10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

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 incorporation or organization)	(I.R.S. Employer Identification No.)
599 Lexington Avenue, 18th floor New York, New York	10022
(Address of Principal Executive Offices)	(Zip Code)

(212) 758-2555

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

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   ¨    Not Applicable   x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ¨    Not Applicable  x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of March 16, 2004 the number of shares of Common Stock, $.01 par value, outstanding (the only class of common stock of the registrant outstanding) was 9,069,293. The registrant’s Common Stock is not traded in a public market.

Aggregate market value of the registrant’s voting and nonvoting Common Stock: Not Applicable.

Documents Incorporated by Reference: None

RIVER HOLDING CORP. AND SUBSIDIARIES

Fiscal Year Ended December 31, 2003

TABLE OF CONTENTS

			Page
PART I			1
	Item 1.	Business	1
	Item 2.	Properties	8
	Item 3.	Legal Proceedings	8
	Item 4.	Submissions of Matters to a Vote of Security Holders	8
PART II			8
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	8
	Item 6.	Selected Financial Data	9
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	25
	Item 8.	Financial Statements and Supplementary Data	26
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	27
	Item 9A.	Controls and Procedures	28
PART III			28
	Item 10.	Directors and Executive Officers of the Registrant	28
	Item 11.	Executive Compensation	30
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32
	Item 13.	Certain Relationships and Related Transactions	35
	Item 14.	Principal Accounting Fees and Services	36
PART IV			37
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	37
SIGNATURES			S-1

PART I

Item 1. Business

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include without limitation the words “believes,” “anticipates,” “estimates,” “intends,” “expects,” and words of similar import. All statements other than statements of historical fact included under “Item 1. Business,” “Item 2. Properties,” “Item 3. Legal Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking information and may reflect certain judgments by management. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of River Holding Corp. and its subsidiaries or the respiratory care and anesthesia products industries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These potential risks, uncertainties and other factors include, but are not limited to, those identified in the “Risk Factors” section of this Form 10-K located at the end of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” River Holding Corp. disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

General

River Holding Corp. (“Holding” or “River”) conducts all of its business through its majority-owned subsidiary, Hudson Respiratory Care Inc. and its subsidiaries (collectively, “Hudson RCI” or the “Company”). Consequently, the following discussion relates primarily to the Company. The Company is a leading manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company offers one of the broadest respiratory care and anesthesia product lines in the industry, including such products as oxygen masks, humidification systems, incentive breathing exercisers, endotracheal tubes, small volume nebulizers, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers such as outpatient surgery centers, long-term care facilities, physician offices, home health care agencies and the pre-hospital market. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company’s products are sold to nearly 1,900 distributors and alternate site service providers and shipped to over 5,400 customer locations in more than 100 countries worldwide. The Company has supplied the disposable respiratory care market for over 58 years and is known for impeccable product quality, a strong brand name and leading market positions.

The Company manufactures and markets approximately 2,000 respiratory care and anesthesia products. The Company believes that its broad product offering represents a competitive advantage over suppliers with more limited product offerings, as health care providers seek to reduce medical supply costs and concentrate purchases among fewer vendors. The Company also benefits competitively in the United States from its extensive relationships with leading group purchasing organizations (“GPOs”) and Integrated Delivery Networks (“IDNs”), as these types of organizations play an increasingly important role in hospitals’ purchasing decisions.

The Company maintains two manufacturing facilities and three distribution facilities in the United States, one manufacturing facility and one assembly operation in Mexico, an assembly and distribution facility in Malaysia and sales and marketing offices in the United States, Sweden, the United Kingdom, France and Germany.

Hudson Oxygen Therapy Sales Company (“Hudson Oxygen”), Hudson RCI’s predecessor, was founded in 1945. In 1988, Hudson Oxygen formed Industrias Hudson, a subsidiary that oversees the Company’s assembly operation in Mexico. In 1989, Hudson Oxygen merged with Respiratory Care Inc. to form Hudson RCI. In April 1998, the Company consummated a recapitalization, pursuant to which it became a majority-owned subsidiary of River Holding Corp. (“Holding”). In the past five years, the Company has completed a number of strategic acquisitions in order to expand its product line and geographic penetration. Most significantly, the July 1999 acquisition of Hudson RCI AB (formerly Louis Gibeck AB), a Swedish company that manufactures and markets heat moisture exchangers (“HMEs”) and filters under the Gibeck brand name, the November 1999 acquisition of

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Tyco’s Voldyne^® incentive breathing exerciser product line and the October 2000 purchase of the SHERIDAN^® endotracheal tube product line from Tyco. Holding’s principal executive offices are located at 599 Lexington Avenue, 18^th floor, New York, New York 10022, and its telephone number is (212) 758-2555.

Industry Overview

The Company breaks down the worldwide market for disposable respiratory care and anesthesia products into the U.S. Hospital market, the U.S. Alternate Site market and the international market. In the respiratory and anesthesia clinical areas, oxygen or an anesthetic agent is delivered from a gas source, such as a mechanical ventilator or respirator, to the patient’s pulmonary system. The gas is typically delivered to the patient through specialized tubing connecting to a cannula, mask or endotracheal tube. In addition, it is often clinically desirable to humidify or medicate the gas prior to delivery to the patient. The market for respiratory care and anesthesia products, including disposable products, is expected to be positively impacted by demographic trends, both domestically and internationally. In the United States, changes in demographics, including an aging population, increased incidence and awareness of respiratory illnesses and heightened focus on cost-efficient treatment, have had a positive impact on the domestic respiratory care and anesthesia markets. There has been an increasing incidence of respiratory illnesses (such as asthma and emphysema), due in part to an increasingly susceptible aging population, environmental pollution, smoking-related illnesses and communicable diseases with significant respiratory impact, such as tuberculosis, HIV and influenza. The Company believes that the international respiratory care and anesthesia markets will experience many of the trends currently affecting domestic markets. In addition, many international markets have high incidences of communicable respiratory diseases and are becoming increasingly aware of the clinical and economic value of single-use, disposable products.

The market for respiratory care and anesthesia products is also affected by trends involving the health care market in general. In particular, the overall trend towards cost containment and infection control has increased the desirability of disposable products relative to reusable products, and has influenced pricing, product utilization, distribution channels, purchasing decisions and health care delivery methods.

Efforts to contain rising health care costs have increased the preference for disposable medical products that improve the productivity of health care professionals and reduce overall provider costs. Health care organizations are evaluating modes of treatment that are less labor and/or technology intensive as a means of decreasing the cost of care, which can often result in increased disposable usage. In particular, increased utilization of disposable products can decrease labor and other costs associated with sterilizing and reprocessing reusable products. In addition, the risks of transmission of infectious diseases such as HIV, hepatitis and tuberculosis, and related concerns about the occupational safety of health care professionals, have also contributed to an increased preference for disposable single-use medical products.

Cost containment has caused consolidation throughout the health care product supply channel, which has favored reliable manufacturers with large, high quality product offerings and competitive pricing. In an effort to contain costs, service providers have consolidated and affiliated with GPOs, which take advantage of group buying power to obtain lower supply costs. This, in turn, has led to consolidation among distributors, who seek to provide “one-stop shopping” for these large buying groups. Distributors have also sought to concentrate purchases among fewer vendors in an effort to reduce supply costs. Since selection as a contracted GPO provider and strong relationships with distributors are critical to many health care manufacturers, the Company has responded to these trends by providing a broad range of integrated products, combined with reliable delivery and strong after-sales support.

Cost containment has also caused a migration of the decision making function with respect to supply acquisition to include both the clinician and the administrator. As teams of clinicians, purchasing agents, materials managers and upper level administrative management become more involved in the purchasing decision, a greater emphasis will be placed on overall value (price/product features and clinical/patient benefits).

As a result of U.S. cost containment measures, health care is increasingly provided outside of traditional hospital settings through lower cost alternate health care sites, such as outpatient surgery centers, long-term care facilities, physician offices and patients’ homes. Growth of the U.S. Alternate Site market is also attributable to advances in technology that have facilitated the delivery of care outside of the hospital, an increased number of illnesses and diseases considered to be treatable outside of the hospital and increased acceptance by the medical community of, and patient preference for, non-hospital treatment.

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Products

The Company manufactures and markets products for use in respiratory care and anesthesia. The products for each market are similar and often overlap, as do the distribution channels.

The Company categorizes its products into four clinical product groups (i) oxygen therapy; (ii) airway management; (iii) humidification; and (iv) aerosol therapy. Although the Company’s sales efforts differ depending on the clinical use of its products, management focuses on geographic segments for strategic decision making.

Product Group	Description
Oxygen Therapy: oxygen masks, cannulae, oxygen tubing, prefilled and refillable humidifiers, oxygen regulators, cylinder carts and bases, oxygen analyzers/monitors, oxygen sensors, and adaptors and connectors.	Used to transport, regulate, deliver and analyze therapeutic, supplemental oxygen to a patient. Cylinder carts and bases are used to transport and stabilize oxygen cylinders. Regulators control the pressure and flow of oxygen from the primary gas source to the patient. Oxygen masks and nasal cannulae cover the nose and mouth or fit inside the nostrils and are connected to an oxygen source via small diameter tubing through which oxygen flows. Oxygen analyzers, monitors and sensors are utilized to measure and monitor the oxygen concentration being delivered to the patient. Adaptors and connectors are frequently used in respiratory care and anesthesia to add accessories, modify configurations, and/or customize other related products to meet specific needs.
Airway Management: oral airways, SHERIDAN® endotracheal tubes, Voldyne® incentive breathing exercisers (IBEs), disposable and re-useable resuscitation bags, hyperinflation bags, breathing bags, air cushion masks, anesthesia circuits, filters and Ventilarm® monitors.	Used to secure and maintain an open airway and unobstructed breathing passage; convey an oxygen/air mixture and/or anesthetic gas from a mechanical ventilator, anesthesia gas machine to a patient; artificially support ventilation during resuscitative efforts; and measure and monitor airway pressure.
Humidification: ConchaTherm® heated humidifiers and accessories, Humid-Heat® system and accessories, Concha® water, ConchaPak®, Aqua+® and Humid-Vent® HMEs, volume ventilator circuits, heated wire circuits, neonatal CPAP and CPAP heated humidifiers.	Heated humidification systems actively heat and humidify oxygen/air mixtures or anesthetic gases provided by a mechanical ventilator or anesthesia gas machine or other gas source. Heat Moisture Exchangers (HMEs) passively conserve the heat and humidity in the patient’s exhaled breath for use during inspiration. Breathing filters are used to protect patients, caregivers and medical equipment from cross-contamination with bacteria and viruses. The infant CPAP system provides non-invasive respiratory support to premature infants with under-developed, immature lungs.

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Product Group

Description

Aerosol Therapy: AquaTherm® and ThermaGard® nebulizer heaters, aerosol masks, prefilled and refillable large volume nebulizers, aerosol tubing, unit dose solutions, small volume nebulizers, peak flow meters, spacers/changers and compressor accessories.

Used to create and deliver aerosolized particles of liquid water, sodium chloride or medication solutions to the patient’s airways to dilute and mobilize secretions and/or dilate constricted breathing passages. The peak flow meter is used to monitor the patient’s respiratory status before and after an aerosolized medication treatment. Spacers/Chambers are used as an adjunct to metered dose inhaler therapy to facilitate optimal treatment effectiveness.

The Company’s percentage of sales by product group for the years ending December 31, 2003, 2002 and 2001 is as follows:

	Year Ended
	December 31, 2003		December 31, 2002		December 31, 2001
Oxygen Therapy	29.4	%	32.1	%	32.6	%
Airway Management	25.5		28.1		29.2
Humidification	24.3		23.5		21.6
Aerosol Therapy	20.8		16.3		16.6
	100.0	%	100.0	%	100.0	%

Sales, Marketing and Distribution

The Company’s main focus for operational management and strategic decisions is based on geographic segments. These are defined as the United States and European operations, each having their own, distinct management team.

The Company has sales offices in California, Sweden, Germany, France and the United Kingdom and two distribution facilities in the United States, one in Europe and one in Malaysia. Additionally, the Company contracts with a third-party distribution facility in Charlotte, North Carolina. The Company also employs sales managers in Thailand, China, Mexico, Chile and Australia. While a majority of the Company’s U.S. Hospital sales logistically moves through distributors, the Company’s marketing efforts are focused on the health care service provider. In the alternate site market, the Company both sells and markets directly to the service provider. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. See Note 9 to “Item 8. Financial Statements” for information with respect to international sales. The Company’s U.S. sales personnel currently call on approximately 5,300 hospitals and surgery centers, over 50 hospital distributors and over 1,100 alternate site customers. Due to consolidation and cost pressures among the Company’s customer base, the Company’s target call point at the health care provider has changed to include the clinician, a purchasing manager or corporate executive.

In the current U.S. Hospital market environment, GPO and Integrated Delivery Network (“IDN”) relationships are an essential part of access to the Company’s target markets and the Company has entered into preferred supplier arrangements with eight national GPOs. The Company is typically positioned as either a sole supplier of respiratory care disposables to the GPO, or as one of two suppliers. While these arrangements set forth pricing and terms for various levels of purchasing, they do not obligate either party to purchase or sell a specific amount of product. In addition, GPO affiliated hospitals often purchase products from other suppliers notwithstanding the existence of sole or dual source GPO arrangements. Further, these arrangements are terminable at any time, but in practice usually run for two to three years. The Company enjoys longer terms with three of its major GPOs, Novation LLC, Consorta and HealthTrust Purchasing Group. The Company’s most significant GPO relationships are with Novation LLC, HealthTrust Purchasing Group, AmeriNet Inc., Consorta, Broadlane and Med Assets.

Health care providers have responded to pressures to reduce their costs by merging with other facilities, which make up the care continuum. Changes to the Company’s customer base may result in the renegotiation of contracts, the granting of price concessions or in the loss of the customer. Alternatively, to the extent a customer of the Company grows through acquisition activity, the Company may benefit from increased sales to the larger entity.

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The Company markets its products primarily through consultative dialogue with health care providers, targeted print and web site advertising, trade shows, selective promotional arrangements with distributors and the Company’s heater lease program. To support sales of the entire line of humidification and ventilation products, the Company leases heaters to domestic customers without charge. The revenues from the sale of products used in connection with the operation of the heaters covers the depreciation of the heater cost.

