLES> 32,784 23,153
<ALLOWANCES> (1,026) (635)
<INVENTORY> 25,333 19,091
<CURRENT-ASSETS> 63,759 43,723
<PP&E> 44,504 32,996
<DEPRECIATION> (59,527) 0
<TOTAL-ASSETS> 254,137 163,621
<CURRENT-LIABILITIES> (37,972) (15,963)
<BONDS> (115,000) (115,000)
(36,455) (32,438)
0 0
<COMMON> (92,158) (63,535)
<OTHER-SE> 106,036 102,315
<TOTAL-LIABILITY-AND-EQUITY> (254,137) (163,621)
<SALES> (40,807) (27,169)
<TOTAL-REVENUES> (40,807) (27,169)
<CGS> 22,503 15,781
<TOTAL-COSTS> 10,151 7,178
<OTHER-EXPENSES> 339 (30)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,997 3,873
<INCOME-PRETAX> (2,815) (468)
<INCOME-TAX> 1,216 187
<INCOME-CONTINUING> (1,599) (281)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,599) (281)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
