-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JXwwwPJ5GpZjZHxTH+NnADEMn3pdMU4mv3HXt9GkJVuy4fKxuq5i9FoHlZAe5UYE PD3yTExq6HZQdsxScOFZyg== 0001017062-02-001556.txt : 20020814 0001017062-02-001556.hdr.sgml : 20020814 20020814152317 ACCESSION NUMBER: 0001017062-02-001556 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER HOLDING CORP CENTRAL INDEX KEY: 0001061892 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 954674065 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-56135 FILM NUMBER: 02735702 BUSINESS ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 18TH FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129582555 MAIL ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 18TH FL CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 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 - 333-56135 ---------------- RIVER HOLDING CORP. (Exact name of registrant as specified in its charter) ----------------- DELAWARE 95-4674065 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 599 Lexington Avenue, 18th Floor 10022 New York, New York (Zip Code) (Address of Principal Executive Offices) (212) 758-2555 (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 9,144,293 on August 14, 2002. ================================================================================ RIVER HOLDING CORP. AND SUBSIDIARIES QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1. River Holding Corp. Unaudited Condensed Consolidated Financial Statements: Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................................................................................1 Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and June 30, 2001...................................................3 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30, 2001..................................................................4 Notes to Unaudited Condensed Consolidated Financial Statements...................................6 Hudson Respiratory Care Inc. Unaudited Condensed Consolidated Financial Statements: Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001...............................................................................15 Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and June 30, 2001..............................................17 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30, 2001.................................................................18 Notes to Unaudited Condensed Consolidated Financial Statements..................................20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................................29 Item 3. Quantitative and Qualitative Disclosures About Market Risks ....................................37 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................................................38 Item 2. Changes in Securities...........................................................................38 Item 3. Defaults Upon Senior Securities.................................................................38 Item 4. Submission of Matters to a Vote of Security Holders.............................................38 Item 5. Other Information...............................................................................38 Item 6. Exhibits and Reports on Form 8-K................................................................38 SIGNATURE..............................................................................................................39
i RIVER HOLDING CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (amounts in thousands)
JUNE 30, DECEMBER 31, 2002 2001 ---------- ------------ CURRENT ASSETS: Cash ....................................................................... $ 3,378 $ 7,085 Accounts receivable, less allowance for doubtful accounts of $1,167 and $1,801 at June 30, 2002 and December 31, 2001, respectively .... 20,595 19,287 Inventories, net ........................................................... 23,915 25,218 Other current assets ....................................................... 1,811 1,265 ---------- ------------ Total current assets ................................................. 49,699 52,855 PROPERTY, PLANT AND EQUIPMENT, net .......................................... 51,852 53,613 OTHER ASSETS: Goodwill ................................................................... 32,877 28,498 Deferred financing and other costs, net .................................... 8,625 8,316 Other assets ............................................................... 762 823 ---------- ------------ Total other assets ................................................... 42,264 37,637 ---------- ------------ Total assets ......................................................... $ 143,815 $ 144,105 ========== ============
See notes to unaudited condensed consolidated financial statements 1 RIVER HOLDING CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (amounts in thousands, except per share amounts)
JUNE 30, DECEMBER 31, 2002 2001 ---------- ------------ CURRENT LIABILITIES: Notes payable to bank .................................................... $ 22,927 $ 20,680 Accounts payable ......................................................... 9,683 14,943 Accrued liabilities ...................................................... 18,663 17,520 ---------- ------------ Total current liabilities ................................................ 51,273 53,143 NOTE PAYABLE TO AFFILIATE ................................................. 37,217 17,217 NOTES PAYABLE TO BANK, net of current portion ............................. 53,000 73,250 SENIOR SUBORDINATED NOTES PAYABLE ......................................... 115,000 115,000 OTHER NON-CURRENT LIABILITIES ............................................. 1,480 1,187 ---------- ------------ Total liabilities ....................................................... 257,970 259,797 MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 1,800 shares authorized; 470 and 445 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively; liquidation preference -- $47,031 and $44,474 respectively ..................................................... 46,613 43,847 Accrued preferred stock dividend, payable in kind ........................ 1,127 1,142 ---------- ------------ 47,740 44,989 STOCKHOLDERS' EQUITY (DEFICIT): Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares issued and outstanding at June 30, 2002 and December 31, 2001 ....................................................... 3,325 3,137 Common stock, $0.01 par value; 15,000 shares authorized; 9,144 issued and outstanding at June 30, 2002 and December 31, 2001 ....................................................... 97,848 97,848 Additional paid in capital ............................................... 750 -- Cumulative translation adjustment ........................................ 1,957 (234) Accumulated deficit ...................................................... (265,775) (261,432) ---------- ------------ Total stockholders' deficit ............................................. (161,895) (160,681) ---------- ------------ Total liabilities, mandatorily-redeemable preferred stock and stockholders' deficit .................................... $ 143,815 $ 144,105 ========== ============
See notes to unaudited condensed consolidated financial statements 2 RIVER HOLDING CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- NET SALES................................................... $ 41,477 $ 40,801 $ 84,462 $ 78,606 COST OF SALES............................................... 24,129 25,525 49,619 54,121 ----------- ------------ ----------- ----------- Gross Profit.............................................. 17,348 15,276 34,843 24,485 OPERATING EXPENSES: Selling, distribution, general & administrative........... 11,641 13,261 23,463 25,782 Amortization of goodwill.................................. -- 2,549 -- 5,785 Research and development.................................. 815 436 1,412 901 ----------- ------------ ----------- ----------- 12,456 16,246 24,875 32,468 ----------- ------------ ----------- ----------- Income (loss) from operations........................... 4,892 (970) 9,968 (7,983) INTEREST EXPENSE AND OTHER, net............................. 5,183 6,343 10,046 13,842 ----------- ------------ ----------- ----------- Net loss before provision for income taxes.............. (291) (7,313) (78) (21,825) PROVISION FOR INCOME TAXES.................................. 902 340 1,326 527 ----------- ------------ ----------- ----------- $ (1,193) $ (7,653) $ (1,404) $ (22,352) =========== ============ =========== =========== Net loss................................................ OTHER COMPREHENSIVE INCOME: Foreign currency translation gain......................... 1,778 3,831 2,191 4,560 ----------- ------------ ----------- ----------- Comprehensive income (loss)............................. $ 585 $ (3,822) $ 787 $ (17,792) =========== ============ =========== ===========
See notes to unaudited condensed consolidated financial statements 3 RIVER HOLDING CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amount in thousands)
SIX MONTHS ENDED ----------------------- JUNE 30, JUNE 30, 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................ $ (1,404) $ (22,352) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization ....................................... 5,776 9,648 Amortization of deferred financing costs ............................ 888 505 Provision for bad debts ............................................. 54 -- Loss on disposal of equipment ....................................... 46 -- Change in operating assets and liabilities: Accounts receivable ................................................. (568) (411) Inventories ......................................................... 2,094 10,120 Other current assets ................................................ 375 (70) Other assets ........................................................ 83 (2,323) Accounts payable .................................................... (6,140) (9,156) Accrued liabilities ................................................. 63 30 Other non-current liabilities ....................................... 96 981 ---------- ---------- Net cash provided by (used in) operating activities .............. 1,363 (13,028) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment .............................. (3,904) (2,464) Proceeds from sales of property, plant and equipment .................... 11 4,464 ---------- ---------- Net cash (used in) provided by investing activities .............. (3,893) 2,000 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank ...................................... (20,258) (3,500) Proceeds from bank borrowings ........................................... -- 6,227 Repayment of notes payable to affiliates ................................ -- (6,000) Proceeds from notes payable to affiliates ............................... 20,000 9,451 Sale of common stock, net of issuance costs ............................. -- 803 Additions of deferred financing costs ................................... (447) 215 ---------- ---------- Net cash (used in) provided by financing activities .............. (705) 7,196 Effect of exchange rate changes on cash ................................... (472) 4,560 ---------- ---------- NET (DECREASE) INCREASE IN CASH ........................................... (3,707) 728 CASH, beginning of period ................................................. 7,085 3,530 ---------- ---------- CASH, end of period ....................................................... $ 3,378 $ 4,258 ========== ==========
See notes to unaudited condensed consolidated financial statements 4
SIX MONTHS ENDED --------------------------------- JUNE 30, JUNE 30, 2002 2001 --------------- --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................................... $ 8,747 $ 7,693 =============== =============== Income taxes....................................................... $ 1,856 $ -- =============== =============== NON-CASH FINANCING ACTIVITIES: Preferred dividends accrued or paid-in-kind........................... $ 2,734 $ 2,361 =============== =============== Issuance of Warrants.................................................. $ 750 $ -- =============== ===============
See notes to unaudited condensed consolidated financial statements 5 RIVER HOLDING CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 1. Financial Statements. River Holding Corp. ("Holding") is a holding company with no other operations than those of its majority-owned subsidiary, Hudson Respiratory Care Inc. (the "Company"). The condensed consolidated financial statements included herein have been prepared by Holding, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2002, the results of operations for the three-month and six-month periods ended June 30, 2002 and June 30, 2001 and statements of cash flows for the six-month periods ended June 30, 2002 and June 30, 2001 pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although Holding 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 Holding's 2001 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the six-month period ended June 30, 2002 are not necessarily indicative of the results to be achieved for a full year. Management Plans to Improve Financial Condition and Results of Operations Management believes that Holding's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing as may be required and, ultimately to attain profitable operations. As further discussed in Note 5, on May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to Holding's majority shareholder. In addition, management has taken numerous actions to improve the operating performance of the Company. Such actions included: the elimination of a distribution warehouse, elimination of non-essential management personnel, reductions in inventory levels, aggressive collection of accounts receivable and elimination of individual products that did not attain acceptable levels of profitability. Management believes that the results of its plans and the agreement reached and funding received on May 14, 2002 discussed above will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. Significant Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements 6 Effective January 1, 2001, Holding adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, 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. The adoption of this new standard did not have a material impact on Holding's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Any acquisitions made by Holding after June 2001 will be recorded in accordance with SFAS 141. Effective January 1, 2002, Holding adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill is no longer amortized and is assessed at least annually for impairment using a fair value methodology. Holding stopped amortizing goodwill, effective January 1, 2002, and as a result no charge for goodwill amortization is included in the 2002 financial statements. Holding completed its transitional impairment test of goodwill as of January 1, 2002 in the second quarter of 2002, which indicates no impairment of existing goodwill. Net loss for the three and six months ended June 30, 2001, excluding amortization of goodwill would have been (in thousands) $5,104 and $16,567 compared to $7,653 and $22,352, respectively. The change in goodwill for the six months ended June 30, 2002 is the result of changes in foreign currency exchange rates. Holding operates in two reporting units; North American operations (also the guarantor) and international operations (also the non-guarantor). These two reporting units are identical to the operating segments described in Note 3. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement. SFAS 143 is effective January 1, 2003. Holding does not expect the adoption of SFAS 143 to have a material impact on Holding's financial statements. In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on Holding's financial statements. In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a 7 liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Holding will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002. 2. Inventories. Inventories consisted of the following (amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ------------- ------------- Raw materials........................................ $ 4,884 $ 7,377 Work-in-process...................................... 5,358 5,392 Finished goods....................................... 15,701 14,481 ------------- ------------- 25,943 27,250 Provision for obsolescence........................... (2,028) (2,032) ------------- ------------- $ 23,915 $ 25,218 ============= =============
3. Segment Data and Subsidiaries Guaranteeing Debt. The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The company has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's operating segments are the same as its reporting segments. The Company is the 100% owner of certain subsidiaries that do not guarantee the Company's senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): 8 RIVER HOLDING CORP. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- ASSETS CURRENT ASSETS: Cash ................................................ $ 1,020 $ 2,358 $ -- $ 3,378 Accounts receivable ................................. 14,664 5,931 -- 20,595 Receivables from non-guarantor ...................... 1,320 -- (1,320) -- Inventories ......................................... 19,032 5,599 (716) 23,915 Other current assets ................................ 866 945 -- 1,811 ---------- ---------- ------------- ---------- Total current assets ............................. 36,902 14,833 (2,036) 49,699 PROPERTY, PLANT AND EQUIPMENT, NET ................................... 50,615 1,237 -- 51,852 OTHER ASSETS: Goodwill, net ....................................... -- 32,877 -- 32,877 Deferred financing and other costs, net ............. 8,625 -- -- 8,625 Investment in non-guarantor subsidiaries at cost .... 28,636 4,000 (32,636) -- Other ............................................... 762 -- -- 762 ---------- ---------- ------------- ---------- Total other assets ............................... 38,023 36,877 (32,636) 42,264 ---------- ---------- ------------- ---------- $ 125,540 $ 52,947 $ (34,672) $ 143,815 ========== ========== ============= ========== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to bank ............................... $ 6,750 $ 16,177 $ -- $ 22,927 Accounts payable .................................... 8,655 1,028 -- 9,683 Payables to guarantor ............................... -- 1,320 (1,320) -- Accrued liabilities ................................. 14,462 4,201 -- 18,663 ---------- ---------- ------------- ---------- Total current liabilities ........................ 29,867 22,726 (1,320) 51,273 OTHER LIABILITIES: NOTE PAYABLE TO AFFILIATE ........................... 26,951 10,266 -- 37,217 NOTES PAYABLE TO BANK, net of current portion ....... 53,000 -- -- 53,000 SENIOR SUBORDINATED NOTES PAYABLE ................... 115,000 -- -- 115,000 OTHER NON-CURRENT LIABILITIES ....................... 167 1,313 -- 1,480 ---------- ---------- ------------- ---------- Total liabilities ................................ 224,985 34,305 (1,320) 257,970 Mandatorily-redeemable preferred stock ................ 47,740 -- -- 47,740 ---------- ---------- ------------- ---------- COMMON STOCK .......................................... 97,848 28,636 (28,636) 97,848 STOCKHOLDERS' EQUITY (DEFICIT) ........................ (245,033) (9,994) (4,716) (259,743) ---------- ---------- ------------- ---------- $ 125,540 $ 52,947 $ (34,672) $ 143,815 ========== ========== ============= ==========