The Company utilizes a network of over 50 hospital distributors, as well as over 1,100 alternate site distributors and end-users, to reach its markets. The Company has been selected as the FOCUS preferred vendor of respiratory disposables for Owens & Minor Inc. Such status provides some competitive advantage to the Company’s products versus competing product lines. Owens & Minor Inc. is the Company’s largest distributor, accounting for approximately $35.9 million or approximately 19.4% of total 2003 net sales, $32.7 million or approximately 19.1% of total 2002 net sales and $30.4 million or 19.4% of total 2001 net sales. The Company provides a price list to its distributors which details base acquisition prices. Distributors receive orders from the healthcare service providers and charge the contract pricing (which is determined by their GPO affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between base acquisition price and the specific contract price to the distributor. The Company’s international distributors outside of the European Union (“EU”), Middle East and Africa place their orders directly with dedicated international customer service representatives. Customer orders are shipped from one of two warehouse locations. Sales strategies and marketing plans are tailored to each specific country and clinical product group. Region and territory sales managers are responsible for the launch of products into their markets, including related support and training. The Company utilizes a network of approximately 120 international distributors, typically on an exclusive basis by product group or market/country. Customers within Europe, the Middle East and Africa are serviced by the Company’s Sweden office.

Manufacturing and Assembly

The Company operates two manufacturing facilities in the United States, one in Tecate, Mexico and assembly facilities in Ensenada, Mexico and Kuala Lumpur, Malaysia. While the Company believes that it is operating at a high utilization rate, existing facilities could support increased capacity with additional machinery and workers. The Company’s manufacturing facility in Temecula, California operates 71 injection molding machines. During the past several years, many of the machines have been replaced with more efficient models, which have increased capacity. Tubing is produced on 11 extrusion lines: six corrugated, four vinyl and one repellitizer/regrinder. The Temecula facility uses approximately 19 million pounds of over 30 different kinds of resin annually; the most prominent are PVC, polyethylene, polypropylene and polystyrene. Sterile prefilled humidification and nebulization products are manufactured using nine blow/fill/seal machines in the Company’s facility in Arlington Heights, Illinois. The Company has planned to purchase an additional three machines to expand the capacity of the Arlington Heights facility.

The Company has completed the relocation of the SHERIDAN^® endotracheal tubes product line from Argyle, New York to Tecate, Mexico. Furthermore, the Voldyne^® IBE product line was moved from Temecula, California to Tecate, Mexico. The Tecate facility currently operates four extrusion lines, four blow molding machines, seven assembly lines and three packaging machines for the endotracheal product line. In addition, Tecate has three IBE work cells that consist of blow molding, assembly and packaging machines.

The Company’s facility located in Ensenada, Mexico is primarily used for the assembly of certain products molded and/or extruded at the Temecula facility. Each of the Tecate and the Ensenada facilities is a maquiladora, and therefore there are minimal tariffs associated with the transport of products and components across the United States-Mexico border. The Company’s facility located in Kuala Lumpur, Malaysia assembles virtually all of the HME and filter products marketed by the Company. The components assembled by the Malaysian operation are generally molded by outside vendors in Malaysia.

The Company monitors the quality of its products at its manufacturing facilities by statistical sampling and visual and dimensional inspection. The Company also inspects incoming raw materials for inconsistencies, rating its

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vendors on quality and delivery time. The Company is routinely audited by the Food and Drug Administration (“FDA”) and has received no significant regulatory actions. The Company is in substantial compliance with the GMP/QSR regulations of the FDA and the United States and Mexico operations have qualified for an “advanced notification” program allowing the Company to be informed of FDA inspections in advance. The Company utilizes outside facilities for sterilization of products produced in Temecula, Arlington Heights, Kuala Lumpur, Tecate and Ensenada. Certain Arlington Heights products are manufactured in a sterile environment and are certified sterile as a result of the production process. The Ensenada, Tecate, Temecula, Sweden and Arlington Heights facilities are certified as ISO 9001 and ISO 13485 compliant and the Kuala Lumpur facility is certified as ISO 9002 compliant.

Suppliers and Raw Materials

The Company’s primary raw materials are various resins, which are formed into the Company’s products. The top 10 purchased products in 2003 were tubing grade PVC, LDPE-EVA, mask grade PVC, polystyrene, polypropylene, clear PVC, manual resuscitators, elastic, bag material and aerosol pocket chambers. The Company believes that it is able to purchase materials at a cost no higher than its competitors. The Company believes that sufficient availability exists for its raw materials, as they consist of mainly readily available plastic resins.

Research and Development

The Company believes product development and innovation are an essential part of its continued success. The Company focuses on developing new products, design enhancements to existing products and process improvements to its manufacturing operations. Manufacturing, sales, marketing and clinical expertise is incorporated into the research and development process. This expertise is expected to continue to be performed by internal staff for the foreseeable future, however external expertise is utilized as necessary.

The Company develops new products to expand its product line in anticipation of changes in demand. Significant advances to humidification products introduced include; CONCHATHERM^® IV Plus heated humidifier for respiratory support, CONCHATHERM^® 2000 heater humidifier for the sleep apnea market, and a first of its kind active humidification system, Humid-Heat^®, which incorporates the desired features of passive and active humidification for respiratory support. Complementing its new active humidifier, the Company recently introduced an enhanced line of heated wire ventilator circuits, a nebulizer adaptor (NebTee) to allow in-line nebulization of medication without contamination, the patient-ventilator system and a series of flexible adaptors and connectors for respiratory care and anesthesia.

As of December 31, 2003, the Company’s research and development department consisted of 20 people including engineers, scientists and technicians. The Company incurred research and development expenses of $3.2 million, $2.6 million and $2.0 million in 2003, 2002 and 2001, respectively.

Competition

The global medical supply industry is highly fragmented and characterized by intense competition. Many of the products manufactured by the Company are available from several sources and many of the Company’s customers have relationships with several manufacturers. Competition in the international market includes both local and global manufacturers. The Company’s primary competitor in the U.S. respiratory care sector is Cardinal Health (formerly, Allegiance Healthcare) and its primary competitors in the anesthesia sector include Tyco, Smiths Industries Medical Systems, Inc. (“SIMS”) and Vital Signs, Inc. The Company competes on the basis of brand name, product design, quality, breadth of product line, service and price.

Patents and Trademarks

The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does seek and obtain intellectual property rights on concepts, processes and trademarks when appropriate. The Company has 17 active utility patents and several design patents in the United States with the majority of the patents maintained in other countries. One patent expires in 2007, three

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expire in 2008 and the remaining patents expire between 2010 and 2019. The Company has over 60 well recognized and accepted registered trademarks in the United States, which are also recognized in other countries in which the Company manufactures, distributes or sells its products.

Government Regulation and Environmental Matters

The Company and its customers and suppliers are subject to extensive federal and state regulation in the United States, as well as regulation by foreign governments. Most of the Company’s products are subject to government regulation in the United States and other countries. In the United States, the Food, Drug and Cosmetic (“FD&C “) Act and other statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, marketing, advertising and promotion of such products. Under the FD&C Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the clearance or approval of Federal and foreign governmental agencies, including the FDA, prior to marketing, distributing and manufacturing certain of those products. The Company may also need to obtain FDA clearance before modifying marketed products or making new promotional claims. Foreign sales are subject to similar requirements.

The Company is required to comply with pertinent sections of the Code of Federal Regulations, 21CFR GMP/QSR, which set forth requirements for, among other things, the Company’s manufacturing process, design control and associated record keeping, including testing and sterility. Further, the Company’s plants and operations are subject to review and inspection by state, Federal and foreign governmental entities. The distribution of the Company’s products may also be subject to state regulation. The impact of FDA regulation on the Company has increased in recent years as the Company has increased its manufacturing operations. The Company’s suppliers, including contract sterilization facilities, are also subject to similar governmental requirements. The FDA also has the authority to issue special controls for devices manufactured by the Company.

The Company is also subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, business licenses, manufacturing practices, fire hazard control and the handling and disposal of hazardous or infectious materials or substances and emissions of air pollutants. The Company owns and leases properties, which are subject to environmental laws and regulations.

Employees

As of March 16, 2004, the Company employed 2,174 employees in the United States and abroad, substantially all of whom were full-time employees. None of the Company’s employees are represented by unions and the Company considers its employee relations to be good.

Where You Can Find More Information

Although the Company is not subject to the reporting requirements of the Securities and Exchange Act of 1934, the Company files periodic reports with the Securities and Exchange Commission (“SEC”). You may read and copy the periodic reports that the Company has filed or may file in the future at the SEC’s public reference facility at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a web site that contains periodic reports and other information regarding the registrants that file electronically with the SEC at http://www.sec.gov.

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Item 2. Properties

The Company owns or leases its manufacturing, office and warehouse facilities. The Company’s major facilities and their primary uses are summarized below:

	Square Feet	Owned/Leased	Lease Expiration
United States:
Temecula, California (Headquarters, offices)	26,000	Owned
Temecula, California (manufacturing)	119,000	Owned
Temecula, California (distribution)	99,000	Leased	November 2005
Arlington Heights, Illinois (manufacturing)	94,000	Leased	May 2010
Elk Grove, Illinois (distribution)	73,000	Leased	May 2010
International:
Ensenada, Mexico (manufacturing)	97,000	Owned
Tecate, Mexico (manufacturing)	90,200	Leased	March 2005
Stockholm, Sweden (Headquarters, offices)	16,500	Leased	October 2006
Ashby de la Zouch, U.K. (sales office)	3,850	Leased	May 2006
Lyon, France (sales office)	3,080	Leased	April 2005
Lohmar, Germany (sales office)	2,255	Leased	April 2005
Kuala Lumpur, Malaysia (manufacturing)	33,300	Leased	July 2004

The Company owns approximately 10 acres of land in Temecula, California on which its headquarters and a manufacturing center are located. The Company owns the Ensenada facility and the underlying land is held in a 30 year trust that expires in August 2019.

The Company believes that its present facilities are suitable and adequate for its current and presently anticipated future needs.

Item 3. Legal Proceedings

Holding or the Company are 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 or the Company’s existing lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of Holding or the Company.

Item 4. Submissions of Matters to a Vote of Security Holders

On October 2, 2003, the holders of a majority of the outstanding 11 ¹/2% Senior PIK Preferred Stock of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding (the “Holding Junior Preferred Stock”) and Common Stock, each class voting separately, by written consent, approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock through and including April 15, 2005. 372,608 shares of Holding Preferred Stock, 2,308 shares of Junior Preferred Stock and 8,121,791 shares of Common Stock consented to the amendment.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

There is no established public trading market for the Holding’s Common Stock. As of March 16, 2004, all of the outstanding Common Stock of Holding is held by 18 holders of record.

In April 2001, Holding issued an aggregate of 10,002 shares of its common stock to certain of its employees under Holding Stock Subscription Plan for an aggregate purchase price of $100,013. Holding relied on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering in issuing the common stock as the purchasers were sophisticated and employees of the Company and Holding.

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In August 2001, Holding issued an aggregate of 3,000 shares of its Holding Junior Preferred Stock to certain of its and the Company’s stockholders for an aggregate purchase price of $3,000,000. Holding relied on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering in issuing the Holding Junior Preferred Stock as the purchasers were sophisticated and shareholders of the Company or Holding.

No underwriters were employed with respect to any sales of securities of Holding in the transactions described above. No commissions or fees were paid with respect to such sales.

Holding has not paid cash dividends to its shareholders in the past two years, and does not intend to pay cash dividends on its Common Stock in the foreseeable future. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of restrictions on Holding’s ability to pay cash dividends.

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters– Equity Compensation Plan Information.”

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial and operating data as of and for each of the five fiscal years ended December 31, 2003, 2002, 2001, 2000 and 1999. Financial data as of and for each of the five years in the period ended December 31, 2003, were derived from the Company’s audited consolidated financial statements and notes thereto. All the data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Holding’s and the Company’s audited consolidated financial statements and notes thereto included elsewhere in this Report.

River Holding Corp. (consolidated)

	Fiscal Year
	2003			2002			2001			2000			1999
	(dollar amounts in thousands)
Operating Data:
Net sales	$	184,595		$	171,959		$	158,068		$	159,278		$	128,803
Cost of sales		104,834			104,762			111,270			87,183			77,678
Gross profit		79,761			67,197			46,798			72,095			51,125
Operating expenses:
Selling expenses		20,964			20,370			20,337			18,262			13,122
Distribution expenses		10,177			9,174			10,588			10,109			4,647
General and administrative expenses		19,725	(a)		18,589	(b)		26,833	(d)		24,022	(f)		14,732	(g)
Impairment of goodwill		—			—			161,591	(e)		—			—
Impairment of fixed assets		—			—			4,712	(e)		—			—
Amortization of goodwill		—			—			8,570			8,400			5,080
Research and development expenses		3,236			2,578			2,043			2,388			2,031
Operating income (loss)		25,659			16,486			(187,876	)		8,914			11,513
Other (income) and expenses:
Interest expense		24,612			20,875			20,542			21,089			17,263
Other (income) expense		309			(3,138	)(c)		1,563			1,159			1,232
Total other expense		24,921			17,737			22,105			22,248			18,595
(Loss) income before provision for income taxes		738			(1,251	)		(209,981	)		(13,334	)		(7,082	)
Provision for income taxes		1,716			1,897			12,252	(e)		3,203			(1,508	)
Net loss	$	(978	)	$	(3,148	)	$	(222,233	)	$	(16,537	)	$	(5,574	)

	Fiscal Year
	2003			2002			2001			2000		1999
	(dollar amounts in thousands)
Balance Sheet Data:
Total assets	$	147,680		$	143,503		$	144,105		$	361,036	$	344,961
Total debt		284,112			278,928			271,136			261,975		247,115
Shareholders’ deficit		(164,896	)		(165,412	)		(160,681	)		62,927		78,393
Working capital		22,216			12,913			(288	)		29,972		36,204

9

	Fiscal Year
	2003			2002			2001			2000			1999
Other Financial Data:
Net cash provided by operating activities	$	18,686		$	6,261		$	5,564		$	11,624		$	7,097
Net cash used in investing activities		(7,496	)		(379	)		(9,017	)		(26,942	)		(75,818	)
Net cash (used in) provided by financing activities		(9,543	)		(5,545	)		7,330			16,220			71,529
Depreciation and amortization	$	14,000		$	13,407		$	21,239		$	20,051		$	15,655
Capital expenditures		7,518			7,546			9,029			11,329			10,973

(a) Consists of (i) general and administrative expense of $19,586 and (ii) provision for bad debts of $139.

(b) Consists of (i) general and administrative expense of $17,744 and (ii) provision for bad debts of $845.

(c) Includes a $2.9 million gain on sale of facilities in Temecula, California.

(d) Consist of (i) general and administrative expense of $23,889, (ii) amortization of goodwill of $3,490 and (iii) provision for bad debts of $2,826.

(e) For additional information see “2001 Fourth Quarter Charges” section in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation – Results of Operations.”

(f) Consists of (i) general and administrative expense of $20,916 and (ii) provision for bad debts of $3,106.

(g) Consists of (i) general and administrative expense of $14,292 and (ii) provision for bad debts of $440.

Hudson Respiratory Care Inc.

	Year
	2003			2002			2001			2000			1999
	(dollar amounts in thousands)
Operating Data:
Net sales	$	184,595		$	171,959		$	158,068		$	159,278		$	128,803
Cost of sales		102,610			102,511			109,010			84,923			75,418
Gross profit		81,985			69,448			49,058			74,355			53,385
Operating expenses:
Selling expenses		20,964			20,370			20,337			18,262			13,122
Distribution expenses		10,177			9,174			10,588			10,109			4,647
General and administrative expenses		19,387	(a)		18,549	(c)		30,205	(e)		27,343	(g)		14,732	(h)
Impairment of goodwill		—			—			33,128	(f)		—			—
Impairment of fixed assets		—			—			4,469	(f)		—			—
Research and development expenses		3,236			2,578			2,043			2,387			2,031
Operating income (loss)		28,221			18,777			(51,712	)		16,254			18,853
Other (income) and expenses:
Interest expense		24,612	(b)		20,875			20,542			21,089			17,263
Other (income) expense		(264	)		(2,331	)(d)		1,563			1,159			1,232
Loss on early extinguishment of debt		573			—			—			—			—
Total other expense		24,921			18,544			22,105			22,248			18,495
Income (loss) before provision for income taxes		3,300			233			(73,817	)		(5,994	)		358
Provision for income taxes		1,716			1,897			69,854	(f)		3,203			1,586
Net income (loss)	$	1,584		$	(1,664	)	$	(143,671	)	$	(9,197	)	$	(1,228	)

	Year
	2003			2002			2001			2000			1999
	(dollar amounts in thousands)
Balance Sheet Data:
Total assets	$	144,710		$	137,937		$	137,055		$	275,234		$	251,819
Total debt		284,112			278,928			271,136			261,975			247,115
Shareholders’ deficit		(167,915	)		(171,068	)		(167,821	)		(22,775	)		(14,649	)
Working capital		22,797			13,081			(160	)		29,559			35,971
Other Financial Data:
Net cash provided by operating activities	$	18,611		$	6,261		$	5,564		$	10,379		$	7,097
Net cash used in investing activities		(7,496	)		(379	)		(9,017	)		(26,941	)		(75,818	)
Net cash (used in) provided by financing activities		(9,468	)		(5,545	)		7,330			17,464			71,529
Depreciation and amortization (i)	$	10,513		$	9,770		$	12,656		$	11,719		$	8,315
Capital expenditures		7,518			7,546			9,029			11,329			10,973

(a) Consists of (i) general and administrative expense of $19,248 and (ii) provision for bad debts of $139.

10

(b) Includes $3.1 million of interest expense associated with the mandatorily-redeemable preferred stock due to adoption of SFAS 150.

(c) Consists of (i) general and administrative expense of $17,704 and (ii) provision for bad debts of $845.

(d) Includes a $2.3 million gain on sale of facilities in Temecula, California.

(e) Consists of (i) general and administrative expense of $23,889, (ii) amortization of goodwill of $3,490 and (iii) provision for bad debts of $2,826.

(f) For additional explanation, see “2001 Fourth Quarter Charges” section “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(g) Consists of (i) general and administrative expense of $24,237 and (ii) provision for bad debts of $3,106.

(h) Consists of (i) general and administrative expense of $14,292 and (ii) provision for bad debts of $440.

(i) Consists of depreciation and amortization expense of $10,113, $9,370 and $12,223 in 2003, 2002 and 2001, respectively and amortization of capitalized subordinated debt fees of $400, $400 and $433 in 2003, 2002 and 2001, respectively.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Because Holding is a holding company with no operations, the following discussion relates primarily to the Company. The following discussion of the Company’s consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K.

Holding’s acquisition of a majority of the Company’s stock was accounted for as a purchase, and as a result, additional expenses relating to amortization of goodwill of $5.0 million in 2001, and additional depreciation related to the allocation of purchase price at fair value to depreciable assets of $2.2 million in 2003, 2002 and 2001.

Goodwill resulting from the acquisition of the Company was recorded on the books of River and not pushed down to the Company, resulting in an additional $128.4 million of goodwill recorded at Holding. As a result of significant losses, both Holding and the Company recorded goodwill impairment in 2001 of $161.6 million and $33.1 million, respectively.

As a result of Holding’s acquisition of the Company, Holding recorded property, plant and equipment at fair value. As of December 31, 2003 the remaining value of the step-up in basis to fair value was approximately $3.7 million.

On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.

There are no other material differences between Holding consolidated and the Company.

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, (i) the buying patterns of the Company’s distributors, GPOs and other purchasers of the Company’s products, (ii) forecasts regarding the severity of the annual cold and flu season, (iii) announcements of new product introductions by the Company or its competitors, (iv) changes in the Company’s pricing of its products and the prices offered by the Company’s competitors, (v) rate of overhead absorption due to variability in production levels and (vi) variability in the number of shipping days in a given quarter.

Recent Developments

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. The Company recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

11

As a condition to the extension of credit under the Revolving A Facility and the Term B Facility, on September 30, 2003 the holders of a majority of the outstanding principal amount of the Senior Subordinated Convertible Promissory Notes of the Company and Unsecured Senior Promissory Notes of the Company, shown as “Notes Payable to Affiliates” on the Company’s consolidated balance sheet, agreed to amend their respective notes to extend the maturity to March 31, 2008.

As a condition to the extension of credit under the Revolving A Facility and the Term B Facility, on October 2, 2003, the holders of a majority of the outstanding 11 ¹/2% Senior PIK Preferred Stock of the Company (“Senior Preferred Stock”), 12% Junior Convertible Preferred Stock of the Company (the “Junior Preferred Stock”) and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Determination for the Senior Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Senior Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding Holding Preferred Stock, Holding Junior Convertible Preferred Stock and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank credit facility with a new $19.2 million bank credit facility (the “HRCI AB Facility”). Proceeds from the new facility were used to repay borrowings under the previous arrangement (approximately $13.4 million) with the balance under the new facility available for working capital and general corporate purposes.

Critical Accounting Policies

Revenue Recognition: Holding recognizes revenue net of reserves when product is shipped and title passes to the customer as the earnings process is substantially complete at that time. Holding establishes reserves for sales returns for shipping errors or damaged goods, rebates and other allowances based on historical experience. Holding sells its products to its distributors based on a listed price. Distributors charge the service providers, or the distributor’s end customers, a contract price (which is determined by their group purchasing organization affiliation or individual contract price) plus a service margin. As is customary within the industry, Holding rebates the difference between the list price and the specific contract price to the distributor. Holding records revenue and receivables net of rebatable amounts, based on historical experience. In the event no rebate is payable, the rebate amount is reversed and recognized as revenue.

Accounts Receivable: Management performs various analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Management applies specified percentages to the accounts receivable aging to estimate the amount that will ultimately be uncollectible and, therefore, should be reserved. The percentages are increased as the accounts age.

Management establishes and monitors these percentages through extensive analyses of historical realization data, accounts receivable aging trends, other operating trends, and the extent of contracted business and business combinations. Also considered are relevant business conditions, including general economic factors as they relate to the Holding’s international customers. If indicated by such analyses, management may periodically adjust the uncollectible estimate and corresponding percentages. Further, focused reviews of certain large and/or problematic payors are performed to determine if additional reserves are required.

Inventory: Inventories are stated at the lower of cost (first-in, first-out (“FIFO”) method) or market. Management utilizes various analyses based on forecasts, historical sales and inventory levels to ensure that the current carrying value of inventory accurately reflects the current and expected requirements of Holding within a reasonable timeframe. Management also utilizes the various analyses to determine required reserves for excess and obsolete inventory and makes required adjustments, if necessary.

Impairment of Long-Lived Assets: Holding reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to fair value and an impairment loss will be recognized.

12

Goodwill: Holding periodically reviews the recoverability of the carrying value of goodwill using the methodology prescribed in SFAS 142. Recoverability of goodwill is determined by comparing the fair value of the operating segments to the accounting value of the underlying net assets. If the fair value of the Company is determined to be less than the fair value of the net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the Company and the fair value of all other assets and liabilities.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2003, which note is incorporated herein by this reference.

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.

	Fiscal Year
	2003		2002		2001
	(dollars in thousands)
Net sales	$	184,595	$	171,959	$	158,068
Cost of sales		102,610		102,511		109,010
Gross profit		81,985		69,448		49,058
Selling expenses		20,964		20,370		20,337
Distribution expenses		10,177		9,174		10,588
General and administrative expenses		19,248		17,704		23,889
Amortization of goodwill		—		—		3,490
Impairment of goodwill		—		—		33,128
Impairment of fixed assets		—		—		4,469
Research and development expenses		3,236		2,578		2,043
Provision for bad debts		139		845		2,826
Total operating expenses		53,764		50,671		100,770
Operating income (loss)	$	28,221	$	18,777	$	(51,712	)

13

	Fiscal Year
	2003		2002		2001
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	55.6		59.6		69.0
Gross profit	44.4		40.4		31.0
Selling expenses	11.4		11.8		12.9
Distribution expenses	5.5		5.3		6.7
General and administrative expenses	10.4		10.3		15.1
Amortization of goodwill	—		—		2.2
Impairment of goodwill	—		—		21.0
Impairment of fixed assets	—		—		2.8
Research and development expenses	1.8		1.5		1.3
Provision for bad debts	0.1		0.5		1.8
Total operating expenses	29.2		29.4		63.8
Operating income (loss)	15.2	%	11.0	%	(32.8	)%

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net sales were $184.6 million in 2003 as compared to $172.0 million in 2002, representing an increase of $12.6 million or 7.3%. This increase was driven by increased volumes in most markets including the U.S. Hospital market where sales increased by $4.7 million or 5.2%; sales into the Pacific Rim which increased by $1.4 million or 11.7%; and sales into the U.S. Alternate Site market which were up $1.1 million or 4.4%. European sales increased by $5.6 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar (an increase to reported sales of $5.1 million). Sales to the Company’s OEM customers grew by $0.3 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar (an increase to reported sales of $0.5 million) offset by a slight decrease of $0.2 million. These gains were partially offset by a decline in sales into Latin America of $0.4 million or 7.6%. Sales into other geographic areas were relatively unchanged representing a decrease of $0.1 million from the prior year.

The Company’s gross profit in 2003 was $82.0 million, an increase of $12.6 million or 18.1% from 2002. As a percentage of sales, gross margin in 2003 increased to 44.4% in 2003 from 40.4% in 2002. The increase in gross profit was primarily attributable to cost reductions of $6.6 million (3.5 margin points), higher overall sales volume primarily in the U.S. Hospital market ($2.3 million) and the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products ($3.7 million or 0.5 margin points). The $6.6 million improvement in gross profit was driven by: (i) cost reductions of $3.3 million for products sold in the U.S. Hospital and Pacific Rim markets (1.7 margin points); (ii) cost reductions and price increases of $1.1 million for products sold into Europe (0.8 margin points); (iii) cost reductions of $0.9 million on the Company’s OEM products (0.4 margin points); and (iv) reduced spending of $1.3 million associated with the completion of the move of the Argyle, New York facility to Tecate, Mexico (0.6 margin points).

Selling expenses were $21.0 million in 2003 as compared to $20.4 million in 2002, representing an increase of $0.6 million or 2.9%. The increase was due to unfavorable changes in exchange rates of $1.1 million, offset by net spending declines of $0.5 million. These declines were attributable to lower expenses associated with changes in Company’s GPO programs (down $0.9 million) and reduced expenses associated with supporting the Company’s dealer base (down $0.6 million), offset by increases in staffing (up $0.7 million) and travel expense (up $0.3 million) both required to support the growth in sales. As a percentage of net sales, selling expenses were 11.4% in 2003 as compared to 11.8% in 2002. While we expect to maintain competitive contract terms and continue to improve selling expenses as a percentage of net sales, declines in expenses associated with the Company’s GPO programs and dealer incentives may not continue.

14

Distribution expenses were $10.2 million in 2003 as compared to $9.2 million in 2002, representing an increase of $1.0 million or 10.9%. The increase was primarily attributable to increases in expenses directly associated with greater sales volume including increased intracompany freight charges of $0.4 million, increased cost of shipping supplies of $0.4 million and increased European distribution expenses of $0.3 million. Distribution expense also increased due to unfavorable changes in exchange rates of $0.5 million. These increases were partially offset by decreased labor and overtime of $0.6 million in the domestic operations due to operating efficiencies. As a percentage of sales, distribution expense was 5.5% in 2003 and 5.3% in 2002.

General and administrative expenses, including the provision for bad debts, were $19.4 million in 2003 as compared to $18.5 million in 2002, representing an increase of $0.9 million or 4.5%. This increase was primarily the result of unfavorable changes in exchange rates of $0.7 million, increased incentive compensation of $0.9 million, increased staffing in Europe of $0.5 million, increased compensation and benefit expenses domestically of $0.4 million and increases in other expenses of $0.4 million. These increases were offset in part by the elimination of third party expenses associated with an amendment to the Company’s credit facility in May 2002 ($1.3 million) and reduced bad debt expense of $0.7 million. As a percentage of net sales, general and administrative expenses were 10.4% in 2003 as compared to 10.3% in 2002.