9 RIVER HOLDING CORP. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- ASSETS CURRENT ASSETS: Cash ................................................ $ 4,713 $ 2,372 $ -- $ 7,085 Accounts receivable ................................. 13,989 5,298 -- 19,287 Receivables from non-guarantor ...................... 6,515 -- (6,515) -- Inventories ......................................... 20,377 7,030 (2,189) 25,218 Other current assets ................................ 2,758 13,553 (15,046) 1,265 ---------- ---------- ------------- ---------- Total current assets ............................. 48,352 28,253 (23,750) 52,855 PROPERTY, PLANT AND EQUIPMENT, NET ................................... 52,470 1,143 -- 53,613 OTHER ASSETS: Goodwill, net ....................................... -- 28,498 -- 28,498 Deferred financing and other costs, net ............. 8,316 -- -- 8,316 Investment in non-guarantor subsidiaries ............ 28,623 -- (28,623) -- Other ............................................... 599 224 -- 823 ---------- ---------- ------------- ---------- Total other assets ............................... 37,538 28,722 (28,623) 37,637 ---------- ---------- ------------- ---------- $ 138,360 $ 58,118 $ (52,373) $ 144,105 ========== ========== ============= ========== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to bank ............................... $ 3,750 $ 16,930 $ -- $ 20,680 Accounts payable .................................... 13,761 1,182 -- 14,943 Payables to guarantor ............................... -- 6,515 (6,515) -- Accrued liabilities ................................. 14,584 15,356 (12,420) 17,520 ---------- ---------- ------------- ---------- Total current liabilities ........................ 32,095 39,983 (18,935) 53,143 OTHER LIABILITIES: NOTE PAYABLE TO AFFILIATE ........................... 14,951 2,266 -- 17,217 NOTES PAYABLE TO BANK, net of current portion ....... 73,250 -- -- 73,250 SENIOR SUBORDINATED NOTES PAYABLE ................... 115,000 -- -- 115,000 OTHER NON-CURRENT LIABILITIES ....................... 146 1,041 -- 1,187 ---------- ---------- ------------- ---------- Total liabilities ................................ 235,442 43,290 (18,935) 259,797 Mandatorily-redeemable preferred stock ................ 44,989 -- -- 44,989 ---------- ---------- ------------- ---------- STOCKHOLDERS' EQUITY (DEFICIT) ........................ (142,071) 14,828 (33,438) (160,681) ---------- ---------- ------------- ---------- $ 138,360 $ 58,118 $ (52,373) $ 144,105 ========== ========== ============= ==========
10 RIVER HOLDING CORP. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- NET SALES ............................................. $ 36,085 $ 9,034 $ (3,642) $ 41,477 COST OF SALES ......................................... 24,026 4,231 (4,128) 24,129 ---------- ---------- ------------- ---------- Gross Profit ........................................ 12,059 4,803 486 17,348 OPERATING EXPENSES: Selling, distribution, general and administrative ... 9,103 2,538 -- 11,641 Amortization of goodwill ............................ -- -- -- -- Research and development ............................ 530 285 -- 815 ---------- ---------- ------------- ---------- 9,633 2,823 -- 12,456 ---------- ---------- ------------- ---------- Income from operations .............................. 2,426 1,980 486 4,892 INTEREST EXPENSE AND OTHER, net: ...................... 4,820 380 (17) 5,183 ---------- ---------- ------------- ---------- Net (loss) income before provision for income taxes . (2,394) 1,600 503 (291) PROVISION FOR INCOME TAXES ............................ -- 902 -- 902 ---------- ---------- ------------- ---------- Net (loss) income $ (2,394) $ 698 $ 503 $ (1,193) ========== ========== ============= ========== THREE MONTHS ENDED JUNE 30, 2001 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- NET SALES ............................................. $ 37,026 $ 7,033 $ (3,258) $ 40,801 COST OF SALES ......................................... 25,288 3,734 (3,497) 25,525 ---------- ---------- ------------- ---------- Gross Profit ........................................ 11,738 3,299 239 15,276 OPERATING EXPENSES: Selling, distribution, general and administrative ... 11,531 1,730 -- 13,261 Amortization of goodwill ............................ 1,655 894 -- 2,549 Research and development ............................ 179 257 -- 436 ---------- ---------- ------------- ---------- 13,365 2,881 -- 16,246 ---------- ---------- ------------- ---------- Income (loss) from operations ....................... (1,627) 418 239 (970) INTEREST EXPENSE AND OTHER, net: ...................... 4,949 425 969 6,343 ---------- ---------- ------------- ---------- Net loss before provision for income taxes .......... (6,576) (7) (730) (7,313) PROVISION FOR INCOME TAXES ............................ -- 340 -- 340 ---------- ---------- ------------- ---------- Net Loss .............................................. $ (6,576) $ (347) $ (730) $ (7,653) ========== ========== ============= ==========
11 RIVER HOLDING CORP. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- NET SALES ............................................. $ 73,948 $ 17,588 $ (7,074) $ 84,462 COST OF SALES ......................................... 48,302 8,953 (7,636) 49,619 ---------- ---------- ------------- ---------- Gross Profit ........................................ 25,646 8,635 562 34,843 OPERATING EXPENSES: Selling, distribution, general and administrative ... 18,605 4,858 -- 23,463 Amortization of goodwill ............................ -- -- -- -- Research and development ............................ 865 547 -- 1,412 ---------- ---------- ------------- ---------- 19,470 5,405 -- 24,875 ---------- ---------- ------------- ---------- Income from operations .............................. 6,176 3,230 562 9,968 INTEREST EXPENSE AND OTHER, net: 9,354 692 -- 10,046 ---------- ---------- ------------- ---------- Net (loss) income before provision for income taxes . (3,178) 2,538 562 (78) PROVISION FOR INCOME TAXES ............................ -- 1,326 -- 1,326 ---------- ---------- ------------- ---------- Net (loss) income ..................................... $ (3,178) $ 1,212 $ 562 $ (1,404) ========== ========== ============= ========== SIX MONTHS ENDED JUNE 30, 2001 ---------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ---------- ---------- ------------- ---------- NET SALES ............................................. $ 72,219 $ 13,008 $ (6,621) $ 78,606 COST OF SALES ......................................... 53,254 6,935 (6,068) 54,121 ---------- ---------- ------------- ---------- Gross Profit ........................................ 18,965 6,073 (553) 24,485 OPERATING EXPENSES: Selling, distribution, general and administrative ... 22,619 3,163 -- 25,782 Amortization of goodwill ............................ 3,310 2,475 -- 5,785 Research and development ............................ 394 507 -- 901 ---------- ---------- ------------- ---------- 26,323 6,145 -- 32,468 ---------- ---------- ------------- ---------- Loss from operations ................................ (7,358) (72) (553) (7,983) INTEREST EXPENSE AND OTHER, net ....................... 9,585 2,175 2,082 13,842 ---------- ---------- ------------- ---------- Net loss before provision for income taxes .......... (16,943) (2,247) (2,635) (21,825) PROVISION FOR INCOME TAXES ............................ -- 527 -- 527 ---------- ---------- ------------- ---------- Net loss .............................................. $ (16,943) $ (2,774) $ (2,635) $ (22,352) ========== ========== ============= ==========
12 RIVER HOLDING CORP. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 ------------------------------------- NON- GUARANTOR GUARANTOR TOTAL --------- ---------- ---------- Net cash provided by (used in) operating activities.................. $ 5,559 $ (4,196) $ 1,363 Net cash used in investing activities................................ (3,620) (273) (3,893) Net cash (used in) provided by financing activities.................. (5,697) 4,992 (705) Effect of exchange rate changes on cash.............................. 65 (537) (472) --------- ---------- ---------- NET DECREASE IN CASH................................................. (3,693) (14) (3,707) CASH, beginning of period............................................ 4,713 2,372 7,085 --------- ---------- ---------- CASH, end of period.................................................. $ 1,020 $ 2,358 $ 3,378 ========= ========== ========== SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------- NON- GUARANTOR GUARANTOR TOTAL --------- ---------- ---------- Net cash used in operating activities................................ $ (4,535) $ (8,493) $ (13,028) Net cash (used in) provided by investing activities.................. (1,977) 3,977 2,000 Net cash provided by financing activities............................ 3,735 3,461 7,196 Effect of exchange rate changes on cash.............................. -- 4,560 4,560 --------- ---------- ---------- NET (DECREASE) INCREASE IN CASH...................................... (2,777) 3,505 728 CASH, beginning of period............................................ 437 3,093 3,530 --------- ---------- ---------- CASH, end of period.................................................. $ (2,340) $ 6,598 $ 4,258 ========= ========== ==========
The Company's percentage of sales by geographic region for the three and six month period ended June 30, 2002 and June 30, 2001 is as follows:
Three Months Ended ---------------------------- June 30, June 30, 2002 2001 ------------ ----------- Domestic...................................................... 74.5% 74.6% Europe........................................................ 15.2 13.9 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 6.0 8.0 Canada........................................................ 1.6 1.4 Other international........................................... 2.7 2.1 ------------ ----------- 100.0% 100.0% ============ =========== Six Months Ended ---------------------------- June 30, June 30, 2002 2001 ------------ ----------- Domestic...................................................... 75.4% 77.0% Europe........................................................ 15.0 13.2 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 5.7 6.5 Canada........................................................ 1.6 1.5 Other international........................................... 2.3 1.8 ------------ ----------- 100.0% 100.0% ============ ===========
13 4. Commitments and Contingencies. Holding is not a party to any material lawsuits or other proceedings, including suits relating to product liability and patent infringement. While the results of Holding's other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of Holding. 5. Credit Facility. On May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to Holding's majority stockholder, $12.0 million of which was exchanged for bank term loans previously acquired. These notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004. Proceeds from the senior notes were used to pay interest due under the Subordinated Notes, fund expenses associated with the amendment and provide funds for ongoing working capital purposes. Under the terms of the amendment to the Credit Facility, the lenders and the Company agreed to (i) waive all existing events of default; (ii) extend the final maturity of the Credit Facility to June 30, 2004; (iii) amend existing amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend future financial covenants. 6. Additional Paid In Capital. In conjunction with the debt restructuring the Company issued to Holding's majority stockholder warrants to purchase 20 million shares of common stock the warrants are exercisable upon issuance for $1.00 per share and expire on May 15, 2009. The warrants were valued at $750,000, based on the Black-Sholes valuation model. The fair value of these warrants was estimated at the date of grant with the following assumptions; 5-year risk-free interest rate of 5.25%; no dividend yield; an average volatility factor of 50.0%; and weighted average expected lives of 7 years. The warrant value was deferred and is being amortized to interest expense over the term of the debt. 7. Hudson RCI AB Bank Facility. As of June 30, 2002, Holding's wholly-owned Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial covenants of the Hudson RCI AB bank facility. Holding and Hudson RCI AB are currently in discussions with the lender and expect to receive a waiver curing all defaults (see the "Liquidity and Capital Resources" section of Item 2). Due to the uncertainty of receiving this waiver from the lenders, Holding has classified the entire Hudson RCI AB bank facility as a current liability on the consolidated balance sheet. The Credit Facility and Senior Subordinated notes are not cross-defaulted to the Hudson RCI AB bank facility. 14 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.) UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (amounts in thousands)
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ CURRENT ASSETS: Cash.................................................................... $ 3,378 $ 7,085 Accounts receivable, less allowance for doubtful accounts of $1,167 and $1,801 at June 30, 2002 and December 31, 2001, respectively........................................................... 20,595 19,287 Inventories, net........................................................ 23,915 25,218 Other current assets.................................................... 2,069 1,483 ----------- ------------ Total current assets.............................................. 49,957 53,073 PROPERTY, PLANT AND EQUIPMENT, net....................................... 45,637 46,268 OTHER ASSETS: Goodwill................................................................ 32,877 28,498 Deferred financing and other costs, net................................. 8,625 8,316 Other assets............................................................ 839 900 ----------- ------------ Total other assets................................................ 42,341 37,714 ----------- ------------ Total assets...................................................... $ 137,935 $ 137,055 =========== ============
See notes to unaudited condensed consolidated financial statements 15 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.) UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (amounts in thousands, except per share amounts)
JUNE 30, DECEMBER 31, 2002 2001 ---------- ------------- CURRENT LIABILITIES: Notes payable to bank ...................................................... $ 22,927 $ 20,680 Accounts payable ........................................................... 9,683 15,251 Accrued liabilities ........................................................ 18,753 17,302 ---------- ------------- Total current liabilities .................................................. 51,363 53,233 NOTE PAYABLE TO AFFILIATE ................................................... 37,217 17,217 NOTES PAYABLE TO BANK, net of current portion ............................... 53,000 73,250 SENIOR SUBORDINATED NOTES PAYABLE ........................................... 115,000 115,000 OTHER NON-CURRENT LIABILITIES ............................................... 1,480 1,187 ---------- ------------- Total liabilities ......................................................... 258,060 259,887 MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 1,800 shares authorized; 470 and 445 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively; liquidation preference -- $47,031 and $44,474 respectively ................. 46,613 43,847 Accrued preferred stock dividend, payable in kind .......................... 1,127 1,142 ---------- ------------- 47,740 44,989 STOCKHOLDERS' EQUITY (DEFICIT): Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares issued and outstanding at June 30, 2002 and December 31, 2001 .................................................................. 3,325 3,137 Common stock, $0.01 par value; 15,000 shares authorized; 10,654 issued and outstanding at June 30, 2002 and December 31, 2001 .................... 98,258 98,258 Additional paid in capital ................................................. 750 -- Cumulative translation adjustment .......................................... 1,493 (698) Accumulated deficit ........................................................ (271,691) (268,518) ---------- ------------- Total stockholders' deficit ............................................... (167,865) (167,821) ---------- ------------- Total liabilities, mandatorily-redeemable preferred stock and stockholders' deficit ...................................... $ 137,935 $ 137,055 ========== =============
See notes to unaudited condensed consolidated financial statements 16 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.) UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- NET SALES ...................................................... $ 41,477 $ 40,801 $ 84,462 $ 78,606 COST OF SALES .................................................. 23,564 24,961 48,489 52,991 ---------- ---------- ---------- ---------- Gross Profit ................................................. 17,913 15,840 35,973 25,615 OPERATING EXPENSES: Selling, distribution, general & administrative .............. 11,601 13,261 23,423 25,782 Amortization of goodwill ..................................... -- 1,279 -- 3,245 Research and development ..................................... 815 436 1,412 901 ---------- ---------- ---------- ---------- 12,416 14,976 24,835 29,928 ---------- ---------- ---------- ---------- Income (loss) from operations .............................. 5,497 864 11,138 (4,313) INTEREST EXPENSE AND OTHER, net ................................ 5,183 6,343 10,046 13,842 ---------- ---------- ---------- ---------- Net income (loss) before provision for income taxes ........ 314 (5,479) 1,092 (18,155) PROVISION FOR INCOME TAXES ..................................... 902 340 1,326 527 ---------- ---------- ---------- ---------- Net loss ................................................... $ (588) $ (5,819) $ (234) $ (18,682) ========== ========== ========== ========== OTHER COMPREHENSIVE INCOME: Foreign currency translation gain ............................ 1,778 3,831 2,191 4,560 ---------- ---------- ---------- ---------- Comprehensive income (loss) .............................. $ 1,190 $ (1,988) $ 1,957 $ (14,122) ========== ========== ========== ==========
See notes to unaudited condensed consolidated financial statements 17 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.) UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amount in thousands)
SIX MONTHS ENDED ----------------------- JUNE 30, JUNE 30, 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................... $ (234) $ (18,682) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization ......................................... 4,646 5,979 Amortization of deferred financing costs .............................. 888 505 Provision for bad debts ............................................... 54 -- Loss on disposal of equipment ......................................... 46 -- Change in operating assets and liabilities: Accounts receivable ................................................... (568) (411) Inventories ........................................................... 2,094 10,120 Other current assets .................................................. 375 (71) Other assets .......................................................... 83 (2,323) Accounts payable ...................................................... (6,140) (8,553) Accrued liabilities ................................................... 23 (573) Other non-current liabilities ......................................... 96 981 ---------- ---------- Net cash provided by (used in) operating activities ................. 1,363 (13,028) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ................................. (3,904) (2,464) Proceeds from sales of property, plant and equipment ....................... 11 4,464 ---------- ---------- Net cash (used in) provided by investing activities ................. (3,893) 2,000 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank ......................................... (20,258) (3,500) Proceeds from bank borrowings .............................................. -- 6,227 Repayment of notes payable to affiliates ................................... -- (6,000) Proceeds from notes payable to affiliates .................................. 20,000 9,451 Sale of common stock, net of issuance costs ................................ -- 803 Additions of deferred financing costs ...................................... (447) 215 ---------- ---------- Net cash (used in) provided by financing activities ................. (705) 7,196 Effect of exchange rate changes on cash ...................................... (472) 4,560 ---------- ---------- NET (DECREASE) INCREASE IN CASH .............................................. (3,707) 728 CASH, beginning of period .................................................... 7,085 3,530 ---------- ---------- CASH, end of period .......................................................... $ 3,378 $ 4,258 ========== ==========
See notes to unaudited condensed consolidated financial statements 18
SIX MONTHS ENDED --------------------------------- JUNE 30, JUNE 30, 2002 2001 --------------- --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest........................................................... $ 8,747 $ 7,693 =============== =============== Income taxes (primarily foreign)................................... $ 1,856 $ -- =============== =============== NON-CASH FINANCING ACTIVITIES: Preferred dividends accrued or paid-in-kind........................... $ 2,734 $ 2,361 =============== =============== Issuance of warrants.................................................. $ 750 $ -- =============== ===============
See notes to unaudited condensed consolidated financial statements 19 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (A MAJORITY-OWNED SUBSIDIARY OF RIVER HOLDING CORP.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 1. Financial Statements. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2002, the results of operations for the three month and six month periods ended June 30, 2002 and June 30, 2001 and statements of cash flows for the six month periods ended June 30, 2002 and June 30, 2001 pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company's 2001 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and six-month period ended June 30, 2002 are not necessarily indicative of the results to be achieved for a full year. Management Plans to Improve Financial Condition and Results of Operations Management believes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing as may be required and, ultimately to attain profitable operations. As further discussed in Note 5, on May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to the Company's majority shareholder. In addition, management has taken numerous actions to improve the operating performance of the Company. Such actions included: the elimination of a distribution warehouse, elimination of non-essential management personnel, reductions in inventory levels, aggressive collection of accounts receivable and elimination of individual products that did not attain acceptable levels of profitability. Management believes that the results of its plans and the agreement reached and funding received on May 14, 2002 discussed above will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. Significant Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative 20 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. The adoption of this new standard did not have a material impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Any acquisitions made by the Company after June 2001 will be recorded in accordance with SFAS 141. Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill is no longer amortized and is assessed at least annually for impairment using a fair value methodology. The Company stopped amortizing goodwill, effective January 1, 2002, and as a result, no charges for goodwill amortization are included in the 2002 financial statements. The Company completed its transitional impairment test of goodwill as of January 1, 2002 in the second quarter of 2002, which indicates no impairment of existing goodwill. Net loss for the three and six months ended June 30, 2001, excluding amortization of goodwill would have been (in thousands) $4,540 and $15,437 compared to $5,819 and $18,682, respectively. The change in goodwill for the six months ended June 30, 2002 is the result of changes in foreign currency exchange rates. The Company operates in two reporting units; North American operations (also the guarantor) and international operations (also the non-guarantor). These two reporting units are identical to the operating segments described in Note 3. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement. SFAS 143 is effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material impact on the Company's financial statements. Effective January 1, 2002, the Company adopted SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The adoption of SFAS 144 did not have a material impact on the Company's financial statements. In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002. 21 2. Inventories. Inventories consisted of the following (amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ------------- ------------ Raw materials........................................................ $ 4,884 $ 7,377 Work-in-process...................................................... 5,358 5,392 Finished goods....................................................... 15,701 14,481 ------------- ------------ 25,943 27,250 Provision for obsolescence........................................... (2,028) (2,032) ------------- ------------ $ 23,915 $ 25,218 ============= ============
3. Segment Data and Subsidiaries Guaranteeing Debt. The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The company has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's operating segments are the same as its reporting segments. The Company is the 100% owner of certain subsidiaries that do not guarantee the Company's senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): 22 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- --------- ------------ ----------- ASSETS CURRENT ASSETS: Cash........................................... $ 1,020 $ 2,358 $ -- $ 3,378 Accounts receivable............................ 14,664 5,931 -- 20,595 Receivables from non-guarantor................. 1,320 -- (1,320) -- Inventories.................................... 19,032 5,599 (716) 23,915 Other current assets........................... 1,124 945 -- 2,069 ----------- --------- --------- ----------- Total current assets........................ 37,160 14,833 (2,036) 49,957 PROPERTY, PLANT AND EQUIPMENT, NET.............................. 44,400 1,237 -- 45,637 OTHER ASSETS: Goodwill....................................... -- 32,877 -- 32,877 Deferred financing and other costs, net........ 8,625 -- -- 8,625 Investment in non-guarantor subsidiaries at cost 28,636 4,000 (32,636) -- Other.......................................... 839 -- -- 839 ----------- --------- --------- ----------- Total other assets.......................... 38,100 36,877 (32,636) 42,341 ----------- --------- --------- ----------- $ 119,660 $ 52,947 $ (34,672) $ 137,935 =========== ========= ========= =========== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to bank......................... $ 6,750 $ 16,177 $ -- $ 22,927 Accounts payable.............................. 8,655 1,028 -- 9,683 Payables to guarantor......................... -- 1,320 (1,320) -- Accrued liabilities........................... 14,552 4,201 -- 18,753 ----------- --------- --------- ----------- Total current liabilities.................. 29,957 22,726 (1,320) 51,363 OTHER LIABILITIES: Note payable to affiliate..................... 26,951 10,266 -- 37,217 Notes payable to bank, net of current portion. 53,000 -- -- 53,000 Senior subordinated notes payable............. 115,000 -- -- 115,000 Other non-current liabilities................. 167 1,313 -- 1,480 ----------- --------- --------- ----------- Total liabilities.......................... 225,075 34,305 (1,320) 258,060 Mandatorily-redeemable preferred stock........... 47,740 -- -- 47,740 ----------- --------- --------- ----------- COMMON STOCK..................................... 98,258 28,636 (28,636) 98,258 STOCKHOLDERS' EQUITY (DEFICIT)................... (251,413) (9,994) (4,716) (266,123) ----------- --------- --------- ----------- $ 119,660 $ 52,947 $ (34,672) $ 137,935 =========== ========= ========= ===========
23 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- --------- ------------ ----------- ASSETS CURRENT ASSETS: Cash............................................. $ 4,713 $ 2,372 $ -- $ 7,085 Accounts receivable.............................. 13,989 5,298 -- 19,287 Receivables from non-guarantor................... 6,515 -- (6,515) -- Inventories...................................... 20,377 7,030 (2,189) 25,218 Other current assets............................. 2,976 13,553 (15,046) 1,483 ----------- --------- ---------- ----------- Total current assets.......................... 48,570 28,253 (23,750) 53,073 PROPERTY, PLANT AND EQUIPMENT, NET................................ 45,125 1,143 -- 46,268 OTHER ASSETS: Goodwill......................................... -- 28,498 -- 28,498 Deferred financing and other costs, net.......... 8,316 -- -- 8,316 Investment in non-guarantor subsidiaries......... 28,623 -- (28,623) -- Other............................................ 676 224 -- 900 ----------- --------- --------- ----------- Total other assets............................ 37,615 28,722 (28,623) 37,714 ----------- --------- --------- ----------- $ 131,310 $ 58,118 $ (52,373) $ 137,055 =========== ========= ========= =========== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to bank............................ $ 3,750 $ 16,930 $ -- $ 20,680 Accounts payable................................. 14,069 1,182 -- 15,251 Payables to guarantor............................ -- 6,515 (6,515) -- Accrued liabilities.............................. 14,366 15,356 (12,420) 17,302 ----------- --------- --------- ----------- Total current liabilities..................... 32,185 39,983 (18,935) 53,233 OTHER LIABILITIES: Note payable to affiliate........................ 14,951 2,266 -- 17,217 Notes payable to bank, net of current portion.... 73,250 -- -- 73,250 Senior subordinated notes payable................ 115,000 -- -- 115,000 Other non-current liabilities.................... 146 1,041 -- 1,187 ----------- --------- --------- ----------- Total liabilities............................. 235,532 43,290 (18,935) 259,887 Mandatorily-redeemable preferred stock.............. 44,989 -- -- 44,989 ----------- --------- --------- ----------- STOCKHOLDERS' EQUITY (DEFICIT)...................... (149,211) 14,828 (33,438) (167,821) ------------ --------- --------- ----------- $ 131,310 $ 58,118 $ (52,373) $ 137,055 =========== ========= =========- ===========
24 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- --------- ------------ ----------- NET SALES........................................... $ 36,085 $ 9,034 $ (3,642) $ 41,477 COST OF SALES....................................... 23,461 4,231 (4,128) 23,564 ----------- --------- --------- ----------- Gross Profit..................................... 12,624 4,803 486 17,913 OPERATING EXPENSES: Selling, distribution, general and administrative 9,063 2,538 -- 11,601 Amortization of goodwill......................... -- -- -- -- Research and development......................... 530 285 -- 815 ----------- --------- --------- ----------- 9,593 2,823 -- 12,416 ----------- --------- --------- ----------- Income from operations........................... 3,031 1,980 486 5,497 INTEREST EXPENSE AND OTHER, net: 4,820 380 (17) 5,183 ----------- --------- --------- ----------- Net (loss) income before provision for income taxes (1,789) 1,600 503 314 PROVISION FOR INCOME TAXES.......................... -- 902 -- 902 ----------- --------- --------- ----------- Net (loss) income................................... $ (1,789) $ 698 $ 503 $ (588) =========== ========= ========= =========== THREE MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- --------- ------------ ----------- NET SALES........................................... $ 37,026 $ 7,033 $ (3,258) $ 40,801 COST OF SALES....................................... 24,724 3,734 (3,497) 24,961 ----------- --------- --------- ----------- Gross Profit..................................... 12,302 3,299 239 15,840 OPERATING EXPENSES: Selling, distribution, general and administrative 11,531 1,730 -- 13,261 Amortization of goodwill......................... 385 894 -- 1,279 Research and development......................... 179 257 -- 436 ----------- --------- --------- ----------- 12,095 2,881 -- 14,976 ----------- --------- --------- ----------- Income from operations........................... 207 418 239 864 INTEREST EXPENSE AND OTHER, net: 4,949 425 969 6,343 ----------- --------- --------- ----------- Net loss before provision for income taxes....... (4,742) (7) (730) (5,479) PROVISION FOR INCOME TAXES.......................... -- 340 -- 340 ----------- --------- --------- ----------- Net Loss............................................ $ (4,742) $ (347) $ (730) $ (5,819) =========== ========== ========= ===========
25 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- --------- ------------ ----------- NET SALES........................................... $ 73,948 $ 17,588 $ (7,074) $ 84,462 COST OF SALES....................................... 47,172 8,953 (7,636) 48,489 ----------- --------- --------- ----------- Gross Profit..................................... 26,776 8,635 562 35,973 OPERATING EXPENSES: Selling, distribution, general and administrative 18,565 4,858 -- 23,423 Amortization of goodwill......................... -- -- -- -- Research and development......................... 865 547 -- 1,412 ----------- --------- --------- ----------- 19,430 5,405 -- 24,835 ----------- --------- --------- ----------- Income from operations........................... 7,346 3,230 562 11,138 INTEREST EXPENSE AND OTHER, net: 9,354 692 -- 10,046 ----------- --------- --------- ----------- Net (loss) income before provision for income taxes (2,008) 2,538 562 1,092 PROVISION FOR INCOME TAXES.......................... -- 1,326 -- 1,326 ----------- --------- --------- ----------- Net (loss) income................................... $ (2,008) $ 1,212 $ 562 $ (234) =========== ========= ========= ============ SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATIONS TOTAL ----------- ---------- ------------ ----------- NET SALES........................................... $ 72,219 $ 13,008 $ (6,621) $ 78,606 COST OF SALES....................................... 52,124 6,935 (6,068) 52,991 ----------- --------- --------- ----------- Gross Profit..................................... 20,095 6,073 (553) 25,615 OPERATING EXPENSES: Selling, distribution, general and administrative 22,619 3,163 -- 25,782 Amortization of goodwill......................... 770 2,475 -- 3,245 Research and development......................... 394 507 -- 901 ----------- --------- --------- ----------- 23,783 6,145 -- 29,928 ----------- --------- --------- ----------- Loss from operations............................. (3,688) (72) (553) (4,313) INTEREST EXPENSE AND OTHER, net..................... 9,585 2,175 2,082 13,842 ----------- --------- --------- ----------- Net loss before provision for income taxes....... (13,273) (2,247) (2,635) (18,155) PROVISION FOR INCOME TAXES.......................... -- 527 -- 527 ----------- --------- --------- ----------- Net loss............................................ $ (13,273) $ (2,774) $ (2,635) $ (18,682) =========== ========= ========= ===========