Research and development expenses were $3.2 million in 2003 as compared to $2.6 million in 2002, representing an increase of $0.6 million or 23.1%. This increase was primarily attributable to increases in personnel expense associated with increased product development activities of $0.4 million and unfavorable changes in exchange rates of $0.2 million. As a percentage of net sales, research and development expenses were 1.8% in 2003 as compared to 1.5% in 2002.

Interest and other expense was $24.9 million in 2003 as compared to $18.5 million in 2002, representing an increase of $6.4 million or 34.6%. The increase was primarily due to the treatment of preferred stock dividends as interest expense of $3.1 million during 2003 (due to adoption of SFAS 150) and the increase in interest expense associated with increased debt to affiliates of $1.4 million, offset by lower interest expense of $1.0 million associated with decreased bank borrowings. During the last quarter of 2003, the Company expensed the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003. During the fourth quarter of 2002, the Company recognized a gain of $2.3 million on the sale of facilities in Temecula, California.

Income tax provision was $1.7 million in 2003 as compared to $1.9 million in 2002 and related primarily to foreign income taxes.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net sales on a consolidated basis were $172.0 million in 2002, an increase of $13.9 million or 8.8% from 2001. Sales for the U.S. Hospital market increased by $6.6 million or 6.7%. This increase was primarily the result of a weaker than normal flu season in 2001, the decision not to offer dealers purchase incentives at the end of 2001 and market share growth in 2002 in the Company’s core disposable product categories during 2002. Sales to the U.S. Alternate Site market increased by $0.6 million or 2.0%, primarily the result of overall growth in the marketplace. Sales into Europe increased by $3.1 million or 15.5%, as the Company saw significant growth in sales to end users through its European subsidiaries as well as sales to dealers. Sales to the Pacific Rim increased by $0.7 million or 6.4% primarily due to increased demand for the Company’s SHERIDAN^® endotracheal tube product line. Sales to Latin America, Canada and the Company’s OEM customers were relatively flat, increasing by $0.5 million, $0.3 million and $0.3 million, respectively. Additionally, $1.8 million of the increase in sales is attributable to favorable foreign exchange rates.

The Company’s gross profit for 2002 was $69.4 million, an increase of $20.4 million or 41.6% from 2001. As a percentage of net sales, the Company’s gross margin for 2002 was 40.4% as compared to 31.0% for 2001, an increase of 9.4 margin points. The margin increase was partially due to events in 2001 that had a negative impact on the 2001 margin and did not reoccur in 2002 including: (i) charges in the fourth quarter of 2001 relating to an

15

initiative put in place to discontinue and dispose of less profitable products (3.2 margin points); (ii) sale of inventory in 2001 recorded a higher net realizable value rather than manufacturing cost as a result of the SHERIDAN^® acquisition (1.3 margin points) and (iii) higher levels of unabsorbed manufacturing costs in 2001 resulting from lower than expected demand and decreased inventories (0.8 margin points). Additionally, the following items contributed to the improvement of the 2002 margin: (i) cost reduction programs implemented and recognized in 2002 (3.3 margin points); (ii) an improvement in shipping costs in 2002, resulting from specific cost reduction programs put into place (1.1 margin points); (iii) favorable foreign currency exchange rates (0.6 margin points) and (iv) other cost decreases (0.9 margin points). These increases in margin were offset by 2002 transition expenses relating to the relocation of the Argyle facility to Tecate (1.8 margin points).

Selling expenses were $20.4 million for 2002, unchanged from 2001. As a percentage of sales, selling expenses were 11.8% in 2002 as compared to 12.9% in 2001.

Distribution expenses were $9.2 million in 2002, representing a $1.4 million or 13.2% decrease from 2001. As a percentage of sales, distribution expenses were 5.3% in 2002 versus 6.7% in 2001. This decline is primarily the result of specific programs implemented by management designed to improve the efficiency of its distribution facilities, including reductions in labor and overtime, intracompany freight charges and rental expenses from the closure of the Atlanta distribution center in 2001.

General and administrative expenses, including provision for bad debts, were $18.5 million for 2002, a decrease of $8.2 million or 30.6% from 2001. This decrease resulted primarily from the effect of impairment charges recorded in 2001 and severance costs related to the 2001 closure of the Atlanta distribution center. Additionally, the Company made a decision in 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs by $2.2 million in 2001.

No amortization of goodwill was recorded in 2002, while $3.5 million was recorded in 2001. This is the result of the Company’s adoption of SFAS 142, under which the Company ceased amortizing goodwill effective January 1, 2002. As a result of significant losses in 2001, the Company assessed future cash flows and determined that goodwill was not recoverable and recorded a goodwill impairment charge of approximately $33.1 million in 2001. No goodwill impairment charge was recorded in 2002.

As a result of the Company’s analysis of fixed assets in 2001, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, the Company recorded an impairment charge of approximately $4.5 million in 2001. No fixed asset impairment charge was recorded in 2002.

Research and development expenses were $2.6 million in 2002 as compared to $2.0 million in 2001. The increase is primarily the result of increased spending on product development in 2002 through the use of outside consultants.

Interest expense was $20.9 million in 2002; a $0.3 million or 1.6% increase from 2001. This increase was primarily due to increased notes to affiliates, which carry a higher interest rate than bank debt. This was partially offset by a general decrease in bank debt interest rates.

The income tax provision in 2002 was $1.9 million in 2002, as compared to $69.9 million in 2001. As a result of losses in 2001 and cumulative losses in recent years, the Company recorded a full valuation allowance of $68.9 million for deferred tax assets in 2001. The income tax provision in 2002 relates primarily to foreign taxes.

16

2001 Fourth Quarter Charges

The following is a summary of the charges incurred by Holding and the Company in the fourth quarter of 2001 (amounts in thousands):

	River Holding		Hudson RCI
Write-off of deferred tax asset	$	11,293	$	68,881
Goodwill impairment		161,591		33,128
Impairment of fixed assets		4,712		4,469
Destruction of obsolete inventory		4,582		4,582
Write-off of uncollectible accounts receivable		2,189		2,189
Distribution center closure		930		930
Relocation of manufacturing facilities		900		900
Total fourth quarter charges	$	186,197	$	115,079

As a result of significant losses in the fourth quarter and cumulative losses in recent years, Holding and the Company have reevaluated their ability to realize the future benefit of its net deferred tax assets held in light of the historical operating losses. Accordingly, Holding and the Company recorded a full valuation allowance against its deferred tax assets of approximately $11.3 Million and $68.9 million, respectively.

As a result of significant losses in the fourth quarter, Holding and the Company have reassessed future cash flows and determined that goodwill was not recoverable. Accordingly, Holding and the Company recorded a goodwill impairment charge of approximately $161.6 million and $33.1 million, respectively.

As a result of the Company’s analysis of fixed assets in the fourth quarter, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, Holding and the Company recorded an impairment charge of approximately $4.7 million and $4.5 million, respectively.

As a result of an analysis of product lines during the fourth quarter of 2001, the Company concluded that it would no longer support a certain number of individual products, resulting in the related inventories of those products no longer having value. The Company recorded charges of $4.6 million related to the destruction of obsolete inventory resulting from this strategic decision.

The Company made a decision in the fourth quarter of 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs based on analysis of those aged customer receivables.

The Company recorded a charge of approximately $0.9 million related to the fourth quarter closure of its Atlanta distribution center. This charge primarily consisted of future rent commitments.

During fiscal 2001, the Company made a decision to relocate from its manufacturing operation in Argyle, New York to Tecate, Mexico. In addition, the Company made a decision to move certain product manufacturing from Temecula, California to Ensenada, Mexico. The Company recorded approximately $0.9 million in severance costs related to the relocations.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations and borrowings under its bank revolving facility and, historically, investments from and loans to its shareholders. Cash provided by operations totaled $18.6 million, $6.3 million and $5.6 million in 2003, 2002 and 2001, respectively. The increase from 2002 to 2003 is attributable to higher profitability offset in part by increases in inventories and decrease in accrued liabilities. The Company had operating working capital of $22.8 million and $13.1 million as of the end of 2003 and 2002, respectively. The increase in working capital was due to the refinancing of the bank revolving facility in 2003. Inventories were $23.8 million and $22.6 million as of the end of 2003 and 2002, respectively. Accounts receivable, net of allowances, were $25.1 million and $24.2 million at the end of 2003 and 2002, respectively. In 2003, 2002 and 2001, the Company recorded bad debt expense of $0.1 million, $0.8 million and $2.8 million, respectively. The average days sales in accounts receivable outstanding was approximately 49 days for 2003, compared to 46 days for

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2002 and 55 days for 2001. The Company offers 30-day credit terms to its U.S. hospital distributors. Alternate site and international customers typically receive 60 to 90 day terms and, as a result, as the Company’s alternate site and international sales have increased, the Company anticipates that the amount and aging of its accounts receivable will increase gradually over time as alternate site and international sales become a larger percentage of the Company’s total sales.

Net cash used in investing activities was $7.5 million $0.4 million and $9.0 million in 2003, 2002 and 2001, respectively and was used primarily to finance customary purchases of property, plant and equipment. In 2002, the Company sold certain land and buildings at the Temecula location, realizing a $2.3 million gain on the transaction that offset capital expenditures. Capital expenditures, consisting primarily of new manufacturing equipment purchases, computer systems purchases, production of heaters, and expansion of the Ensenada facility, totaled $7.5 million, $7.5 million and $9.0 million in 2003, 2002 and 2001, respectively.

Net cash used in financing was $9.5 million and $5.5 million in 2003 and 2002, respectively, reflecting net pay down of bank debt. Net cash provided by financing activity in 2001 was $7.3 million, reflecting net borrowings by the Company and the issuance of $3.0 million in junior preferred stock and $0.1 million in common stock.

As of December 31, 2003, the Company had outstanding $284.1 million of indebtedness, consisting of $115.0 million of 9 ¹/8% Subordinated Notes due 2008 (the “Senior Subordinated Notes”), mandatorily redeemable preferred stock of $56.5 million, borrowings of $50.3 million under the Company’s Revolving Facility, $9.7 million in interest payable to affiliates, $39.3 million in notes payable to affiliates and $13.3 million in borrowings under the bank facility of Hudson RCI AB, its Swedish subsidiary.

The following is a summary of the Company’s consolidated contractual obligations as of December 31, 2003:

(amounts in thousands)	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Long-term debt	$	284,112	$	9,178	$	8,509	$	204,869	$	61,556
Lease commitments		9,997		2,993		3,493		2,214		1,297
Total contractual obligations	$	294,109	$	12,171	$	12,002	$	207,083	$	62,853

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. The Company recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub-facilities and letters of credit. Sub-facilities under the Revolving A Facility consist of a $5.6 million five-year amortizing real estate loan, a $2.4 million three-year amortizing equipment loan, a $6.0 million amortizing 2.5-year general facility and a $5.0 million letter of credit sub-facility.

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor subsidiaries.

The Term B Facility consists of a $30.0 million non-amortizing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Term B facility is guaranteed jointly and severally by Holding and the guarantor subsidiaries.

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Required reductions in the Revolving Facility are equal to (amounts in thousands):

Year ending December 31	2004		2005		2006		2007
	$	3,680	$	3,680	$	2,080	$	40,792

Interest rates under the Revolving A Facility are based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not the Company obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

	Margin
Period and Loan Type	Base Rate	Eurodollar
Revolving A Facility
Working Capital	(0.5)%-.5%	2.0%-3.0%
Real Estate Revolver	0.5%-1.5%	3.25%-4.0%
Equipment Revolver	0.0%-1.0%	2.5%-3.5%
General Revolver	1.5%	NA
Term B Facility	11% Fixed

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test. As of December 31, 2003, the Company was in compliance with all terms and conditions of the Revolving Facility.

As of March 16, 2004 borrowings available under the Revolving Facility consisted of $10.8 million.

The Senior Subordinated Notes bear interest at the rate of 9 ¹/8%, payable semiannually on each April 15 and October 15, and will require no principal repayments until maturity in 2008. The Senior Subordinated Notes are general unsecured obligations of the Company and contain covenants that place limitations on, among other things, (i) the ability of the Company, any subsidiary guarantors and other restricted subsidiaries to incur additional debt, (ii) the making of certain restricted payments including investments, (iii) the creation of certain liens, (iv) the issuance and sale of capital stock of restricted subsidiaries, (v) asset sales, (vi) payment restrictions affecting restricted subsidiaries, (vii) transactions with affiliates, (viii) the ability of the Company and any subsidiary guarantor to incur layered debt, (ix) the ability of Holding to engage in any business or activity other than those relating to ownership of capital stock of the Company and (x) certain mergers, consolidations and transfers of assets by or involving the Company. The Company is currently in compliance with the terms and provisions of the Senior Subordinated Notes.

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As of December 31, 2003, the Company and HRC had an aggregate of $39.3 million in notes payable to the majority shareholder of Holding’s, current shareholders of the Company and certain members of management. The following table summarizes these notes (amounts in thousands):

Issue Date	Maturity Date	Interest Rate		Note Amount		Warrants Issued In Connection With Note (shares)
April 2001	March 2008	10.0	%	$	6,451	—
August 2001	March 2008	10.0			8,500	—
May 2002	March 2008	12.0			12,000	12,000
Issued by Hudson					26,951	12,000
July 1999	March 2008	12.0			2,266	—
May 2002	March 2008	12.0			8,000	8,000
December 2002	March 2008	12.0			2,100	2,100
Issued by HRC					12,366	10,100
Total				$	39,317	22,100

All warrants, including those issued in connection with HRC notes, are for the common stock of Hudson. The notes issued in April and August of 2001 have a conversion provision allowing the holder, at their demand, to exchange the notes for Company common stock at $10.00 per share.

The Notes issued by the Hudson and HRC are unsecured and rank pari passu to the Senior Subordinated Notes.

Accrued interest payable to affiliates totaled $9.8 million and $4.7 million at December 31, 2003 and 2002 respectively. Interest on the notes are not payable until the maturity date.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank Credit Facility with a new $19.2 million bank credit facility (the “HRCI AB Facility”). The total amount outstanding under this facility totaled $13.3 million as of December 31, 2003. The HRCI AB Facility, which is denominated in Swedish Krona, consists of a $9.6 million amortizing term facility, a bank overdraft facility of $6.9 million and revolving credit which provides for additional borrowings up to the total credit limit of $19.2 million, provided, however, that $6.9 million must always fall due within the agreement period of one year. Borrowings may be made in Swedish Krona or other foreign currencies as requested by Hudson AB. The HRCI AB Facility bears interest at a margin of the applicable base (determined by the bank) rate plus 1.65% (4.40 % at December 31, 2003). The HRCI AB Facility is valid for one year periods (initial expiration of September 30, 2004) and renews automatically, provided that either party can terminate with six months prior notice. The HRCI AB Facility is guaranteed by the non-guarantor subsidiaries. The HRCI AB Facility requires Hudson AB to provide periodic reporting of financial results including annual statements as well as to maintain certain convents including a minimum equity to assets ratio and minimum interest coverage ratio. As of March 16, 2004, Hudson AB was in compliance with all terms and conditions of the HRCI AB Facility and had $6.0 million available for borrowings.

In April 1998, the Company issued to Holding 300,000 shares of its Senior Preferred Stock with an aggregate liquidation preference of $30.0 million, which has terms and provisions materially similar to those of the Holding Preferred Stock described below. The Certificate of Determination of the Senior Preferred Stock was amended in October 2003 to change the date after which dividends must be paid in cash from April 15, 2004 to April 15, 2005. The amendment was approved by the required percentage of each class of shareholders required to vote thereon. The Certificate of Designation of the Holding Preferred Stock was amended in the same manner. In August 2001, the Company issued 3,000 shares of Junior Preferred Stock to Holding for cash consideration of $3.0 million. The Company’s Credit Facility prohibits the Company from paying cash dividends on its Senior Preferred Stock.

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The Holding Preferred Stock has an aggregate liquidation preference of $55.6 million at December 31, 2003 and bears interest at 11 ¹/2% per annum. Under the terms of the Holding Preferred Stock, at the election of Holding, dividends may be paid in kind on or before April 15, 2005 and thereafter must be paid in cash. The Company’s Revolving Facility prohibits Holding from paying cash dividends on its Holding Preferred Stock.

The Company believes that its sources of funding, consisting of projected positive cash flow from operating activities, the availability of additional funds under its Revolving Facility and HRCI AB Facility (totaling approximately $16.8 million at March 16, 2004), and its accumulated cash, will be sufficient to meet its current and presently anticipated needs for operating activities, investing activities, and financing activities (primarily consisting of scheduled payments on long-term debt).

RISK FACTORS

Restrictions on Ability to Pay Cash Dividends

As Holding is a holding company, its primary source of liquidity is dividends or other distributions from Hudson RCI. Holding’s only asset is its investment in Hudson RCI. The ability of Hudson RCI to pay cash dividends or make distributions to Holding when required is restricted by law or prohibited under the terms of Hudson RCI’s debt instruments, including the Revolving Facility. In addition, Holding is prohibited from paying cash dividends under the Revovling Facility until April 2005, at which time it must pay cash dividends to holders of the Holding Preferred Stock. No assurance can be made that Hudson RCI will be able to pay cash dividends to Holding when required on the Holding Preferred Stock and, thus, Holding may not be able to make payments of cash dividends to the holders of Holding Preferred Stock when required by the terms of the Holding Preferred Stock. In the event 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.

Substantial Leverage; Shareholders’ Deficit

Because Holding’s only operations are through the Company, there are no risks other than those for the Company. As such, the following discussion relates solely to the Company.

As of December 31, 2003, the Company had $284.1 million of outstanding indebtedness and a shareholders’ deficit of approximately $167.9 million. This level of indebtedness may reduce the flexibility of the Company to respond to changing business and economic conditions. In addition, subject to the restrictions in the Revolving Facility and the indenture governing the Senior Subordinated Notes (the “Indenture”), the Company may incur additional senior or other indebtedness from time to time to finance acquisitions or capital expenditures or for other general corporate purposes. See “—Liquidity and Capital Resources.” The Revolving Facility prohibits the payment of dividends by the Company to Holding to finance the payment of dividends on the Holding Preferred Stock.

The Company’s high degree of leverage may have significant consequences for the Company, including: (i) the ability of the Company to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes, if necessary, may be impaired; (ii) a substantial portion of the Company’s cash flow will be dedicated to the payment of interest and principal on its indebtedness and will not be available to the Company for its operations and future business opportunities; (iii) the covenants contained in the Indenture and the Credit Facility limit the Company’s ability to, among other things, borrow additional funds, dispose of assets or make investments and may affect the Company’s flexibility in planning for, and reacting to, changes in business conditions; (iv) indebtedness under the Credit Facility is at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; and (v) the Company’s high degree of leverage may make it more vulnerable to a downturn in its business or the economy generally or limit its ability to withstand competitive pressures. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such actions could be effected on a timely basis or on satisfactory terms or that these actions would enable the Company to continue to satisfy its capital requirements. The Company’s ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company’s future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. The terms of the Company’s indebtedness, including the Revolving Facility and the Indenture, may also prohibit the Company from taking such actions.

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Medical Cost Containment

In recent years, widespread efforts have been made in both the public and private sectors to control health care costs, including the prices of products such as those sold by the Company, in the United States and abroad. Cost containment measures have resulted in increased customer purchasing power, particularly through the increased presence of GPOs in the marketplace and increased consolidation of distributors. Health care organizations are evaluating ways in which costs can be reduced by decreasing the frequency with which a treatment, device or product is used. Cost containment has also caused a shift in the decision-making function with respect to supply acquisition from the clinician to the administrator, resulting in a greater emphasis being placed on price, as opposed to features and clinical benefits. The Company has encountered significant pricing pressure from customers and believes that it is likely that efforts by governmental and private payers to contain costs through managed care and other efforts and to reform health systems will continue and that such efforts may have an adverse effect on the pricing and demand for the Company’s products. There can be no assurance that current or future reform initiatives will not have a material adverse effect on the Company’s business, financial conditions or results of operations.

The Company’s products are sold principally to a variety of health care providers, including hospitals and alternate site providers, that receive reimbursement for the products and services they provide from various public and private third party payors, including Medicare, Medicaid and private insurance programs. As a result, while the Company does not receive payments directly from such third party payors, the demand for the Company’s products in any specific care setting is dependent in part on the reimbursement policies of the various payors in that setting. In order to be reimbursed, the products generally must be found to be reasonable and necessary for the treatment of medical conditions and must otherwise fall within the payor’s list of covered services. In light of increased controls on Medicare spending, there can be no assurance on the outcome of future coverage or payment decisions for any of the Company’s products by governmental or private payors. If providers, suppliers and other users of the Company’s products are unable to obtain sufficient reimbursement, a material adverse impact on the Company’s business, financial condition or operations may result.

The Company expects that the trend toward cost containment that has impacted the domestic market will also be experienced in international health care markets, impacting the Company’s growth in foreign countries, particularly where health care is socialized.

Industry Consolidation and Customer Concentration

Cost containment has resulted in significant consolidation within the health care industry. A substantial number of the Company’s customers, including group purchasing organizations, hospitals, national nursing home companies and national home health care agencies, have been affected by this consolidation. The acquisition of any of the Company’s significant customers could result in the loss of such customers by the Company, thereby negatively impacting its business, financial condition and results of operations. In addition, the consolidation of health care providers often results in the renegotiation of terms and in the granting of price concessions. The Company’s customer relationships, including exclusive or preferential provider relationships, are terminable at will by either party without advance notice or penalty. Because larger purchasers or groups of purchasers tend to have more leverage in negotiating prices, this trend has caused the Company to reduce prices and could have a material adverse effect on the Company’s business, financial condition or results of operations. As GPOs and integrated health care systems increase in size, each relationship represents a greater concentration of market share and the adverse consequences of losing a particular relationship increases considerably. In 2003, the Company’s seven largest group purchasing arrangements accounted for approximately 38.3% of net sales. Distributors have also consolidated in response to cost containment. For 2003, approximately 29.6% of the Company’s net sales were to two distributors, Owens & Minor Inc. and Cardinal Health, which accounted for 19.4% and 10.2%, respectively, of the Company’s net sales. The loss of the Company’s relationship with these distributors would have a material adverse effect on the Company’s business, financial condition and results of operations.

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Government Regulation

The Company and its customers and suppliers are subject to extensive federal and state regulation in the United States, as well as regulation by foreign governments. The Company cannot predict the extent to which future legislative and regulatory developments concerning practices and products for the health care industry may affect the Company. Most of the Company’s products are subject to government regulation in the United States and other countries. In the United States, the FD&C Act, and other statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, marketing, advertising and promotion of such products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Under the FD&C Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the clearance or approval of Federal and foreign governmental agencies, including the FDA, prior to marketing, distributing and manufacturing certain of those products, which can be time consuming and expensive. The Company may also need to obtain FDA clearance before modifying marketed products or making new promotional claims. Delays in receipt of or failure to receive required approvals or clearances, the loss of previously received approvals or clearances, or failures to comply with existing or future regulatory requirements in the United States or in foreign countries could have a material adverse effect on the Company’s business. Foreign sales are subject to similar requirements.

The Company is required to comply with pertinent sections of the Code of Federal Regulations, 21CFR GMP/QSR, which set forth requirements for, among other things, the Company’s manufacturing process, design control and associated record keeping, including testing and sterility. Further, the Company’s plants and operations are subject to review and inspection by state, federal and foreign governmental entities. The distribution of the Company’s products may also be subject to state regulation. The impact of FDA regulation on the Company has increased in recent years as the Company has increased its manufacturing operations. The Company’s suppliers, including contract sterilization facilities, are also subject to similar governmental requirements. There can be no assurance that changes to current regulations or additional regulations imposed by the FDA will not have an adverse impact on the Company’s business and financial condition in the future. If the FDA believes that a company is not in compliance with applicable regulations, it can institute proceedings to detain or seize products, issue a recall, impose operating restrictions, enjoin future violations and assess civil and criminal penalties against the company, its officers or its employees and can recommend criminal prosecution to the Department of Justice. Other regulatory agencies may have similar powers. In addition, product approvals could be withdrawn due to the failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing. The FDA also has the authority to issue special controls for devices manufactured by the Company. In the event that such additional special controls were issued, the Company’s products would be required to conform, which could result in significant additional expenditures for the Company.

The Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, business licenses, manufacturing practices, fire hazard control and the handling and disposal of hazardous or infectious materials or substances and emissions of air pollutants. The Company owns and leases properties, which are subject to environmental laws and regulations. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company’s business, financial condition or results of operations. In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company.

Group Purchasing Organizations

A significant portion of the Company’s sales is generated through its relationship and contracts with various GPOs and IDNs. These contracts define the terms and conditions of the relationship between the Company, the GPOs and IDNs and their affiliated hospitals, but do not commit affiliated hospitals to purchase products from the Company. The contracts are cancelable with appropriate notice by the Company, GPO or IDN. There can be no assurance that these contracts will be renewed on terms substantially similar to the expiring contracts, if at all.

In 2002, there was intense scrutiny from the United States Senate involving potential restraint-of-trade activities practiced by GPOs and IDNs, particularly as it relates to issuance of long-term and/or sole-source contracts. It has been a long-time practice of many GPOs and IDNs, including those with which the Company maintains contracts, to issue multiple-year contracts to only one vendor. There can be no assurance that such sole-source

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and/or long-term contracts will continue in the future and future regulatory decrees may require GPOs to award contracts to multiple vendors and/or contracts for shorter time periods. There can be no assurance that should sole-source and/or long-term contracts be eliminated, the Company could maintain its current level of market share with GPO and IDN affiliated hospitals.

International Sales and Foreign Operations

Sales made outside the United States represented approximately 28.9% of the Company’s 2003 net sales and the Company intends to increase international sales as a percentage of total net sales. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows and financial position of the Company, including increased regulation, extended payment periods, competition from firms with more local experience, currency exchange rate fluctuations and import and export controls. The Company has sales operations in Germany, Sweden, the United Kingdom, France and other countries where sales are made in local currency. While the Company may choose to hedge its foreign currency exposures by attempting to purchase goods and services with the proceeds from sales in local currencies where possible, and purchase forward contracts to hedge receivables denominated in foreign currency, there can be no assurance that the Company’s hedging strategies will allow the Company to successfully mitigate its foreign exchange exposures.

The Company also maintains a manufacturing and assembly facilities in Ensenada and Tecate, Mexico and an assembly and distribution facility in Kuala Lumpur, Malaysia and, as a result, is subject to operational risks such as changing labor trends, trade policies and civil unrest in those countries. In the event the Company was required to transfer its foreign operations to the United States or was otherwise unable to benefit from its lower cost foreign operations, its business, financial condition and results of operations would be adversely affected.

Product Liability

The manufacturing and marketing of medical products entails an inherent risk of product liability claims. Although the Company has not experienced any significant losses due to product liability claims and currently maintains product liability insurance coverage, there can be no assurance that the amount or scope of the coverage maintained by the Company will be adequate to protect it in the event a significant product liability claim is successfully asserted against the Company. In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company.

Dependence on Key Personnel and Management of Expanding Operations

The Company’s success, to a large extent, depends upon the continued services of its executive officers. The loss of services of any of these executive officers could materially and adversely affect the Company.

The Company’s plans to expand its business may place a significant strain on the Company’s operational and financial resources and systems. To manage its expanding operations, the Company may be required to, among other things, improve its operational, financial and management information systems. The Company may also be required to attract, train and retain additional highly qualified management, technical, sales and marketing and customer support personnel. The process of locating such personnel with the combination of skills and attributes required to implement the Company’s strategy is often lengthy. The inability to attract and retain additional qualified personnel could materially and adversely affect the Company.

Competition

The global medical supply industry is highly fragmented and characterized by intense competition. Many of the products manufactured by the Company are available from several sources and many of the Company’s customers tend to have relationships with several manufacturers. The Company’s primary competitor in the respiratory care sector is Cardinal Health (formerly Allegiance Healthcare) and its primary competitors in the anesthesia sector include Tyco, Smiths Industries Medical Systems, Inc. (“SIMS”) and Vital Signs, Inc. The Company competes on the basis of brand name, product design, quality, breadth of product line, service and price.