26 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 ---------------------------------------- NON- GUARANTOR GUARANTOR TOTAL -------- ---------- ------------ Net cash provided by (used in) operating activities..... $ 5,559 $ (4,196) $ 1,363 Net cash used in investing activities................... (3,620) (273) (3,893) Net cash (used in) provided by financing activities..... (5,697) 4,992 (705) Effect of exchange rate changes on cash................. 65 (537) (472) -------- --------- ------------ NET DECREASE IN CASH.................................... (3,693) (14) (3,707) CASH, beginning of period............................... 4,713 2,372 7,085 -------- --------- ------------ CASH, end of period..................................... $ 1,020 $ 2,358 $ 3,378 ======== ========= ============ SIX MONTHS ENDED JUNE 30, 2001 ---------------------------------------- NON- GUARANTOR GUARANTOR TOTAL -------- ---------- ------------ Net cash used in operating activities................... $ (4,535) $ (8,493) $ (13,028) Net cash (used in) provided by investing activities..... (1,977) 3,977 2,000 Net cash provided by financing activities............... 3,735 3,461 7,196 Effect of exchange rate changes on cash................. -- 4,560 4,560 -------- --------- ------------ NET (DECREASE) INCREASE IN CASH......................... (2,777) 3,505 728 CASH, beginning of period............................... 437 3,093 3,530 -------- --------- ------------ CASH, end of period..................................... $ (2,340) $ 6,598 $ 4,258 ======== ========= ============
The Company's percentage of sales by geographic region for the three and six month period ended June 30, 2002 and June 30, 2001 is as follows:
Three Months Ended ------------------------- June 30, June 30, 2002 2001 -------- -------- Domestic...................................................... 74.5% 74.6% Europe........................................................ 15.2 13.9 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 6.0 8.0 Canada........................................................ 1.6 1.4 Other international........................................... 2.7 2.1 -------- -------- 100.0% 100.0% ======== ======== Six Months Ended ------------------------- June 30, June 30, 2002 2001 -------- -------- Domestic...................................................... 75.4% 77.0% Europe........................................................ 15.0 13.2 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand).... 5.7 6.5 Canada........................................................ 1.6 1.5 Other international........................................... 2.3 1.8 -------- -------- 100.0% 100.0% ======== ========
27 4. Commitments and Contingencies. The Company is not a party to any material lawsuits or other proceedings, such as suits relating to product liability and patent infringement. While the results of the Company's other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company. 5. Credit Facility. On May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to Holding's majority stockholder, $12.0 million of which was exchanged for bank term loans previously acquired. These notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004. Proceeds from the senior notes were used to pay interest due under the Subordinated Notes, fund expenses associated with the amendment and provide funds for ongoing working capital purposes. Under the terms of the amendment to the Credit Facility, the lenders and the Company agreed to (i) waive all existing events of default; (ii) extend the final maturity of the Credit Facility to June 30, 2004; (iii) amend existing amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend future financial covenants. As a result of the amendment, the Company is currently in compliance with the terms and provisions of the Credit Facility. 6. Additional Paid In Capital. In conjunction with the debt restructuring the Company issued to Holding's majority stockholder warrants to purchase 20 million shares of common stock. The warrants are exercisable upon issuance for $1.00 per share and expire on May 15, 2009. The warrants were valued at $750,000, based on the Black-Sholes valuation model. The fair value of these warrants was estimated at the date of grant with the following assumptions; 5-year risk-free interest rate of 5.25%; no dividend yield; an average volatility factor of 50.0%; and weighted average expected lives of 7 years. The warrant value was deferred and is being amortized to interest expense over the term of the debt. 7. Hudson RCI AB Bank Facility. As of June 30, 2002 the Company's wholly-owned Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial covenants of the Hudson RCI AB bank facility. The Company and Hudson RCI AB are currently in discussions with the lender and expect to receive a waiver curing all defaults (see the "Liquidity and Capital Resources" section of Item 2). Due to the uncertainty of receiving this waiver from the lenders, the Company has classified the entire Hudson RCI AB bank facility as a current liability on the consolidated balance sheet. The Credit Facility and Senior Subordinated notes are not cross-defaulted to the Hudson RCI AB bank facility. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Because River Holding Corp. ("Holding") is a holding company with no operations other than those of Hudson Respiratory Care Inc. (the "Company" or "Hudson RCI"), the following discussion throughout this section relates primarily to the Company. The following discussion of Holding and the Company's consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of Holding and the Company and the notes thereto included elsewhere in this Form 10-Q. Holding's acquisition of a majority of the Company's stock was accounted for as a purchase. As a result of Holding's acquisition of the Company, Holding recorded property, plant and equipment at fair value. Additional expenses relating to amortization of goodwill, $5.8 million in the first six months of 2001, was recorded and additional depreciation related to the allocation of purchase price at fair value to depreciable assets of $1.1 million in the first six months of 2002 and 2001 was also recorded. As of June 30, 2002, the remaining value of the step-up in basis to fair value was approximately $6.2 million. Goodwill, resulting from the acquisition of the Company, was recorded on the books of Holding and not pushed down to the Company. As result, an additional $128.4 million of goodwill was recorded at Holding. As a result of significant losses, both Holding and the Company recorded a goodwill impairment of $161.6 million and $33.1 million, respectively, in the fourth quarter of 2001. Holding and the Company also recorded deferred tax assets stemming from Holding's purchase of the Company. Holding and the Company recorded an $11.2 million and $68.9 million valuation allowance against these assets in the fourth quarter of 2001, respectively. There are no other material differences between Holding consolidated and the Company. 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'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 As of March 31, 2002, the Company was not in compliance with certain financial and reporting covenants under agreements governing its Credit Facility, Bank Notes Payable and Subordinated Notes. On March 31, 2002, the Company did not make a scheduled amortization payment of the Term Loan Facility to its senior lenders as required under the Credit Facility. As a result, in early April 2002, the lenders under the Credit Facility blocked the Company from making either the April 15, 2002 interest payment required under the Senior Subordinated Notes or the April 15, 2002 dividend payment required under the 11-1/2% Senior Exchangeable PIK Preferred Stock due 2010. On May 14, 2002, the Company reached an agreement with its senior lenders to amend and restate the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to the Holding's majority 29 stockholder, $12.0 million of which was exchanged for bank term loans previously acquired. These notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004. Proceeds from the senior notes were used to pay interest due under the Subordinated Notes, fund expenses associated with the amendment and provide funds for ongoing working capital purposes. Under the terms of the amendment to the Credit Facility, the lenders and the Company agreed to (i) waive all existing events of default; (ii) extend the final maturity of the Credit Facility to June 30, 2004; (iii) amend existing amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend future financial covenants to include only a limitation on capital expenditures and a minimum EBITDA test. As a result of the amendment, the Company is currently in compliance with the terms and provisions of the Credit Facility. As of June 30, 2002, the Company's wholly-owned Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial covenants of the Hudson RCI AB bank facility. The Company and Hudson RCI AB are currently in discussions with the lender and expect to receive a waiver curing all defaults (see the "Liquidity and Capital Resources" section of this Item). Due to the uncertainty of receiving this waiver from the lenders, the Company has classified the entire Hudson RCI AB bank facility as a current liability on the consolidated balance sheet. The Credit Facility and Senior Subordinated notes are not cross-defaulted to the Hudson RCI AB bank facility. 30 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.
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------- ------------ -------------- ------------- (amounts in thousands) Net sales......................................... $ 41,477 $ 40,801 $ 84,462 $ 78,606 Cost of sales..................................... 23,564 24,961 48,489 52,991 ------------- ----------- -------------- ------------- Gross profit................................... 17,913 15,840 35,973 25,615 ------------- ----------- -------------- ------------- Selling expenses.................................. 5,377 5,760 10,398 10,571 Distribution expenses............................. 2,096 2,221 4,408 4,998 General and administrative expenses............... 4,128 5,280 8,617 10,213 Amortization of goodwill.......................... -- 1,279 -- 3,245 Research and development expenses................. 815 436 1,412 901 ------------- ----------- -------------- ------------- Total operating expenses.......................... 12,416 14,976 24,835 29,928 ------------- ----------- -------------- ------------- Operating income.................................. $ 5,497 $ 864 $ 11,138 $ (4,313) ============= =========== ============== ============= THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------- ----------- -------------- ------------- Net sales......................................... 100.0% 100.0% 100.0% 100.0% Cost of sales..................................... 56.8 61.2 57.4 67.4 ------------- ----------- -------------- ------------- Gross profit................................... 43.2 38.8 42.6 32.6 ------------- ----------- -------------- ------------- Selling expenses.................................. 13.0 14.1 12.3 13.4 Distribution expenses............................. 5.1 5.4 5.2 6.4 General and administrative expenses............... 9.9 12.9 10.2 13.0 Amortization of goodwill.......................... -- 3.1 -- 4.1 Research and development expenses................. 2.0 1.1 1.7 1.1 ------------- ----------- -------------- ------------- Total operating expenses.......................... 30.0 36.7 29.4 38.1 ------------- ----------- -------------- ------------- Operating income.................................. 13.2% 2.1% 13.2% (5.5)% ============= =========== ============== =============
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 Net sales, reported net of accrued rebates, were $41.5 million in the second quarter of 2002 as compared to $40.8 million in the second quarter of 2001, representing an increase of $0.7 million or 1.7%. This is primarily the result of increased domestic hospital sales of $0.8 million or 3.5%, principally due to variability in distributor buying patterns. Sales in Europe and other International increased by $0.9 million as customers benefited from favorable currency movement that made the price of the Company's products relatively less expensive than for the second quarter of 2001. Sales in the Pacific Rim declined by $0.8 million in the second quarter of 2002, the result of initial stocking of SHERIDAN(R) product in the second quarter of 2001. The gains were partially offset by sales declines of $0.2 million elsewhere. The Company's gross profit for the second quarter of 2002 was $17.9 million, an increase of $2.1 million or 13.1% from the second quarter of 2001. As a percentage of sales, the gross profit was 43.2% and 38.8% for the second quarter of 2002 and 2001, respectively. This increase was primarily due to (i), 2001 sales of inventory originally recorded at a higher net realizable value rather than internal manufacturing costs as a result of the SHERIDAN(R) acquisition, (ii), an improvement in shipping costs in 2002, the result of the Company streamlining and enhancing the new management information system implemented in 2000 (implementation problems with the new system adversely affected shipping costs in 2001 due to difficulties the Company was experiencing in its installation and the implementation of programs in 2001 and 2002 designed to reduce freight costs) (iii), underabsorption in 2001 of manufacturing overhead as a result of an aggressive plan to reduce inventories by slowing production and by (iv), an unfavorable mix variance in 2001 caused by higher sales of products at lower gross margins. 31 Selling expenses were $5.4 million for the second quarter of 2002, as compared to $5.8 million in the second quarter of 2001. The decrease of $0.4 million or 6.7% was primarily the result of temporary personnel vacancies in the Company's European operations. As a percentage of net sales, selling expenses were 13.0% in the first quarter of 2002 as compared to 14.1% in the second quarter of 2001. Distribution expenses were $2.1 million for the second quarter of 2002, relatively unchanged from the second quarter of 2001. General and administrative expenses were $4.1 million in the second quarter of 2002, a decrease of $1.2 million or 21.8% from the second quarter of 2001. This decrease was primarily the result of decreased temporary staffing levels and the elimination of certain consulting fees. As a percentage of net sales, general and administrative expenses were 9.9% in the second quarter of 2002 as compared to 12.9% in the second quarter of 2001. Research and development expenses were $0.8 million for the second quarter of 2002 as compared to $0.4 million for the second quarter of 2001. This increase of $0.4 million or 86.9% is the result of increased spending on product development in 2002 through the use of outside consultants. Amortization of goodwill was $0.0 million in the second quarter of 2002, as compared to $1.3 million in the second quarter of 2001. This is the result of the Company's adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002. Interest expense and other was $5.2 million for the second quarter of 2002, as compared to $6.3 million in the second quarter of 2001. The decrease was primarily due to lower interest rates. The Company's tax expense relates primarily to foreign taxes earned on its international operations. For U.S. and state tax purposes, the Company has significant net operating loss carryforwards for which a valuation allowance has been established against the deferred tax asset. The Company continues to evaluate the need for the valuation allowance and will reverse it when it is more likely than not that the deferred tax asset will be realized. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 Net sales, reported net of accrued rebates, were $84.5 million in the first six months of 2002 as compared to $78.6 million in the first six months of 2001, representing an increase of $5.9 million or 7.4%. Domestic hospital sales increased by $3.4 million or 7.4% due principally to customers increased purchases at the end of 2000 in anticipation of a strong influenza season in the first quarter of 2001 that did not materialize, negatively impacting sales in the first quarter of 2001. These customers did not exhibit those purchasing patterns at the end of 2001. International sales increased by $2.7 million or 14.9%, primarily driven by continued growth in Europe, which benefited from favorable currency movement that made the price of the Company's products relatively less expensive than for the first six months of 2001. These gains were partially offset by a decline in sales to the Pacific Rim, the result of initial stocking of SHERIDAN(R) product in the second quarter of 2001. The Company's gross profit for the first six months of 2002 was $36.0 million, an increase of $10.4 million or 40.4% from the first six months of 2001. As a percentage of sales, the gross profit was 42.6% and 32.6% for the first six months of 2002 and 2001, respectively. This increase was primarily due to (i) 2001 sales of inventory originally recorded at a higher net realizable value rather than internal manufacturing costs as a result of the SHERIDAN(R) acquisition, (ii), an improvement in shipping costs in the first quarter of 2002, the result of the Company streamlining and enhancing the new management information system implemented in 2000 (implementation problems with the new system adversely affected shipping costs in 2001 due to difficulties the Company was experiencing in its installation and the implementation of programs in 2001 designed to reduce freight costs) (iii), underabsorption in 2001 of manufacturing overhead as a result of an aggressive plan to reduce inventories by slowing production and (iv) an unfavorable mix variance caused by higher sales of products at lower gross margins. Selling expenses were $10.4 million for the first six months of 2002, a $0.2 million or 1.6% decrease from the first six months of 2001. This decrease was primarily due to temporary personnel vacancies in the Company's European 32 operations. As a percentage of net sales, selling expenses were 12.3% in the first six months of 2002 as compared to 13.4% in the first six months of 2001. Distribution expenses were $4.4 million for the first six months of 2002, a decrease of $0.6 million or 11.8% from the first six months of 2001. This decline is primarily the result of specific programs implemented by management designed to improve the efficiency of its distribution facilities, including closure of the Company's Atlanta distribution center in August 2001. The majority of the benefit from these special programs (excluding closure of the Atlanta facility) was realized in the second quarter of 2001. As a percentage of sales, distribution expenses decreased to 5.2% in the first six months of 2002 as compared to 6.4% in the first six months of 2001. General and administrative expenses were $8.6 million in the first six months of 2002, a decrease of $1.6 million or 15.6% from the first six months of 2001. This decrease was primarily the result of decreased temporary staffing levels and the elimination of certain consulting fees. As a percentage of net sales, general and administrative expenses were 10.2% in the first six months of 2002 as compared to 13.0% in the first six months of 2001. Research and development expenses were $1.4 million for the first six months of 2002, an increase of $0.5 million or 56.7% for the fist six months of 2001. The increase is primarily the result of increased spending on product development in 2002 through the use of outside consultants. Amortization of goodwill was $0.0 million in the first six months of 2002, as compared to $3.2 million in the first six months of 2001. This is the result of the Company's adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002. Interest expense and other was $10.0 million for the first six months of 2002, as compared to $13.8 million in the first six months of 2001. The decrease was primarily due to lower interest rates. The Company's tax expense relates primarily to foreign taxes earned on its international operations. For U.S. and state tax purposes, the Company has significant net operating loss carryforwards for which a valuation allowance has been established against the deferred tax asset. The Company continues to evaluate the need for the valuation allowance and will reverse it when it is more likely than not that the deferred tax asset will be realized. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flow from operations, borrowings under its working capital bank facility and historically, investments from shareholders. Cash provided by (used in) operations totaled $1.4 million and $(13.0) million for the first six months of 2002 and 2001, respectively. The increase for the first six months of 2002 as compared to the first six months of 2001 is primarily attributable to increased operating income and a decrease in working capital. The Company had an operating working capital deficit of $1.4 million and $0.2 million as of the end of June 30, 2002 and December 31, 2001, respectively. Inventories were $23.9 million and $25.2 million as of the end of June 30, 2002 and December 31, 2001, 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 markets increase. Accounts receivable, net of allowances, were $20.6 million and $19.3 million at June 30, 2002 and December 31, 2001, respectively. The Company typically 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 as the alternate site and international markets become a larger percentage of the Company's overall sales. During the six months ended June 30, 2002, net cash used in investing activities was $3.9 million, reflecting primarily purchases of manufacturing equipment, new heater production and costs incurred to move the Company's Argyle operation to Tecate, Mexico. This move is anticipated to cost approximately $4.6 million and will be completed in 2003. Through June 30, 2002, expenditures related to the move have totaled $2.3 million ($1.4 million in 2002). During the six months ended June 30, 2001, favorable currency translation gains attributable to foreign operations 33 exceeded purchases of manufacturing equipment resulting in net cash provided by investing activities of $2.0 million. The Company currently estimates that capital expenditures will be approximately $8.0 million in each of 2002 and 2003, consisting primarily of additional and replacement manufacturing equipment, new heater production and costs related to the start-up of the Tecate facility. During the six months ended June 30, 2002 and June 30, 2001, net cash (used in) provided by financing was $(0.7) million and $7.2 million, respectively, reflecting repayment on the Company's borrowings in the first six months of 2002 and borrowings made through Hudson RCI AB, the Company's Swedish subsidiary in the first six months of 2001. As of June 30, 2002, after giving effect to the amendment and restatement of the Credit Facility and related transactions consummated in May 2002 (the "Restructuring"), the Company had outstanding $228.2 million of indebtedness, consisting of $115.0 million of Senior Subordinated Notes, borrowings of $59.8 million under the Company's Credit Facility, $37.2 million in notes payable to affiliates and $16.2 million in outstanding borrowings under the bank facility of Hudson RCI AB, the Company's Swedish Subsidiary. For additional information regarding the Restructuring, reference is made to Item 2 of the Company's Quarterly report on Form 10-Q, for the Quarter Ended March 31, 2002. The Credit Facility currently consists of a $40.0 million Term Loan Facility (of which $8.8 million is currently outstanding) and a $55.0 million Revolving Loan Facility of which up to $40.0 million (all of which has been borrowed and is outstanding) may be used for permitted acquisitions ("Acquisition Facility") and up to $15.0 million (the "Working Capital Portion") may be used for general corporate purposes (other than acquisitions). The Revolving Loan Facility has a letter of credit sub-limit of $7.5 million. The Term Loan Facility and Acquisition Facility mature on June 30, 2003 and June 30, 2004, respectively and require quarterly principal installments totaling $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004. The Revolving Loan Facility matures on June 30, 2004. As of June 30, 2002, total usage of the Working Capital Portion was $12.0 million (including letters of credit) and $3.0 million was available for borrowings. As of June 30, 2002, the Company had $37.2 million outstanding pursuant to unsecured promissory notes payable to affiliates of the Company, (including Freeman Spogli, Holding's majority stockholder). Of these notes, $20.0 million bear interest at 12.0% per annum and are due December 2004, $14.9 million bear interest at 10.0% per annum and are due March 2005 and $2.3 million bear interest at 9.0% per annum and are due August 2006. Interest may be paid or deferred to the due date at the option of the Company. Of the December 2004 notes, $12.0 million rank pari passu with the Credit Facility and senior to the Senior Subordinated Notes and $8.0 million are senior, on a structural basis, to both the Credit Facility and the Senior Subordinated Notes. The March 2005 notes are convertible into the Company's common stock at the option of the holder and are subordinated to borrowings under the Credit Facility and rank pari-passu with the Senior Subordinated Notes. The August 2006 notes rank senior, on a structural basis, to both the Credit Facility and the Senior Subordinated Notes. All of the notes held by affiliates have been pledged for the benefit of the lenders under the Credit Facility. As of June 30, 2002, Hudson RCI AB, the Company's Swedish subsidiary, was not in compliance with certain financial covenants in its bank facility (the "Hudson RCI AB Facility"). The Company and Hudson RCI AB are currently in negotiations with the lender concerning an amendment curing these defaults and expects to receive from the lender a waiver curing all past covenant violations, but no assurance can be given that such an agreement will be reached. Accordingly, the entire outstanding balance of the Hudson RCI AB Facility is classified as current on the consolidated balance sheet. The Company's Credit Facility and the Senior Subordinated Notes are not cross-defaulted to the Hudson RCI AB facility. If a waiver of such default is not obtained, the lender may pursue its remedies under the facility, including, among other things, immediate acceleration of all borrowings of the facility. In addition, the default entitles the lender to take control of all the common stock of Hudson RCI AB and its European parent companies. Holding has issued 470,310 shares (including shares issued as payment in kind dividends) of its 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 with an aggregate liquidation preference of $47.0 million. At Holding's election, dividends may be paid in kind until April 15, 2003 and thereafter must be paid in cash. The Credit Facility currently prohibits the Company from paying cash dividends on the "mirror" preferred stock the Company has issued to Holding. 34 In August 2001, Holding issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the "Junior Preferred Stock") to Holding, for total cash consideration of $3.0 million, which Holding invested in the Company in exchange for the Company's junior preferred stock. Each share of the Junior Preferred Stock may be redeemed, from time to time, in whole or in part, at the option of the Company at a redemption price of 100% of the Liquidation Preference of the Junior Preferred Stock or $1,000 per share plus accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock. At June 30, 2002, the liquidation preference of the Junior Preferred Stock including accrued dividends was $3.3 million. At June 30, 2002, the Company was in compliance with all provisions of its debt securities and preferred stock, with the exception of the Hudson RCI AB Credit Facility noted above. For additional information regarding the Company's debt securities and preferred stock, reference is made to Item 7 of the Company's Annual Report on Form 10-K, for the year ended December 31, 2001 and Item 2 of the Company's Quarterly Report on Form 10-Q, Item 2, for the quarter ended March 31, 2002. The Company believes that cash generated from anticipated improved operating performance, together with the net available proceeds from the Refinancing and available borrowing capacity under the Revolving Credit Facility, will provide sufficient liquidity to fund its operations and meet its obligations for the next twelve months. If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, asset sales and/or curtail operations. Neither Holding nor the Company currently have commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on Holding and the Company. As Holding is a holding company, its primary source of liquidity is dividends or other distributions from the Company. Holding's only asset is its investment in Hudson RCI. The ability of the Company to pay cash dividends or make distributions to Holding when required is restricted by law and restricted or prohibited under the terms of debt instruments, including the Credit Facility. Since the Credit Agreement currently prohibits the Company from paying cash dividends to Holding, Holding may not be able to pay cash dividends to the Holders of Holding Preferred Stock commencing in April, 2003 as required by the terms of the Holding Preferred Stock. In the event that Holding is unable to pay cash dividends to the holders of Holding Preferred Stock for two consecutive periods, the sole remedy of the holders is the ability to elect two members to Holding's Board of Directors. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, 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. The adoption of this new standard did not have a material impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Any acquisitions made by the Company after June 2001 will be recorded in accordance with SFAS 141. Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial 35 statements. Goodwill is no longer amortized and is assessed at least annually for impairment using a fair value methodology. The Company stopped amortizing goodwill, effective January 1, 2002, and as a result, no charges for goodwill amortization are included in the 2002 financial statements. The Company completed its transitional impairment test of goodwill as of January 1, 2002 in the second quarter of 2002, which indicates no impairment of existing goodwill. Net loss for the three and six months ended June 30, 2001, excluding amortization of goodwill would have been (in thousands) $4,540 and $15,437 compared to $5,819 and $18,682, respectively. The change in goodwill for the six months ended June 30, 2002 is the result of changes in foreign currency exchange rates. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement. SFAS 143 is effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material impact on the Company's financial statements. Effective January 1, 2002, the Company adopted SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The adoption of SFAS 144 did not have a material impact on the Company's financial statements. In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002. 36 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 Holding's 10-K for the fiscal year ended December 31, 2001. 37 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 10.1(1) Amended and restated Credit Agreement dated as of May 14, 2002 among Hudson RCI, Holding, the Lenders party thereto, and Deutsche bank Trust Americas ("Deutsche Bank"), as administrative agent and collateral agent 10.2(1) Form of Amended and Restated Security Agreement dated as of May 14, 2002 between Hudson RCI and Deutsche Bank. 10.13(1) Form of Nonrecourse Pledge Agreement dated as of May 14, 2002 among the Pledgor and Deutsche Bank, as collateral agent for the Lenders. 10.15(1) Tecate Facility Sub-Lease 10.16(1) Form of Supplement No. 1 dated as of May 14, 2002, to the Pledge Agreement. 10.17(1) Form of Master Assignment and Exchange Agreement dated as of May 14, 2002 by and among Holding, Hudson RCI, the financial institutions listed on the signature pages thereof, Deutsche Bank, as administrative agent for the Lenders and FSEP IV. 10.18(1) Letter agreement dated August 17, 2001 between Hudson RCI and Charles French. 10.19(1) Form of Stock Option Plan 10.20(1) Form of Stock Option Agreement 10.21(1) Receivables Purchase Agreement dated May 14, 2002 by and between Hudson RCI and HRC Holding. 10.22 First Amendment to Pledge Agreement among Hudson RCI, Holding, each subsidiary pledgor of Hudson RCI and Collateral Agent, dated as of February 25, 2002. 10.23 Subsidiary Guaranty by and among Guarantors of Hudson RCI and Collateral Agent, dated as of May 14, 2002. 10.24 Supplement No. 1 to Subsidiary Guaranty for Industrias Hudson, S.A. de C.V. 10.25 Supplement No. 2 to Subsidiary Guranty for Hudson Respiratory Care Tecate S. De R.L. de C.V. 10.26 Form of Stock Purchase Warrant, dated May 15, 2002, issued by Hudson RCI to FSEP IV. (b) Reports on Form 8-K None. - ---------- (1) Incorporated by reference to the exhibit designated by the same number in the Form 10-K filed by the Company for the fiscal year ended December 31, 2001. 38 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized. RIVER HOLDING CORP., a Delaware corporation August 14, 2002 By: /s/ Patrick G. Yount ------------------------------------- Patrick G. Yount Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Each of the undersigned hereby certifies in his capacity as an officer of Holding that the Quarterly Report of Holding on Form 10-Q for the period ended June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of Holding at the end of such period and the results of operations of Holding for such period. RIVER HOLDING CORP., a Delaware corporation August 14, 2002 By: /s/ Patrick G. Yount ------------------------------------- Patrick G. Yount Chief Financial Officer /s/ Charles A. French ------------------------------------- Charles A. French President and Chief Executive Officer 39 EX-10.22 3 dex1022.txt 1ST AMENDMENT TO PLEDGE AGREEMENT EXHIBIT 10.22 FIRST AMENDMENT TO PLEDGE AGREEMENT This FIRST AMENDMENT TO PLEDGE AGREEMENT, dated as of February 25, 2002 (the "First Amendment") is delivered to amend that certain Pledge Agreement, dated as of April 7, 1998, (the "Pledge Agreement") among Hudson Respiratory Care Inc., a California corporation (the "Borrower"), River Holding Corp., a Delaware corporation ("Holding"), each Subsidiary Pledgor of the Borrower thereto and Bankers Trust Company, a New York banking corporation ("BTCo."), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties. RECITALS WHEREAS, the Borrower, Holding, the Lenders ( as defined in Article I of the Credit Agreement, as defined below), Salomon Brothers Inc., as Arranger, Advisor and Syndication Agent, and BTCo., as swingline lender, and as issuing bank, and as administrative agent, and as Collateral Agent for the Lenders entered into a Credit Agreement dated as of April 7, 1998, as amended (the "Credit Agreement"); WHEREAS, capitalized terms used herein shall have the respective meanings ascribed thereto in the Pledge Agreement and the Credit Agreement unless herein defined or unless the context shall otherwise require. References to sections, paragraphs and clauses all refer to such sections, paragraphs or clauses of the Credit Agreement unless otherwise specified; WHEREAS, the parties hereto desire to amend the Pledge Agreement in certain respects; NOW THEREFORE, upon the full and complete satisfaction of the conditions precedent to the effectiveness of this First Amendment set forth in Section 2 hereof, and for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the undersigned do hereby agree as follows: SECTION 1. AMENDMENT TO PLEDGE AGREEMENT Effective when the conditions set forth in Section 2 hereof are satisfied, the Pledge Agreement is hereby amended as follows: 1.1 Amendment of Schedule II. Pursuant to Section 10 of the Pledge Agreement, the Pledge Agreement is hereby amended by deleting Schedule II to the Pledge Agreement in its entirety and substituting the Schedule II attached hereto therefor. SECTION 2. CONDITIONS TO EFFECTIVENESS OF FIRST AMENDMENT This First Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied: 2.1 Executed First Amendment. Counterparts of this First Amendment are duly executed by the Borrower, Holding and the Collateral Agent and the Collateral Agent shall 1 have received written or telephonic notification of such execution and authorization of delivery thereof. 