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Some of the Company’s competitors have greater financial and other resources than the Company and may succeed in utilizing these resources to obtain an advantage over the Company. The general trend toward cost containment in the health care industry has had the effect of increasing competition among manufacturers, as health care providers and distributors consolidate and as GPOs increase in size and importance

Acquisitions

An element of the Company’s business strategy may be to pursue strategic acquisitions that either expand or complement the Company’s business. Acquisitions involve a number of special risks, including the diversion of management’s attention to the assimilation of the operations and the assimilation and retention of the personnel of the acquired companies, and potential adverse effects on the Company’s operating results. The Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. In addition, the Credit Facility and the Indenture contain certain restrictions regarding acquisitions. The Indenture restricts acquisitions to those companies in the same line of business as the Company, and requires that all such acquired companies be designated Restricted Subsidiaries (as defined therein). The Credit Facility restricts all acquisitions. The inability of the Company to successfully finance, complete and integrate strategic acquisitions in a timely manner could have an adverse impact on the Company’s ability to effect a portion of its growth strategy.

Patents and Trademarks

The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does seek and obtain intellectual property rights on concepts, processes and trademarks when appropriate. The Company has 17 active utility patents and several design patents in the United States with the majority of the patents maintained in other countries. One patent expires in 2007, three expire in 2008 and the remaining patents expire between 2010 and 2019. The Company has over 60 well recognized and accepted registered trademarks in the United States, which are also recognized in other countries in which the Company manufactures, distributes or sells its products.

The Company’s success will depend in part on its ability to maintain its patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties and without breaching or otherwise losing rights in technology licenses obtained by the Company for other products. There can be no assurance that any patent owned by the Company will not be circumvented or challenged, that the rights granted there under will provide competitive advantages to the Company or that any of the Company’s pending or future patent applications will be issued with claims of the scope sought by the Company, if at all. If challenged, there can be no assurance that the Company’s patents (or patents under which it licenses technology) will be held valid or enforceable. In addition, there can be no assurance that the Company’s products or proprietary rights do not infringe the rights of third parties. If such infringement were established, the Company could be required to pay damages, enter into royalty or licensing agreements on onerous terms and/or be enjoined from making, using or selling the infringing product. Any of the foregoing could have a material adverse effect upon the Company’s business, financial condition or results of operations.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Because Holding’s only operations are through the Company, there are no market risks other than those disclosed by the Company. As such, the following discussion relates solely to the Company.

Quantitative Disclosures. With the continued growth in Europe, the Company has greater foreign currency exposure with respect to its international operations. Until the Company’s acquisition of Hudson RCI AB in 1999, the Company’s only international exposure was its manufacturing operation in Mexico. All sales were previously denominated in United States dollars. Currently, the Company has operations in Germany, Sweden, France the United Kingdom and other countries where sales are made in local currency. The Company may hedge its foreign currency exposures by attempting to purchase goods and services with the proceeds from sales in local currencies where possible. The Company may also purchase forward contracts to hedge receivables denominated in foreign currency that are expected to be collected and converted into another currency. However, there can be no assurance that the Company’s hedging strategies will allow the Company to successfully mitigate its foreign exchange exposures.

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The Company has additional foreign currency exposure related to financing activities in currencies other than the local currency in which it operates. Specifically, the Company is exposed to foreign currency risk related to the future financing instruments value that is denominated in foreign currencies. At December 31, 2003, the net fair value liability of financial instruments with exposure to foreign currency risk was $13.3 million. The potential loss in fair value of such financial instruments from a 10% adverse change in foreign currency exchange rates would be approximately $1.5 million.

The Company is exposed to certain market risks associated with interest rate fluctuations on its debt. All debt arrangements are entered into for purposes other than trading. The Company’s exposure to interest rate risk arises from financial instruments entered into in the normal course of business that, in some cases, relate to the Company’s acquisitions of related businesses. Certain of the Company’s financial instruments are fixed rate, short-term investments which are held to maturity. The Company’s fixed rate debt consists primarily of outstanding balances on the Senior Subordinated Notes and its variable rate debt relates to borrowings under the Revolving Facility (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”). With respect to the Company’s fixed rate debt, changes in interest rates generally affect the fair value of such debt, but do not have an impact on earnings or cash flows. Because the Company generally cannot prepay its fixed rate debt prior to maturity, interest rate risk and changes in fair value should not have a significant impact on this debt until the Company is required to refinance. With respect to variable rate debt, changes in interest rates affect earnings and cash flows, but do not impact fair value. The impact on the Company’s interest expense in the upcoming year of a one-point interest rate change on the outstanding balance of the Company’s variable rate debt would be approximately $0.3 million.

The following table presents the future principal cash flows and weighted-average interest rates expected on the Company’s existing long-term debt instruments. The fair value of the Company’s fixed rate debt is estimated based on quoted market prices.

Expected Maturity Date

(as of December 31, 2003)

	2004			2005			2006			2007			2008			There- after			Total		Fair Value
	(Dollars in thousands)
Fixed Rate Debt	$	—		$	—		$	—		$	30,000		$	164,077		$	56,480		$	250,557	$	239,057
Average Interest Rate		—	%		—	%		—	%		11.0	%		9.1	%		11.5	%
Variable Rate Debt	$	9,178		$	6,429		$	2,080		$	10,792		$	—		$	5,076		$	33,555	$	33,555
Average Interest Rate		4.7	%		4.8	%		4.9	%		4.1	%		—	%		4.4	%

Qualitative Disclosures. The Company’s primary exposure relates to (1) interest rate risk on long-term and short-term borrowings, (2) the Company’s ability to pay or refinance long-term borrowings at maturity at market rates, (3) the impact of interest rate movements on the Company’s ability to meet interest expense requirements and exceed financial covenants and (4) the impact of interest rate movements on the Company’s ability to obtain adequate financing to fund future acquisitions. The Company manages interest rate risk on its outstanding long-term and short-term debt through the use of fixed and variable rate debt. While the Company cannot predict or manage its ability to refinance existing debt or the impact interest rate movements will have on its existing debt, management evaluates the Company’s financial position on an ongoing basis.

Item 8. Financial Statements and Supplementary Data.

See the Index included at “Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.”

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

On January 25, 2002, the Company dismissed Arthur Andersen LLP (“Andersen”) as its independent accountant. Andersen provided both accounting and audit services to Holding, and was the primary consultant for the implementation of the Company’s SAP software platform.

The reports of Andersen on Holding’s financial statements for the fiscal year 2000 and prior contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

Holding’s Board of Directors approved the decision to change accountants on January 17, 2002, and the Audit Committee of the Board of Directors approved the decision to change accountants on January 25, 2002.

In connection with its audit for the fiscal year ended December 31, 2000, there have been no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference thereto in its report on the financial statements of Holding for such time periods, except as follows:

During the audit of its financial statements for the year ended December 31, 2000, Holding had a disagreement with Andersen regarding the reserves for accounts receivable (doubtful accounts and rebates) as of December 31, 2000. Andersen informed Holding of its concerns as to the methodology utilized to establish the level of these reserves as well as that inadequate support had been provided for these reserves. Upon further review and analysis by Holding, and continuing discussions with Andersen, these reserves were adjusted, and backup substantiation developed, to the satisfaction of Andersen, which issued its report on Holding’s financial statements for the year ended December 31, 2000.

Members of the Audit Committee of the Board of Directors of Holding met with Andersen to discuss these matters. Holding believes that the concerns expressed by Andersen with respect to the foregoing issue have been addressed, as evidenced by the fact that Andersen has issued an unqualified report covering Holding’s 2000 financial statements, and that Holding now has policies and procedures in place to properly establish reserve balances, and substantiation, in respect of its accounts receivable in accordance with GAAP. Holding has authorized Andersen to respond fully to the inquiries of the successor accountant concerning this matter.

During the two most recent fiscal years, except as described below, there have been no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Andersen informed the Company in a letter dated July 30, 2001 that the following material weaknesses in internal control existed during fiscal year ended December 31, 2000:

Holding did not prepare on a timely basis reconciliations for substantially all of Holding’s balance sheet accounts, and Holding’s internal process for review and approval of reconciliations was informal and inconsistent.

Holding’s support for the required reserves for accounts receivable (doubtful accounts and rebates) was initially inadequate; upon further review, adjustments required to properly state such reserves as of December 31, 2000 were material to Holding’s consolidated financial statements.

Holding’s consolidated financial statements were not prepared on a timely basis and eliminating entries were not initially well supported.

Holding had a shortage of accounting and finance personnel, and had retained accounting and finance personnel who lacked the appropriate expertise; as a result, Holding’s former Chief Financial Officer was responsible for a disproportionate amount of Holding’s financial reporting process, and the efficiency, timeliness and accuracy of Holding’s financial reporting was adversely impacted.

Members of the Audit Committee of the Board of Directors of Holding discussed these matters with Andersen. Except as described above, these conditions did not result in any disagreements or differences in opinion between Holding and Andersen. Andersen advised Holding in the July 30, 2001 letter that it understood that Holding had taken certain steps subsequent to December 31, 2000 to mitigate these material weakness conditions.

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Holding provided Andersen with a copy of the disclosures made by Holding in this report and requested that Andersen furnish Holding with a letter addressed to the SEC stating whether or not Andersen agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of such letter was filed as an exhibit to the 8-K report filed by Holding on February 1, 2002, in which Holding initially reported this change in auditors.

New Independent Auditor

On January 31, 2002, the Company engaged Deloitte & Touche LLP (“Deloitte”) as the Company’s new principal independent auditor to audit the Company’s financial statements, to replace Andersen. During the period preceding January 31, 2002, the Company had not consulted with Deloitte regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K), or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).

Item 9A. Controls and Procedures

As of the end of the period covered by this report, Holding carried out an evaluation, under the supervision and with the participation of Holding’s management, including the Holding’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Holding’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Holding’s disclosure controls and procedures are effective in timely alerting them to material information relating to Holding that is required to be included in Holding’s periodic SEC reports.

During the period covered by this report, there have been no changes to the Holding’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Holding’s internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

The following individuals are the executive officers and directors of Holding and Hudson RCI as of March 16, 2004:

Name	Age	Position
Charles A. French	61	President, Chief Executive Officer and Director
Lougene Williams	59	Senior Vice President
Patrick G. Yount	44	Vice President and Chief Financial Officer
Ola G. Magnusson	55	Senior Vice President
Jeffery D. Brown	46	Vice President, Marketing and Sales
Sam B. Goldstein	66	Acting Chief Operating Officer
Helen Hudson Lovaas	65	Director
Jon D. Ralph	39	Director
Charles P. Rullman	55	Director
Ronald P. Spogli	56	Director
Sten Gibeck	60	Director

Charles A. French is President, Chief Executive Officer and a Director of the Company and Holding. Mr. French assumed these positions with both the Company and Holding in August 2001, and was a consultant to the Company since January 2001. Prior to joining the Company, since 1989 he had been a private investor focused on healthcare and technology companies. Previously, he held senior management positions at Spectramed, Inc., Caremark, Inc. and Bentley Laboratories, Inc.

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Lougene Williams is a Senior Vice President of the Company responsible for its product development, quality assurance and manufacturing operations, having served in this capacity since January 1996, and assumed the same position with Holding after consummation of the recapitalization in April 1998. Prior to 1996, he was the Company’s Vice President, Manufacturing, having held a similar position with Respiratory Care Inc. From 1976 to 1987, he held manufacturing management positions of increasing responsibility at various manufacturing plants of The Kendall Company.

Patrick G. Yount became the Company’s and Holding’s Vice President and Chief Financial Officer in March 2001. Prior to joining the company, he held the positions of Chief Financial Officer and Chief Operating Officer of Good Source Solutions; a nationwide distributor of specialty food items, from February 1996 to September 2000. Prior to joining Good Source Solutions he held positions as a senior member of the Merchant Banking Group for Banque Paribas in the San Francisco area from 1993 to 1996.

Ola G. Magnusson is a Senior Vice President and serves as President of Hudson RCI AB in Sweden. Mr. Magnusson joined the company in July 1999 in connection with the acquisition of Louis Gibeck AB where he was the President and Chief Executive Officer since January 1996. Prior to joining Louis Gibeck AB, Mr. Magnusson held several different positions, primarily in marketing with Pharmacia, a Swedish pharmaceutical company.

Jeffery D. Brown, Vice President of Marketing and Sales, assumed this position in January 2000. From January 1997 to January 2000 Mr. Brown served as the Company’s Director of Sales. From 1993 to 1997, Mr. Brown served as National Sales Manager and from 1991 to 1993, as Regional Sales Manager. Mr. Brown has also held positions of National Account Manager from 1982 to 1991, and Territorial Sales Manager from 1980 to 1982.

Sam B. Goldstein has been involved with the Company since July 2000 and has served as Acting Chief Operating Officer since August 2001. Prior to joining the Company, Sam spent 37 years in various senior management positions (finance and operations) at Rockwell and National Semiconductor.

Helen Hudson Lovaas is a director of the Company and became a director of Holding after consummation of the recapitalization in April 1998. Mrs. Lovaas began her career at the Company in 1961. She has been Chairman since 1987, when she inherited ownership of the Company and served as Chief Executive Officer from 1987 until May 1997. Mrs. Lovaas had served previously as the Vice President of Administration of Hudson Oxygen for 15 years.

Jon D. Ralph became a director of the Company and of Holding in connection with the recapitalization in April 1998. Mr. Ralph joined Freeman Spogli in 1989 and became a Principal in January 1998. Prior to joining Freeman Spogli, Mr. Ralph spent three years at Morgan Stanley & Co. Incorporated where he served as an analyst in the Investment Banking Division. Mr. Ralph is also a director of The Pantry, Inc.

Charles P. Rullman became a director of the Company and of Holding in connection with the recapitalization in April 1998. Mr. Rullman joined Freeman Spogli as a Principal in 1995. From 1992 to 1995, Mr. Rullman was a General Partner of Westar Capital, a private equity investment firm specializing in middle-market transactions. Prior to joining Westar, Mr. Rullman spent twenty years at Bankers Trust Company and its affiliate BT Securities Corporation where he was a Managing Director and Partner. Mr. Rullman is also a director of The Pantry, Inc.

Ronald P. Spogli became a director of the Company and of Holding in connection with the recapitalization in April 1998. He is a founding Principal of Freeman Spogli, which was founded in 1983. Mr. Spogli is also a director of AFC Enterprises, Inc., Advance Auto Parts, Inc. and Gaylan’s Trading Co. Inc.

Sten Gibeck became a director of the Company and of Holding in connection with the July 1999 acquisition of Hudson RCI AB. Mr. Gibeck has been employed by Hudson RCI AB since 1965, and since July 1997 has served as its Vice President of Research and Development. From 1971 through December 1996, Mr. Gibeck served as the President of Hudson RCI AB.

Directors of the Company and Holding are elected annually and hold office until the next annual meeting of shareholders and until their successors are duly elected and qualified.

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There are no family relationships among our directors or executive officers. There are no material proceedings to which any of our directors or executive officers or any of their associates, is a party adverse to the Company or Holding or any of their subsidiaries, or has a material interest adverse to the Company or Holding, or any of their subsidiaries.

To our knowledge, none or our directors or executive officers has been convicted in a criminal proceeding during the last five years (excluding traffic violations or similar misdemeanors), and none of our directors or executive officers was a party to any judicial or administrative proceeding during the last five year (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

Code of Ethics

Holding has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, controller and persons performing similar functions. The Code of Ethics has been filed as an exhibit to this report.

Item 11. Executive Compensation

The following table sets forth the compensation for each of the fiscal years in the three-year period ended December 31, 2003 of the following persons:

• Each individual who served as the chief executive officer or acted in a similar capacity during 2003; and

• The five most highly compensated executive officers other than the chief executive officer during the year ended December 31, 2003 whose compensation exceeded $100,000.

Summary Compensation Table

	Annual Compensation
	Year	Salary		Bonus		Other Annual Compensation (1)		All Other Compensation (2)
Charles A. French (3) President and Chief Executive Officer	2003 2002 2001	$ $ $	406,538 316,923 66,923	$ $	105,000 225,000 —		—   —   —	$	12,196 —   —
Lougene Williams Senior Vice President	2003 2002 2001	$ $ $	249,327 224,723 221,751	$	78,990 —   —		—   —   —	$ $ $	7,480 6,742 10,200
Jeffery D. Brown Vice President, Marketing & Sales	2003 2002 2001	$ $ $	190,400 177,058 157,701	$	46,478 —   —		—   —   —	$ $ $	5,712 5,312 9,462
Patrick G. Yount (4) Chief Financial Officer	2003 2002 2001	$ $ $	219,477 205,961 145,385	$ $	54,065 25,000 —		—   —   —	$	6,584 —   —
Ola Magnusson Senior Vice President	2003 2002 2001	$ $ $	166,158 122,781 105,963	$ $	51,600 7,713 —	$	—   —   9,099	$ $ $	104,786 62,390 53,331
Sam B. Goldstein (5) Acting Chief Operating Officer	2003 2002 2001		—   —   —		—   —   —	$ $ $	392,906 303,250 188,750		—   —   —

(1) During 2003 and 2002, no Executive Officer named received perquisites and other personal benefits, security or property in an aggregate amount in excess of the lesser of $50,000 or 10% of the total of such officer’s salary and bonus nor did any such officer receive any restricted stock award or stock appreciation right.

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(2) Represents payments by the Company under its defined contribution pension plan for 2001 and profit sharing plan for 2002 and 2003.

(3) Charles A. French became the Company’s President and Chief Executive Officer in August 2001. The compensation amount shown for 2001 is based on a partial year of employment at an annualized salary rate of $200,000.

(4) Patrick G. Yount became the Company’s Chief Financial Officer in March 2001. His compensation shown for 2001 is based on a partial year of employment at an annualized salary rate of $210,000.

(5) Sam B. Goldstein became the Company’s Acting Chief Operating Officer in August 2001. His other annual compensation shown in 2001 is based on a partial year.

Executive Employment Agreements

In May and June 2002, the Company entered into an employment agreement with all Named Executive Officers except Ola Magnusson and Sam B. Goldstein. The Named Executive Officers receive a base salary in an amount and on substantially the same terms and conditions as was being paid by the Company on that date and an annual cash bonus in accordance with the Company’s existing incentive programs. Pursuant to the employment agreements, in the event that employment is terminated by the Company other than “for cause” (as such term is defined in the employment agreements), or if the Named Executive Officer resigns pursuant to a “qualifying resignation” (as such term is defined in the employment agreements), the Company will be required to pay the Named Executive Officer’s base salary for a period of 12 months following the termination (the “Severance Period”). The employment agreements also provide for nondisclosure of confidential information, that the Named Executive Officer shall not engage in any “prohibited activity” (as such term is defined in the employment agreements) during the term of employment and that the Named Executive Officer will refrain from interfering with the Company’s contractual relationships or soliciting the Company’s employees during the Severance Period.

In June 2000, the Company entered into an employment agreement with Ola Magnusson. With the exception of the Severance Period which is 18 months, the terms and conditions of the agreement are substantially similar to those entered into by the other Named Executive Officers.

Compensation of Directors

Directors of Holding receive no compensation as directors. Directors are reimbursed for their reasonable expenses in attending meetings.

Retirement Plans

In 2002, the Company froze its defined-contribution pension plan covering substantially all its domestic employees who are 21 years of age or older with two or more years of service. The plan was replaced by a new profit sharing plan that covers substantially all of its domestic employees who are 18 years of age or older with two or more years of service. Company contributions to the new plan will be made at the Company’s discretion. The 2002 plan year was funded with $1.0 million and the Company has provided $1.0 million for future contributions relating to the new plan in 2003.

The Company has a 401(k) plan covering substantially all of its employees who are 18 years of age or older with 30 days or more of service. Participants may contribute up to 50% of their base compensation to this plan each year, subject to certain Internal Revenue Code limitations. The plan does not require matching contributions by the Company and to date, none have been made.

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Compensation Committee Interlocks and Insider Participation

The Board of Directors of the Company determines the compensation of the executive officers. During 2003, certain members of the Board of Directors determined the compensation of the Company’s Chief Executive Officer and certain members of the Board of Directors and Mr. French determined the compensation of the Company’s other executive officers.

Stock Subscription Plans

In April 1998, Holding adopted an Employee Stock Subscription Plan and an Executive Stock Subscription Plan (collectively, the “Stock Subscription Plans”) pursuant to which executives of the Company purchased 800,000 shares of common stock of Holding valued at $10.00 per share. The Stock Subscription Plans provide for a repurchase option in favor of Holding upon termination of employment at stated repurchase prices. In addition, the Stock Subscription Plans provide for restrictions on the transferability of shares prior to the fifth anniversary of the recapitalization or the Company’s initial public offering. The shares are also subject to a right of first refusal in favor of Holding as well as obligations to sell at the request of Freeman Spogli and co-sale rights if Freeman Spogli and Affiliates sells its shares to a third party.

In 2001, the Board of Directors of the Company approved the adoption of a Stock Option Plan for eligible employees, officers and consultants of the Company. The plan allows for the issuance of up to 5,000,000 shares of Company Common Stock pursuant to the exercise of incentive stock options or non-qualified options. The exercise price of options granted under the plan shall be set at fair market value at the time of the grant as determined by the Board of Directors. As of the date of this filing, 4,300,000 options covering shares of Common Stock have been granted at an exercise price of $1.00 to $1.30 per share, of which 3,750,000 are exercisable as of March 16, 2004.

Option Grants in the Last Fiscal Year

The following table sets forth information concerning options granted to each of the Named Executive Officers during the year ended December 31, 2003:

	OPTION GRANTS IN LAST YEAR				Potential Realizable Value of Assumed Annual Rates of Stock Price Appreciation for Option Term
	Individual Grants
Name	Number of Securities Underlying Options Granted	% of Total Options Granted to Employees in Year	Exercise Price ($/Share)	Expiration Date	5% ($)	10% ($)
Lougene Williams	125,000	15.6	1.30	6/18/10	228,654	316,667
Patrick Yount	125,000	15.6	1.30	6/18/10	228,654	316,667
Jeffrey Brown	125,000	15.6	1.30	6/18/10	228,654	316,667
Ola Magnusson	125,000	15.6	1.30	6/18/10	228,654	316,667
Sam Goldstein	125,000	15.6	1.30	6/18/10	228,654	316,667

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

River Holding Corp.

The following table sets forth certain information, as of March 16, 2004, with respect to the beneficial ownership of capital stock of Holding by (i) each person who beneficially owns more than 5% of such shares, (ii) each of the Named Executive Officers, (iii) each director of Holding and (iv) all Named Executive Officers and directors of Holding as a group.

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Name of Beneficial Owner	Shares of Common Stock	Percent of Class		Shares of Holding Preferred Stock	Percent of Class		Shares of Holding Junior Preferred Stock	Percent of Class
Freeman Spogli & Co. Incorporated (1)	8,352,591	89.8	%	372,608	67.0	%	2,308	76.9	%
Ronald P. Spogli (1)
Charles P. Rullman (1)
Jon D. Ralph (1)
Sten Gibeck (2)	200,000	2.2	%	—			—
Lougene Williams (2)	100,000	1.1	%	—			—
Jeffery D. Brown (2)(3)	25,000	*		—			—
Charles A. French (2)	—	—		—			—
Patrick G. Yount (2)	—	—		—			—
Ola Magnusson (2)	—	—		—			—
Helen Hudson Lovaas (2)(4)	69,200	*					692	23.1	%
All Named Executive Officers and directors of the Company as a group (9 individuals)(5)	8,746,791	93.4	%	372,608	67.0	%	3,000	100.0	%

* Less than 1%.

(1) 1,441,251 shares, 58,749 shares and 6,621,791 shares of common stock are held of record by FS Equity Partners III, L.P. (“FSEP III”), FS Equity Partners International, L.P. (“FSEP International”) and FS Equity Partners IV, L.P. (“FSEP IV”), respectively. Includes 230,800 shares of common stock issuable upon conversion of 2,308 shares of Holding Junior Preferred Stock. As general partner of FS Capital Partners, L.P. (“FS Capital”), which is general partner of FSEP III, FS Holdings, Inc. (“FSHI”) has the sole power to vote and dispose of the shares owned by FSEP III. As general partner of FS&Co. International, L.P. (“FS&Co. International”), which is the general partner of FSEP International, FS International Holdings Limited (“FS International Holdings”) has the sole power to vote and dispose of the shares owned by FSEP International. As general partner of FSEP IV, FS Capital Partners LLC (“FS Capital LLC”) has the sole power to vote and dispose of the shares owned by FSEP IV. Messrs. Spogli and Rullman and Bradford M. Freeman, William M. Wardlaw, J. Frederick Simmons and John M. Roth are the sole directors, officers and shareholders of FSHI, FS International Holdings and Freeman Spogli & Co. Incorporated and such individuals, in addition to Mr. Ralph and Todd W. Halloran and Mark J. Doran, are the sole managing members of FS Capital LLC, and as such may be deemed to be the beneficial owners of the shares of the common stock and rights to acquire the common stock owned by FSEP III, FSEP International and FSEP IV. The business address of Freeman Spogli & Co. Incorporated, FSEP III, FSEP IV, FS Capital, FSHI, FS Capital LLC, and its sole directors, officers, shareholders and managing members is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025 and the business address of FSEP International, FS&Co. International and FS International Holdings is c/o Padget-Brown & Company, Ltd., West Winds Building, Third Floor, Grand Cayman, Cayman Islands, British West Indies.

(2) The business address of these individuals is River Holding Corp., 599 Lexington Avenue, 18th Floor, New York, New York 10022

(3) Represents shares held of record by the Brown Family Trust dated 4/21/98 of which Mr. Brown and his wife, Ellen Ann Brown, are the trustees.

(4) Includes 69,200 shares of common stock issuable upon conversion of 692 shares of Holding Junior Preferred Stock.

(5) Includes 300,000 shares of common stock issuable upon conversion of 3,000 shares of Holding Junior Preferred Stock.

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Hudson Respiratory Care Inc.

The following table sets forth certain information, as of March 16, 2004, with respect to the beneficial ownership of capital stock of the Company by (i) each person who beneficially owns more than 5% of such shares, (ii) each of the Named Executive Officers, (iii) each director of Hudson RCI and (iv) all Named Executive Officers and directors of Hudson RCI as a group.

Name of Beneficial Owner	Shares of Common Stock	Percent of Class		Shares of Senior Preferred Stock	Percent of Class		Shares of Junior Preferred Stock	Percent of Class
River Holding Corp.(1)	9,454,293	82.4	%	556,176	100	%	3,000	100	%
Jon D. Ralph(1)
Charles P. Rullman(1)
Ronald P. Spogli(1)
FS Equity Partners IV, LP (2)	21,319,200	65.6	%	—			—
Jon D. Ralph (2)
Charles P. Rullman (2)
Ronald P. Spogli (2)
Helen Hudson Lovaas (3)	3,630,800	27.2	%	—			—
Sten Gibeck(4) (5)	175,000	1.5	%	—			—
Lougene Williams (6) (7)	228,500	2.0	%	—			—
Charles A. French (6) (8)	750,000	6.3	%	—			—
Patrick G. Yount (6) (9)	230,000	2.0	%	—			—
Jeffrey D. Brown (6) (10)	227,500	2.0	%	—			—
Ola Magnusson (5) (11)	238,125	2.1	%	—			—
All Named Executive Officers and directors of the Company as a group (9 individuals)(12)	36,778,460	100.0	%	556,176	100	%	3,000	100	%

(1) Includes 300,000 shares issuable upon conversion of 3,000 shares of Junior Preferred Stock by Holding. As beneficial owner of 86.5% of the common stock of Holding, Freeman Spogli has the power to vote and dispose of the shares held by Holding. 1,441,251 shares, 58,749 shares and 6,364,648 shares of common stock of Holding is held of record by FS Equity Partners III, L.P. (“FSEP III”), FS Equity Partners International, L.P. (“FSEP International”) and FS Equity Partners IV, L.P. (“FSEP IV”), respectively. As general partner of FS Capital Partners, L.P. (“FS Capital”), which is general partner of FSEP III, FS Holdings, Inc. (“FSHI”) has the sole power to vote and dispose of the shares owned by FSEP III. As general partner of FS&Co. International, L.P. (“FS&Co. International”), which is the general partner of FSEP International, FS International Holdings Limited (“FS International Holdings”) has the sole power to vote and dispose of the shares owned by FSEP International. As general partner of FSEP IV, FS Capital Partners LLC (“FS Capital LLC”) has the sole power to vote and dispose of the shares owned by FSEP IV. Messrs. Spogli and Rullman and Bradford M. Freeman, William M. Wardlaw, J. Frederick Simmons and John M. Roth are the sole directors, officers and shareholders of FSHI, FS International Holdings and Freeman Spogli & Co. Incorporated and such individuals, in addition to Mr. Ralph and Todd W. Halloran and Mark J. Doran, are the sole managing members of FS Capital LLC, and as such may be deemed to be the beneficial owners of the shares of the common stock and rights to acquire the common stock owned by FSEP III, FSEP International and FSEP IV. The business address of Freeman Spogli & Co. Incorporated, FSEP III, FSEP IV, FS Capital, FSHI, FS Capital LLC, and its sole directors, officers, shareholders and managing members is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025 and the business address of FSEP International, FS&Co. International and FS International Holdings is c/o Padget-Brown & Company, Ltd., West Winds Building, Third Floor, Grand Cayman, Cayman Islands, British West Indies. Holding has pledged all shares of the Company’s capital stock held by it to secure its guarantee of the Company’s obligations under the Credit Facility.