2.2 Payment of Fees and Expenses. The Borrower shall have paid the reasonable fees and expenses incurred by the Collateral Agent, including, without limitation, the reasonable fees and expenses of O'Melveny & Myers LLP, special counsel to the Collateral Agent, in connection with the negotiation, preparation, approval, execution and delivery of this First Amendment and the Exhibits referred to herein. Upon receipt of the foregoing, this First Amendment shall become effective. SECTION 3. MISCELLANEOUS 3.1 Ratification of Pledge Agreement. This First Amendment shall be construed in connection with and as part of the Pledge Agreement, and except as modified and expressly amended by this First Amendment, all terms, conditions and covenants contained in the Pledge Agreement are hereby ratified and shall be and remain in full force and effect. 3.2 Notices. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this First Amendment may refer to the Pledge Agreement without making specific reference to this First Amendment but nevertheless all such references shall include this First Amendment unless the context otherwise requires. 3.3 Headings. The descriptive headings of the various Sections or parts of this First Amendment are inserted for convenience only and do not constitute a part of this First Amendment. 3.4 Governing Law. This First Amendment shall be governed by and construed in accordance with the law of the State of New York. 3.5 Counterparts. The execution hereof by the parties hereto shall constitute a contract between such parties for the uses and purposes herein set forth. This First Amendment may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. 2 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered as of the date first written above. RIVER HOLDING CORP, by ------------------------------ Name: Title: HUDSON RESPIRATORY CARE, INC., by ------------------------------ Name: Title: by ------------------------------ Name: Title: BANKERS TRUST COMPANY, as Collateral Agent, by ------------------------------ Name: Title: S-1 Schedule II to the Pledge Agreement CAPITAL STOCK
- ---------------------------------------------------------------------------------------------------------------------- Number of Registered Number and Class Percentage of Issuer Certificate Owner of Shares Class ------ ----------- ----- --------- ----- Industrias Hudson, S.A. de 16 Hudson Respiratory Care Inc. 650 65.0% C.V. Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 13 River Holding Corp. 5,500,000 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 14 River Holding Corp. 800,000 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 15 River Holding Corp. 12,500 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 16 River Holding Corp. 1,706,749 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 17 River Holding Corp. 525,042 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 22 River Holding Corp. 342,857 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 23 River Holding Corp. 5,715 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 24 River Holding Corp. 4,287 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 25 River Holding Corp. 85,714 * Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 27 River Holding Corp. 171,429 * Common - ---------------------------------------------------------------------------------------------------------------------- HRC Holding Inc. 1 Hudson Respiratory Care Inc. 100 100% Common - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 1 River Holding Corp. 300,000 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 2 River Holding Corp. 18,014 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 3 River Holding Corp. 18,283 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 4 River Holding Corp. 19,333 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 5 River Holding Corp. 20,444 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 6 River Holding Corp. 21,620 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 7 River Holding Corp. 22,865 ** Preferred - ---------------------------------------------------------------------------------------------------------------------- Hudson Respiratory Care Inc. 8 River Holding Corp. 24,179 ** Preferred - ----------------------------------------------------------------------------------------------------------------------
1
- ---------------------------------------------------------------------------------------------------------------------- Number of Registered Number and Class Percentage of Issuer Certificate Owner of Shares Class ------ ----------- ----- --------- ----- Hudson Respiratory Care Inc. 1 River Holding Corp. 3,000 100% Junior Convertible Cumulative Preferred - ---------------------------------------------------------------------------------------------------------------------- IH Holding LLC Not Certificated 100% - ----------------------------------------------------------------------------------------------------------------------
* [Subject to change upon review of the stock ownership ledgers.] [Collectively, Certificate Nos. 13, 14, 15, 16, 17, 22, 23, 24, 25 and 27 issued in the name of River Holding Corp. represent 85.92% of the issued and outstanding Common Stock of Hudson Respiratory Care Inc. ** Collectively, Certificate Nos. 1, 2, 3, 4, 5, 6, 7 and 8 issued in the name of River Holding Corp. represent 100.0% of the issued and outstanding Preferred Stock of Hudson Respiratory Care Inc.] DEBT SECURITIES --------------- None. 2 EX-10.23 4 dex1023.txt SUBSIDIARY GUARANTY DATED AS OF MAY 14, 2002 EXHIBIT 10.23 SUBSIDIARY GUARANTEE AGREEMENT dated as of May 14, 2002, among each of the subsidiaries listed on Schedule Ihereto (each such subsidiary individually, a "Guarantor" and collectively, the "Guarantors") of HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), and DEUTSCHE BANK TRUST COMPANY AMERICAS (f/k/a Bankers Trust Company), a New York banking corporation, as collateral agent (the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). Reference is made to the Credit Agreement dated as of April 7, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent and issuing bank (in such capacity, the "Issuing Bank"). Capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Lenders have agreed to make Loans to the Borrower, and the Issuing Bank has agreed to issue Letters of Credit for the account of the Borrower, pursuant to, and upon the terms and subject to the conditions specified in, the Credit Agreement. Each of the Guarantors is a wholly owned Subsidiary of the Borrower and acknowledges that it will derive substantial benefit from the making of the Loans by the Lenders, and the issuance of the Letters of Credit by the Issuing Bank. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit are conditioned on, among other things, the execution and delivery by the Guarantors of a Guarantee Agreement in the form hereof. As consideration therefor and in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit, the Guarantors are willing to execute this Agreement. Accordingly, the parties hereto agree as follows: Section 1. Guarantee. Each Guarantor unconditionally guarantees, jointly with the other Guarantors and severally, as a primary obligor and not merely as a surety, (a) the due and punctual payment of (i) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrower under the Credit Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Borrower to the Secured Parties under the Credit Agreement and the other Credit Documents and (b) unless otherwise agreed upon in writing by the applicable Lender party thereto, all monetary obligations 1 of the Borrower under each Interest Rate Protection Agreement entered into with a counterparty that was a Lender at the time such Interest Rate Protection Agreement was entered into (all the monetary obligations referred to in the preceding clauses (a) through (b) being collectively called the "Obligations"). Each Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Obligation. Anything contained in this Agreement to the contrary notwithstanding, the obligations of each Guarantor hereunder shall be limited to a maximum aggregate amount equal to the greatest amount that would not render such Guarantor's obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any provisions of applicable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (a) in respect of intercompany indebtedness to the Borrower or Affiliates of the Borrower to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (b) under any Guarantee of senior unsecured indebtedness or Indebtedness subordinated in right of payment to the Obligations which Guarantee contains a limitation as to maximum amount similar to that set forth in this clause, pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, contribution, reimbursement, indemnity or similar rights of such Guarantor pursuant to (i) applicable law or (ii) any agreement providing for an equitable allocation among such Guarantor and other Affiliates of the Borrower of obligations arising under Guarantees by such parties (including the Indemnity, Subrogation and Contribution Agreement). Section 2. Obligations Not Waived. To the fullest extent permitted by applicable law, each Guarantor waives presentment to, demand of payment from and protest to the Borrower of any of the Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. To the fullest extent permitted by applicable law, the obligations of each Guarantor hereunder shall not be affected by (a) the failure of the Collateral Agent or any other Secured Party to assert any claim or demand or to enforce or exercise any right or remedy against the Borrower or any other Guarantor under the provisions of the Credit Agreement, any other Credit Document or otherwise, (b) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of this Agreement, any other Credit Document, any Guarantee or any other agreement, including with respect to any other Guarantor under this Agreement or (c) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Collateral Agent or any other Secured Party. Section 3. Security. Each of the Guarantors authorizes the Collateral Agent and each of the other Secured Parties, to (a) take and hold security for the payment of this Guarantee and the Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors of other obligers. 2 Section 4. Guarantee of Payment. Each Guarantor further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Collateral Agent or any other Secured Party to any of the security held for payment of the Obligations or to any balance of any deposit account or credit on the books of the Collateral Agent or any other Secured Party in favor of the Borrower or any other person. Section 5. No Discharge or Diminishment of Guarantee. The obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Collateral Agent or any other Secured Party to assert any claim or demand or to enforce any remedy under the Credit Agreement, any other Credit Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of any Guarantor or that would otherwise operate as a discharge of each Guarantor as a matter of law or equity (other than the indefeasible payment in full in cash of all the Obligations). Section 6. Defenses of Borrower Waived. To the fullest extent permitted by applicable law, each of the Guarantors waives any defense based on or arising out of any defense of the Borrower or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower, other than the final and indefeasible payment in full in cash of the Obligations. The Collateral Agent and the other Secured Parties may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with the Borrower or any other guarantor or exercise any other right or remedy available to them against the Borrower or any other guarantor, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Obligations have been fully, finally and indefeasibly paid in cash. Pursuant to applicable law, each of the Guarantors waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or any other Guarantor or guarantor, as the case may be, or any security. Section 7. Agreement to Pay; Subordination. In furtherance of the foregoing and not in limitation of any other right that the Collateral Agent or any other Secured Party has at law or in equity against any Guarantor by virtue hereof, upon the failure of the Borrower or any other Credit Party to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, each Guarantor hereby promises to and will forthwith pay, or cause to be paid, to the Collateral Agent or such other Secured Party as designated thereby in cash the amount of such unpaid Obligations. Upon payment by any 3 Guarantor of any sums to the Collateral Agent or any Secured Party as provided above, all rights of such Guarantor against the Borrower arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full in cash of all the Obligations. In addition, any indebtedness of the Borrower now or hereafter held by any Guarantor is hereby subordinated in right of payment to the prior payment in full of the Obligations. If any amount shall erroneously be paid to any Guarantor on account of (i) such subrogation, contribution, reimbursement, indemnity or similar right or (ii) any such indebtedness of the Borrower, such amount shall be held in trust for the benefit of the Secured Parties and shall forthwith be paid to the Collateral Agent to be credited against the payment of the Obligations, whether matured or unmatured, in accordance with the terms of the Credit Documents. Section 8. Information. Each of the Guarantors assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks that such Guarantor assumes and incurs hereunder, and agrees that none of the Collateral Agent or the other Secured Parties will have any duty to advise any of the Guarantors of information known to it or any of them regarding such circumstances or risks. Section 9. Representations and Warranties. Each of the Guarantors represents and warrants as to itself that all representations and warranties relating to it contained in the Credit Agreement are true and correct. Section 10. Termination. The Guarantees made hereunder (a) shall terminate when all the Obligations (other than inchoate indemnification and expense reimbursement obligations) have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement, the L/C Exposure has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under the Credit Agreement and (b) shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded or must otherwise be restored by any Secured Party or any Guarantor upon the bankruptcy or reorganization of the Borrower, any Guarantor or otherwise. Section 11. Binding Effect; Several Agreement; Assignments. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Guarantors that are contained in this Agreement shall bind and inure to the benefit of each party hereto and their respective successors and assigns. This Agreement shall become effective as to any Guarantor when a counterpart hereof executed on behalf of such Guarantor shall have been delivered to the Collateral Agent, and a counterpart hereof shall have been executed on behalf of the Collateral Agent, and thereafter shall be binding upon such Guarantor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of such Guarantor, the Collateral Agent and the other Secured Parties, and their respective successors and assigns, except that no Guarantor shall have the right to assign its rights or obligations hereunder or any interest herein (and any such attempted assignment shall be void). If all of the capital stock of a Guarantor is sold, transferred or otherwise disposed of pursuant to a transaction permitted by Section 6.05 of the Credit Agreement, such Guarantor shall be released 4 from its obligations under this Agreement without further action. This Agreement shall be construed as a separate agreement with respect to each Guarantor and may be amended, modified, supplemented, waived or released with respect to any Guarantor without the approval of any other Guarantor and without affecting the obligations of any other Guarantor hereunder. Section 12. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the other Secured Parties under the other Credit Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by any Guarantor therefrom shall in any event be effective unless the same shall be permitted by clause (b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Guarantor in any case shall entitle such Guarantor to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Guarantors with respect to which such waiver, amendment or modification relates and the Collateral Agent, with the prior written consent of the Required Lenders (except as otherwise provided in the Credit Agreement). Section 13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 14. Notices. All communications and notices hereunder shall be in writing and given as provided in Section 9.01 of the Credit Agreement. All communications and notices hereunder to each Guarantor shall be given to it at its address set forth in Schedule 1. Section 15. Survival of Agreement; Severability. (a) All covenants, agreements, representations and warranties made by the Guarantors herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Credit Document shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans and the issuance of the Letters of Credit by the Issuing Bank regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any other fee or amount payable under this Agreement or any other Credit Document is outstanding and unpaid or the L/C Exposure does not equal zero and as long as the Commitments and the L/C Commitment have not been terminated. (b) In the event any one or more of the provisions contained in this Agreement or in any other Credit Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a 5 particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 16. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 11. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Agreement. Section 17. Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Credit Agreement shall be applicable to this Agreement. Section 18. Jurisdiction; Consent to Service of Process. (a) Each Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Credit Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or the other Credit Documents against any Guarantor or its properties in the courts of any jurisdiction. (b) Each Guarantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Credit Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 14. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. Section 19. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, 6 THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 19. Section 20. Additional Guarantors. Pursuant to Section 5.11 of the Credit Agreement, each Restricted Subsidiary of the Borrower that was not in existence on the date of the Credit Agreement is required to enter into this Agreement as a Guarantor upon becoming a Restricted Subsidiary. Upon execution and delivery after the date hereof by the Collateral Agent and such a Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall become a Guarantor hereunder with the same force and effect as if originally named as a Guarantor herein. The execution and delivery of any instrument adding an additional Guarantor as a party to this Agreement shall not require the consent of any other Guarantor hereunder. The rights and obligations of each Guarantor hereunder shall remain in full force and effect notwithstanding the addition of any new Guarantor as a party to this Agreement. Section 21. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Secured Party is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by such Secured Party to or for the credit or the account of any Guarantor against any or all the obligations of such Guarantor now or hereafter existing under this Agreement and the other Credit Documents held by such Secured Party, irrespective of whether or not such Secured Party shall have made any demand under this Agreement or any other Credit Document and although such obligations may be unmatured. The rights of each Secured Party under this Section 21 are in addition to other rights and remedies (including other rights of setoff) which such Secured Party may have. Section 22. Certain Other Rights. (a) The Guarantor authorizes the Collateral Agent, without notice or demand and without affecting its liability hereunder, from time to time, either before or after revocation hereof, to (i) renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (ii) receive and hold security for the payment of the Obligations, and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (iii) apply such security and direct the order or manner of sale thereof as the Collateral Agent in its discretion may determine; and (iv) release or substitute any one or more of the endorsers or guarantors. (b) The Guarantor waives any right to require the Collateral Agent to (i) proceed against the Borrower; (ii) proceed against or exhaust any security held from the Borrower; or (iii) pursue any other remedy in the Collateral Agent's power whatsoever. The Guarantor waives any defense arising by reason of any disability or other defense of the Borrower, or the cessation from any cause whatsoever of the liability of the Borrower, or any claim that the Guarantor's obligations exceed or are more burdensome than those of the Borrower. Until the indebtedness shall have been paid in full, even though the indebtedness is in excess of the Guarantor's liability 7 hereunder, the Guarantor will not pursue any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory, or otherwise) including, without limitation, any claim or right of subrogation under the Bankruptcy Code (Title 11, United States Code) or any successor statute, arising from the existence or performance of this Guarantee Agreement, and until such payment in full, the Guarantor will not pursue any right to enforce any remedy which the Collateral Agent and the Lenders now have or may hereafter have against the Borrower and will not pursue any benefit of, and any right to participate in, any security now or hereafter held by the Collateral Agent. The Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guarantee Agreement and of the existence, creation, or incurring of new or additional indebtedness. (c)(i) The Guarantor understands and acknowledges that if the Collateral Agent forecloses, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Obligations, that foreclosure could impair or destroy any ability that the Guarantor may have to seek reimbursement, contribution, or indemnification from the Borrower or others based on any right the Guarantor may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by the Guarantor under this Guarantee Agreement. The Guarantor further understands and acknowledges that in the absence of this paragraph, such potential impairment or destruction of the Guarantor's rights, if any, may entitle the Guarantor to assert a defense to this Guarantee Agreement based on Section 580d of the California Code of Civil Procedure as interpreted in Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). By executing this Guarantee Agreement, the Guarantor freely, irrevocably, and unconditionally: (A) waives and relinquishes that defense and agree that the Guarantors will be fully liable under this Guarantee Agreement even though the Collateral Agent may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Obligations; (B) agrees that the Guarantor will not assert that defense in any action or proceeding which the Collateral Agent may commence to enforce this Guarantee Agreement; (C) acknowledges and agrees that the rights and defenses waived by the Guarantor in this Guarantee Agreement include any right or defense that the Guarantor may have or be entitled to assert based upon or arising out of any one or more of Sections 580a, 580b, 580d, or 726 of the California Civil Code; and (iv) acknowledges and agrees that the Collateral Agent and the Lenders are relying on this waiver in creating the indebtedness, and that this waiver is a material part of the consideration which the Collateral Agent and the Lenders are receiving for creating the indebtedness. (ii) The Guarantor waives any rights and defenses that are or may become available to the Guarantor by reason of Sections 2787 to 2855, inclusive, of the California Civil Code. (iii) The Guarantor waive all rights and defenses that the Guarantor may have because any of the indebtedness is secured by real property. This means, among other things: (A) the Collateral Agent may collect from the Guarantor without first foreclosing on any real or personal property collateral pledged by the Borrower; and (B) if the Collateral Agent forecloses on any real property collateral pledged by the Borrower: (x) the amount of the indebtedness may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (y) the Collateral Agent may collect from the Guarantor even if the Collateral Agent, by foreclosing on the real property collateral, has 8 destroyed any right the Guarantor may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses the Guarantor may have because any of the indebtedness is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. (iv) The Guarantor waives any right or defense they may have at law or equity, including California Code of Civil Procedure Section 580a, to a fair market value hearing or action to determine a deficiency judgment after a foreclosure. (v) No provision or waiver in this Guarantee Agreement shall be construed as limiting the generality of any other waiver contained in this Guarantee Agreement. (d) The Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial conditions or business operations as the Guarantor may require, and that the Collateral Agent has no duty at any time to disclose to the Guarantor any information relating to the business operations or financial conditions of the Borrower. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. IH HOLDING LLC, By: HUDSON RESPIRATORY CARE INC., its Managing Member By: --------------------------------- Name: Title: S-1 DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by --------------------------------- Name: Title: S-2 Schedule I to the Guarantee Agreement
Guarantor Address --------- ------- IH Holding LLC 27711 Diaz Road, P.O. Box 9020 Temecula, CA 92589-9020
S-2 Annex I to the Subsidiary Guarantee Agreement SUPPLEMENT NO. ________dated as of __________, to the Subsidiary Guarantee Agreement dated as of April [ ], 1998, among each of the subsidiaries listed on Schedule I thereto (each such subsidiary individually, a "Guarantor" and collectively, the "Guarantors") of HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrow"), and DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking corporation, as collateral agent (the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). A. Reference is made to the Credit Agreement dated as of April [ ],1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent and issuing bank (in such capacity, the "Issuing Bank"). B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee Agreement and the Credit Agreement. C. The Guarantors have entered into the Guarantee Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Pursuant to Section 5.11 of the Credit Agreement, each Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Guarantee Agreement as a Guarantor upon becoming a Subsidiary. Section 20 of the Guarantee Agreement provides that additional Subsidiaries of the Borrower may become Guarantors under the Guarantee Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the "New Guarantor") is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Guarantor under the Guarantee Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Guarantor agree as follows: Section 1. In accordance with Section 20 of the Guarantee Agreement, the New Guarantor by its signature below becomes a Guarantor under the Guarantee Agreement with the same force and effect as if originally named therein as a Guarantor and the New Guarantor hereby (a) agrees to all the terms and provisions of the Guarantee Agreement applicable to it as a Guarantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Guarantor thereunder are true and correct on and as of the date hereof. Each S-2 reference to a "Guarantor" in the Guarantee Agreement shall be deemed to include the New Guarantor. The Guarantee Agreement is hereby incorporated herein by reference. Section 2. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Guarantor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Supplement. Section 3. Except as expressly supplemented hereby, the Guarantee Agreement shall remain in full force and effect. Section 4. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 5. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Guarantee Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision hereof in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 6. All communications and notices hereunder shall be in writing and given as provided in Section 14 of the Guarantee Agreement. All communications and notices hereunder to the New Guarantor shall be given to it at the address set forth under its signature below, with a copy to the Borrower. Section 7. The New Guarantor agrees to reimburse the Collateral Agent for its out-of-pocket expenses in connection with this Supplement, including the fees, disbursements and other charges of counsel for the Collateral Agent. S-2 IN WITNESS WHEREOF, the New Guarantor and the Collateral Agent have duly executed this Supplement to the Guarantee Agreement as of the day and year first above written. [Name Of New Guarantor], by --------------------------------- Name: Title: Address: DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by --------------------------------- Name: Title: S-2 EX-10.24 5 dex1024.txt SUPPLEMENT NO. 1 TO SUBSIDIARY GUARANTY EXHIBIT 10.24 SUPPLEMENT NO. 1 dated as of May 29, to the Subsidiary Guarantee Agreement dated as of May 14, 2002, among each of the subsidiaries listed on Schedule I thereto (each such subsidiary individually, a "Guarantor" and collectively, the "Guarantors") of HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrow"), and DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking corporation, as collateral agent (the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). A. Reference is made to the Credit Agreement dated as of April 7,1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent and issuing bank (in such capacity, the "Issuing Bank"). B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee Agreement and the Credit Agreement. C. The Guarantors have entered into the Guarantee Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Pursuant to Section 5.11 of the Credit Agreement, each Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Guarantee Agreement as a Guarantor upon becoming a Subsidiary. Section 20 of the Guarantee Agreement provides that additional Subsidiaries of the Borrower may become Guarantors under the Guarantee Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the "New Guarantor") is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Guarantor under the Guarantee Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Guarantor agree as follows: Section 1. In accordance with Section 20 of the Guarantee Agreement, the New Guarantor by its signature below becomes a Guarantor under the Guarantee Agreement with the same force and effect as if originally named therein as a Guarantor and the New Guarantor hereby (a) agrees to all the terms and provisions of the Guarantee Agreement applicable to it as a Guarantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Guarantor thereunder are true and correct on and as of the date hereof. Each reference to a "Guarantor" in the Guarantee Agreement shall be deemed to include the New Guarantor. The Guarantee Agreement is hereby incorporated herein by reference. Section 2. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Guarantor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Supplement. Section 3. Except as expressly supplemented hereby, the Guarantee Agreement shall remain in full force and effect. Section 4. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 5. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Guarantee Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision hereof in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 6. All communications and notices hereunder shall be in writing and given as provided in Section 14 of the Guarantee Agreement. All communications and notices hereunder to the New Guarantor shall be given to it at the address set forth under its signature below, with a copy to the Borrower. Section 7. The New Guarantor agrees to reimburse the Collateral Agent for its out-of-pocket expenses in connection with this Supplement, including the fees, disbursements and other charges of counsel for the Collateral Agent. 2 IN WITNESS WHEREOF, the New Guarantor and the Collateral Agent have duly executed this Supplement to the Guarantee Agreement as of the day and year first above written. INDUSTRIAS HUDSON, S.A. de C.V., by --------------------------------- Name: Title: Address: DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by --------------------------------- Name: Title: S-1 EX-10.25 6 dex1025.txt SUPPLEMENT NO. 2 TO SUBSIDIARY GUARANTY EXHIBIT 10.25 SUPPLEMENT NO. 1 dated as of May 29, to the Subsidiary Guarantee Agreement dated as of May 14, 2002, among each of the subsidiaries listed on Schedule I thereto (each such subsidiary individually, a "Guarantor" and collectively, the "Guarantors") of HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrow"), and DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking corporation, as collateral agent (the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). A. Reference is made to the Credit Agreement dated as of April 7,1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent and issuing bank (in such capacity, the "Issuing Bank"). B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Guarantee Agreement and the Credit Agreement. C. The Guarantors have entered into the Guarantee Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Pursuant to Section 5.11 of the Credit Agreement, each Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Guarantee Agreement as a Guarantor upon becoming a Subsidiary. Section 20 of the Guarantee Agreement provides that additional Subsidiaries of the Borrower may become Guarantors under the Guarantee Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the "New Guarantor") is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Guarantor under the Guarantee Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Guarantor agree as follows: Section 1. In accordance with Section 20 of the Guarantee Agreement, the New Guarantor by its signature below becomes a Guarantor under the Guarantee Agreement with the same force and effect as if originally named therein as a Guarantor and the New Guarantor hereby (a) agrees to all the terms and provisions of the Guarantee Agreement applicable to it as a Guarantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Guarantor thereunder are true and correct on and as of the date hereof. Each reference to a "Guarantor" in the Guarantee Agreement shall be deemed to include the New Guarantor. The Guarantee Agreement is hereby incorporated herein by reference. Section 2. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Guarantor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Supplement. Section 3. Except as expressly supplemented hereby, the Guarantee Agreement shall remain in full force and effect. Section 4. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 5. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Guarantee Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision hereof in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 6. All communications and notices hereunder shall be in writing and given as provided in Section 14 of the Guarantee Agreement. All communications and notices hereunder to the New Guarantor shall be given to it at the address set forth under its signature below, with a copy to the Borrower. Section 7. The New Guarantor agrees to reimburse the Collateral Agent for its out-of-pocket expenses in connection with this Supplement, including the fees, disbursements and other charges of counsel for the Collateral Agent. 2 IN WITNESS WHEREOF, the New Guarantor and the Collateral Agent have duly executed this Supplement to the Guarantee Agreement as of the day and year first above written. HUDSON RESPIRATORY CARE TECATE, S, de R.L. de C.V., by ------------------------------------- Name: Title: Address: DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by ------------------------------------- Name: Title: S-1 EX-10.26 7 dex1026.txt FORM OF STOCK PURCHASE WARRANT, DATED MAY 15, 2002 EXHIBIT 10.26 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THIS WARRANT AND RESTRICTING ITS TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS WARRANT TO THE SECRETARY OF THE COMPANY. Warrant No. 2002-1 May 15, 2002 Hudson Respiratory Care Inc. STOCK PURCHASE WARRANT This certifies that FS Equity Partners IV, L.P., a Delaware limited partnership, or assigns (the "Holder"), for value received, is entitled to purchase from Hudson Respiratory Care Inc., a California corporation, located at 27111 Diaz Road, P.O. Box 9020, Temecula, California 92589-9020 (the "Company"), 20,000,000 fully paid and nonassessable shares (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and the like) of common stock of the Company, $.01 par value per share ("Common Stock") for a purchase price of $1.00 per share. The shares of the Company's Common Stock for which this Warrant is exercisable are referred to herein as the "Warrant Shares" and the per share purchase price of such Warrant Shares is referred to herein as the "Purchase Price." Subject to earlier expiration as provided in Section 9 herein, this Warrant may be exercised at any time or from time to time up to and including 5:00 p.m. (Pacific time) on May 15, 2009 (the "Expiration Date"), upon surrender to the Company at its principal office (or at such other location as the Company may advise Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by check of the aggregate Purchase Price for the number of Warrant Shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Purchase Price and the Warrant Shares are subject to adjustment as provided in Section 4 of this Warrant. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. This Warrant is exercisable at the option of the Holder of record hereof, at any time or from time to time, up to the Expiration Date for all and any part of the Warrant Shares (but not for a fraction of a share). At the option of the Holder, the Purchase Price for the Warrant Shares being purchased upon any exercise may be paid by (i) delivery of cash or a check, (ii) "net exercise" as provided in the following Section 2, or (iii) reduction (on a dollar for dollar basis) in the principal balance of any indebtedness of the Company owned by the Holder. At the time of any exercise of this Warrant, at the Holder's option, the Company shall pay all accrued unpaid interest owing under the indebtedness being reduced to Holder in cash or the Holder may apply such accrued unpaid interest to the Purchase Price of the Warrant. The Holder shall surrender the instrument evidencing the indebtedness being charged to the Company which shall issue a new instrument reflecting the remaining principal balance thereof. The Company agrees that the Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Certificates for the Warrant Shares so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within a reasonable time after the rights represented by this Warrant have been so exercised. Each stock certificate so delivered shall be in such denominations as may be requested by the Holder hereof and shall be registered in the name of such Holder or such other name as shall be designated by such Holder. In case of a purchase of less than all the Warrant Shares, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the Warrant Shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time, not exceeding fifteen (15) days after the date of such surrender. 2. Net Exercise. 2.1 Net Exercise. In addition to, and without limiting, the other rights of the Holder hereunder, the Holder shall have the right (the "Net Exercise Right") to exercise this Warrant or any part hereof into Warrant Shares at any time and from time to time during the term hereof. Upon exercise of the Net Exercise Right, the Company shall deliver to the Holder, without payment by the Holder of any Purchase Price or any cash or other consideration, that number of Warrant Shares computed using the following formula: X=Y (A-B) ------- A Where:X= The number of Warrant Shares to be issued to the Holder Y= The number of Warrant Shares purchasable pursuant to this Warrant A= The Fair Market Value of one Warrant Share as of the Exercise Date B= The Purchase Price 2 2.2 Method of Exercise. The Net Exercise Right may be exercised by the Holder by the surrender of this Warrant to the Company at its principal office at the address indicated on the first paragraph of this Warrant, together with a written notice specifying that the Holder intends to exercise the Net Exercise Right and indicating the number of Warrant Shares to be acquired upon exercise of the Net Exercise Right. Such exercise shall be effective upon the Company's receipt of this Warrant, together with the exercise notice, or on such later date as is specified in the exercise notice (the "Exercise Date") and, at the Holder's election, may be made contingent upon the closing of the Company's initial public offering of any securities pursuant to a registration statement (an "IPO") under the Securities Act of 1933, as amended (the "Securities Act") or upon consummation of any merger in which shareholders of the Company prior to such merger hold less than 50% of the voting power of the capital stock of the surviving corporation after such merger, or the sale of all or substantially all of the Company's assets, or a transaction, whether effected in a single transaction or a series of related transactions, in which 50% or more of the voting power of the capital stock of the Company is transferred (a "Change of Control"). Certificates for the Warrant Shares so acquired shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the Exercise Date. If applicable, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which Holder is entitled to purchase hereunder. 2.3 Fair Market Value. "Fair Market Value" of a share of Warrant Shares or Common Stock (issued upon net exercise thereof) as of a particular date means: (a) if traded on an exchange or quoted on The NASDAQ National Market, then the average closing prices of the Common Stock for the ten trading days ending with the second prior trading day, (b) if exercise is effective as of the closing of the Company's initial public offering of any securities pursuant to a registration statement under the Securities Act, the "price to public" specified for such shares in the final prospectus for such public offering, (c) if listed by the National Daily Quotation Service "Pink Sheets," then the average of the closing bid and ask prices of the Common Stock for the ten trading days ending with the second prior trading day, and (d) otherwise, the price as determined in good faith by the Board of Directors of the Company. 3. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all Warrant Shares (and shares of its Common Stock reserved for issuance upon net exercise of such Warrant Shares) which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company shall take all steps necessary to cause a sufficient number of shares of authorized but unissued capital stock (and shares of its Common Stock for issuance on net exercise of such capital stock, if any) to be authorized when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of capital stock (and shares of Common Stock for issuance on net 3 exercise of such capital stock, if any) may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the stock may be listed. The Company will not take any action which would result in any adjustment of the Purchase Price (as described in Section 4 hereof) if the total number of shares of capital stock issuable after such action upon exercise of all outstanding warrants, together with all shares of capital stock of the same class and series as such capital stock then outstanding and all shares of capital stock of the same class and series as such capital stock then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of capital stock of the same class and series as the Warrant Shares then authorized by the Company's Articles of Incorporation. 4. Adjustment of Purchase Price and Number of Shares. The Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 4. Upon each adjustment of the Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Purchase Price resulting from such adjustment. 4.1 Subdivision or Combination of Stock. In the event the outstanding shares of Common Stock shall, after the date of this Warrant, be subdivided (split) or combined (reverse split), by reclassification or otherwise, the Warrant Shares issuable upon exercise of this Warrant and the Purchase Price shall, concurrently with the effectiveness of any such subdivision or combination, be proportionately adjusted. 4.2 Dividends, Reclassification. If at any time or from time to time any holders of securities of the same class and series as the Warrant Shares shall have received or become entitled to receive, without payment thereof, (A) any shares of the Company's preferred stock, Common Stock or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution; (B) any cash paid or payable as a dividend; or (C) any shares of the Company's preferred stock, Common Stock or other or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement (other than shares of the same class and series as the Warrant Shares issued as a stock split, adjustments in respect of which shall be covered by the terms of Section 4.1 above), 4 then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of such capital stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clauses (B) and (C) above) which such Holder would hold on the date of such exercise had he or it been the Holder of record of such capital stock as of the date on which holders of such capital stock received or became entitled to receive such shares and/or all other additional stock and other securities and property. 4.3 Adjustment for Capital Reorganization, Merger or Consolidation. In case of any capital reorganization of the capital stock of the Company (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or any merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all the assets of the Company then, as a part of such reorganization, merger or consolidation, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares of stock or other securities or property of the Company resulting from such reorganization that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization if this Warrant had been exercised immediately before such reorganization, subject to further adjustment as provided in this Section 4. The foregoing provisions of this Section 4.3 shall similarly apply to successive reorganizations and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Board. In all events, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 4.4 Other Notices. If at any time: (1) the Company shall declare any cash dividend upon its shares of the same class and series as the Warrant Shares; (2) the Company shall declare any dividend upon its shares of the same class and series as the Warrant Shares payable in stock or make any special dividend or other distribution to the holders of its shares of the same class and series as the Warrant Shares; (3) there shall be any capital reorganization or reclassification of the capital stock of the Company, or any Change of Control; 5 (4) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; (5) the Company shall take or propose to take any other action, notice of which is actually provided to or is required to be provided, pursuant to any written agreement, to holders of its shares of the same class and series as the Warrant Shares; or (6) there shall be an IPO; then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown of the books of the Company, (a) at least 10 days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividends or distribution rights or for determining rights to vote in respect of any such reorganization, reclassification, Change of Control, dissolution, liquidation or winding-up, and (b) in the case of any such reorganization, reclassification, Change of Control, dissolution, liquidation or winding-up, at least 10 days prior written notice of the date when the same is reasonably expected to take place. Any notice given in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of shares of the same class and series as the Warrant Shares shall be entitled thereto. Any notice given in accordance with the foregoing clause (b) shall also specify the date on which the holders of shares of the same class and series as the Warrant Shares are reasonably expected to be entitled to exchange their stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, Change of Control, dissolution, liquidation or winding-up, as the case may be. 5. Issue Tax. The issuance of certificates for shares of the Warrant Shares shall be made without charge to the Holder of the Warrant for any issue tax in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder of the Warrant being transferred. 6. Enforceability. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms. 7. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Warrant Shares in any manner which interferes with the timely exercise of this Warrant. 8. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matters or any rights whatsoever as a shareholder of the 6 Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the Holder to purchase shares of capital stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Purchase Price or as a shareholder of the Company, whether such liability is asserted by the Company or by its creditors. 9. Expiration. This Warrant shall expire upon the earliest of (a) at 5:00 PM on May 15, 2009, (b) one business day prior to an IPO, and (c) one business day prior to consummation of a Change of Control. 10. Warrant Transferable. This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. Each Holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the Holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as transferee hereof on the books of the Company any notice to the contrary notwithstanding, but, until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. 11. Modification and Waiver. This Warrant and any provision hereof may only be amended, waived or modified upon written consent of the Company and holders of in excess of 50% in interest of the Warrants issued under this form of Stock Purchase Warrant, provided that all such Warrants, are amended, waived or modified in a like manner. 12. Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Holder at its address as shown on the books of the Company or to the Company at the address indicated on the first paragraph of this Warrant. 13. Descriptive Headings and Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without giving effect to the conflict of laws principles thereof. 14. Lost Warrant or Stock Certificates. The Company agrees with the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant or stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock 7 certificate, the Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 15. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Purchase Price. 8 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its duly authorized officers, effective as of the date first written above. COMPANY: HUDSON RESPIRATORY CARE INC. By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- SIGNATURE PAGE TO WARRANT FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: --------------------------- The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________ ____________________________ (_____________) shares of ____________ Stock of Hudson Respiratory Care Inc. and herewith makes payment of ____________________ Dollars ($__________) thereof, and requests that the certificates for such shares by issued in the name of, and delivered to ________________________________, whose address is __________________________ ____________. The undersigned represents that it is acquiring such ________________ Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times by within its control). DATED: ----------------------- -------------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) -------------------------------------------- -------------------------------------------- (Address) ASSIGNMENT FOR VALUE RECEIVED, the undersigned, the Holder of the within Warrant, hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of ________________ Stock covered thereby set forth herein below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- DATED: --------------------------- -------------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) -----END PRIVACY-ENHANCED MESSAGE-----