(2) Includes 20,000,000 shares of common stock issuable upon exercise of a currently exercisable warrant. Includes 1,319,200 shares of common stock issuable upon conversion of senior subordinated convertible promissory notes.

(3) Represents 1,073,560 shares held of record by the Helen Lovaas Separate Property Trust U/D/T dated 7/16/97 (“Trust No. 1”) and 426,440 shares held of record by the Helen Lovaas Trust No. 2 U/D/T dated as of January 10, 2000 (“Trust No. 2”). As sole trustee of Trust No. 1, Mrs. Lovaas has the sole power to vote and dispose of the shares owned by Trust No. 1. As co-trustee of Trust No. 2, Mrs. Lovaas has shared power to vote

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and dispose of the shares owned by Trust No. 2. The address of each of Trust No. 1 and Trust No. 2 is c/o Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. Additionally includes 2,000,000 shares of common stock issuable upon exercise of a currently exercisable warrant and 130,800 shares if common stock issuable upon conversion of a senior subordinated convertible promissory note.

(4) Includes 100,000 shares of common stock issuable upon exercise of a currently exercisable warrant and 75,000 shares of common stock subject to an option exercisable within 60 days of March 14, 2003.

(5) The business address of this individual is Hudson AB, Central Vagen 1, P.O. Box 711, SE-194 27, Uplands Vasby, Sweden.

(6) The business address of these individuals is Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589.

(7) Includes 225,000 shares of common stock subject to an option exercisable within 60 days of March 14, 2003 and 3,500 shares of common stock issuable upon conversion of a senior subordinated convertible promissory note.

(8) Includes 750,000 shares of common stock subject to an option exercisable within 60 days of March 14, 2003.

(9) Includes 225,000 shares of common stock subject to an option exercisable within 60 days of March 14, 2003 and 5,000 shares of common stock issuable upon conversion of a senior subordinated convertible promissory note.

(10) Includes 225,000 shares of common stock subject to an option exercisable within 60 days of March 14, 2003 and 2,500 shares of common stock issuable upon conversion of a senior subordinated convertible promissory note.

(11) Includes 225,000 shares of common stock subject to an option exerciseable within 60 days of March 14, 2003 and 13,125 shares of common stock issuable upon conversion of a senior subordinated convertible promissory note.

(12) Includes 22,100,000 shares of common stock issuable upon exercise of a currently exercisable warrant, 300,000 shares issuable upon conversion of 3,000 shares of Junior Preferred Stock, 1,474,125 shares issuable upon conversion of Senior Subordinated promissory notes and 1,725,000 shares subject to an option exercisable within 60 days of March 14, 2003.

Equity Compensation Plan Information

The following table provides information as of March 16, 2004 with respect to the shares of the Company’s Common Stock that may be issued under the Company’s existing equity compensation plans. All of the Company’s existing plans have been approved by the Company’s shareholders.

	A	B		C
	Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A)
Equity Compensation Plans Approved by Stockholders	3,750,000	$	1.02	700,000

Item 13. Certain Relationships and Related Transactions

Shareholders’ Agreement

Helen Hudson Lovaas (the “Continuing Shareholder”) and Holding have entered into a Shareholders’ Agreement, as amended (the “Shareholders’ Agreement”). The Shareholder Agreement provides that (i) Holding and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances of the Company, (ii) in consideration for the contribution received from Holding for certain issuances of the common stock of Holding, the Company will issue equivalent shares of Company common stock to Holding, (iii) in the event of a sale of Company stock by Holding or Freeman Spogli, the Continuing Shareholder is obligated to sell all or part of her shares at the request of Holding and the Continuing Shareholder has the right to participate in such sale on a pro rata basis, (iv) the transferability of the shares is restricted for a two year period following the recapitalization and

35

provides for a right of first offer on the Continuing Shareholder’s common stock and (v) in the event the Company participates in an IPO, the Company will exchange all of the Company’s existing common stock for newly issued common stock.

Issuance of Notes to Shareholders of the Company and Holding

As a condition to the extension of credit under the Revolving A Facility and the Term B Facility, on September 30, 2003 the holders of a majority of the outstanding principal amount of Senior Subordinated Convertible Promissory Notes and Unsecured Senior Promissory Notes, shown as “Notes Payable to Affiliates” on the Company’s balance sheet, agreed to amend the notes to extend the maturity to March 31, 2008.

In connection with the acquisition of Hudson RCI AB during 1999, HRC Holdings borrowed $22.0 million under an unsecured 12% note payable to Holding’s majority stockholder, Freeman Spogli. The Note is due August 1, 2006. During 1999, the Company paid approximately $14.5 million in principal on the note. In April 2001, the Company repaid an additional $6.0 million in principal on the note. Proceeds from the repayment were then reinvested by Holding’s majority stockholder in new notes issued by the Company, as described below.

In August 2001, the Company issued approximately $13.2 million of new unsecured senior subordinated convertible notes in exchange for $5.2 million in new cash and $8.0 million in existing short-term unsecured notes to Freeman Spogli. The Company also issued an additional $1.8 million of unsecured senior subordinated convertible notes to existing shareholders and officers of the Company for cash. The notes bear interest at 10% and are due in March 2008. The interest may be paid or deferred to the due date at the option of the Company and the notes are convertible to common stock at the demand of the holder. The notes are subordinated to borrowings under the Credit Facility and rank pari-passu with the Senior Subordinated Notes.

In October 2002, HRC Holding issued an additional $2.1 million in senior unsecured notes payable to shareholders of the Company and Holding. The notes bear interest at 12% annually with interest and principal due upon maturity at December 31, 2004. A portion of the principal amount of such notes were exchanged by the shareholders for an equal principal amount of the senior unsecured notes of the Company held by Freeman Spogli. In connection with the issuance of these notes in October 2002, the Company issued warrants to purchase 2.1 million shares of the Company’s Common Stock to the holders of the senior unsecured notes.

Item 14. Principal Accounting Fees and Services

The Audit Committee regularly reviews and determines whether specific projects or expenditures with our independent auditors, Deloitte & Touche LLP and their affiliates, potentially affects their independence. The Audit Committee’s policy to pre-approve all audit and permissable non-audit services provided by Deloitte & Touche. Pre-approval is generally provided by the Audit Committee for up to one year, is detailed as to the particular service or category of services to be rendered, and is generally subject to a specific budget. The Audit Committee may also pre-approve additional services or specific engagements on a case-by-case basis. Management is required to provide quarterly updates to the Audit Committee regarding the extent of any services provided in accordance with this pre-approval, as well as the cumulative fees for all non-audit services incurred to date.

The following table sets forth the aggregate fees agreed upon by us with Deloitte & Touche for the year ended December 31, 2003 and 2002:

	2003			2002
Audit fees	$	403,275	(1)	$	370,021	(1)
Audit-related fees		10,000	(2)		64,790	(2)
Tax fees		75,000	(3)		256,307	(3)
All other fees		—			—
Total audit and non-audit fees	$	488,275		$	691,118

(1) Includes fees for professional services rendered for the audit of the Company’s annual financial statements and review of the Company’s annual report on Form 10-K for the year 2003 and 2002 and for the reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q for the first three quarters of 2003 and 2002.

36

(2) Includes fees for professional services rendered in 2003 and 2002, in connection with the Company’s retirement plans.

(3) Includes fees for professional services rendered in 2003 and 2002, in connection with tax compliance (including U.S. federal and international returns) and tax consulting.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)	Documents filed as part of this Report:
				Page
	(1)	Financial Statements
		Financial Statements are filed as part of this Form 10-K		F-1
	(2)	Financial Statement Schedules
		Report of Independent Public Accountants		F-2
		Schedule II — Valuation and Qualifying Accounts
		All other schedules have been omitted because they are not applicable, not required, or the information is included in the consolidated financial statements or notes thereto.
	(3)	Exhibits
		2.1(1)	Agreement dated May 7, 1999 between Sten Gibeck, Hudson RCI and Holding.
		2.2(1)	Agreement dated May 7, 1999 between Euroventures Nordica I B.V., Hudson RCI and Holding.
		2.3(1)	Agreement dated May 7, 1999 between Forsakrings AB Skandia and Livforsakrings AB Skandia, Hudson RCI and Holding.
		2.4(1)	Agreement dated May 7, 1999 between Maud Gibeck, Hudson RCI and Holding.
		2.5(1)	Stock Subscription Agreement dated August 4, 1999 between Sten Gibeck, Holding, FSEP III, FSEP International and FSEP IV.
		2.6(2)	Asset Purchase Agreement dated September 18, 2000 between Hudson RCI and Tyco Healthcare Group L.P.
		2.7(3)	Amendment to Asset Purchase Agreement dated September 27, 2000 between Hudson RCI and Tyco Healthcare Group L.P.
		2.8(4)	Amendment No. 2 to Asset Purchase Agreement dated October 28, 2000 between Hudson RCI and Tyco healthcare Group L.P.
		3.1	Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date.
		3.2(5)	Bylaws of Hudson RCI.
		4.1(5)	Indenture dated as of April 7, 1998 among Hudson RCI, Holding and United States Trust Company of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008 (including form of 9 1/8% Senior Note due 2008).
		4.2(5)	Exchange Indenture dated as of April 7, 1998 among Hudson RCI, Holding and United States Trust Company of New York, as Trustee, with respect to the 11 1/2% Subordinated Exchange Debentures due 2010 (including form of 11-1.2% Senior Subordinated Exchange Debenture due 2010).
		4.3(6)	First Supplemental Indenture dated as of February 25, 2003 among Hudson RCI, Holding, IH Holding LLC, Industrias Hudson S.A. de C.V, Hudson Respiratory Care Tecate de R.L. de C.V. and the Bank of New York.
		10.1(7)	Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and Wells Fargo Foothill, Inc. (“Wells Fargo”), as the Arranger and Administrative Agent.

37

10.2(7)	Stock Pledge Agreement, dated as of October 7, 2003, between Holding and Wells Fargo, as the arranger and administrative agent.
10.3(7)	Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and Wells Fargo, as the arranger and administrative agent.
10.4(7)	Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and Wells Fargo, as the arranger and administrative agent.
10.5(7)	Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.
10.6(7)	Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.
10.7(5)	Shareholders Agreement dated April 7, 1998 among Holding, The Helen Hudson Lovaas Separate Property Trust U/D/T dated July 17, 1997 (the “Hudson Trust”), FS Equity Partners III, L.P. (“FSEP III”), FS Equity Partners International, L.P. (“FSEP International”), FS Equity Partners IV, L.P. (“FSEP IV”), and Hudson RCI.
10.8(5)	Stock Subscription Agreement dated April 7, 1998 between Holding and River Acquisition Corp.
10.13(7)	General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.
10.14(8)	Amendment No. 1 to Shareholders Agreement dated April 8, 1998 among Holding, the Hudson Trust, FSEP III, FSEP IV and Hudson RCI.
10.15(9)	Tecate Facility Sub-Lease.
10.16(7)	Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and Wells Fargo, as arranger and administrative agent.
10.17(7)	Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and Wells Fargo, as arranger and administrative agent.
10.18(9)	Letter agreement dated August 17, 2001 between Hudson RCI and Charles French.
10.19(9)	Form of Stock Option Plan
10.20(9)	Form of Stock Option Agreement.
10.21(9)	Receivables Purchase Agreement dated May 14, 2002 by and between Hudson RCI and HRC Holding.
10.22(7)	Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of Wells Fargo.
10.23(7)	Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and MW Post Advisory Group, LLC (“MW Post”), as Administrative Agent.
10.24(7)	Stock Pledge Agreement, dated as of October 7, 2003, between Holding and MW Post, as the administrative agent.
10.25(7)	Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and MW Post, as the administrative agent.
10.26(10)	Form of Stock Purchase Warrant, dated May 15, 2002, issued by Hudson RCI to FSEP IV.
10.27(6)	Receivables Purchase Agreement dated October 17, 2002 by and between Hudson RCI and HRC Holding.
10.28(6)	Stock Purchase Warrant, dated October 17, 2002 issued by Hudson RCI to the Hudson Trust.
10.29(6)	Stock Purchase Warrant dated October 17, 2002 issued by Hudson RCI to Sten Gibeck.
10.30(6)	Form of Senior Subordinated Promissory Note due December 31, 2004.
10.31(6)	Investment and Exchange Agreement dated October 17, 2002 among Hudson RCI, HRC Holding, FSEP IV, the Hudson Trust and Sten Gibeck.
10.32(6)	Amendment No. 1 to Investment and Exchange Agreement dated February 6, 2003 among Hudson RCI, HRC Holding, FSEP IV, the Hudson Trust and Sten Gibeck.
10.33(7)	Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.

38

10.34(7)	Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.
10.35(7)	General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.
10.36(7)	Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and MW Post, as administrative agent.
10.37(7)	Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and MW Post, as administrative agent.
10.38(7)	Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of MW Post.
10.39(7)	Form of Unsecured Senior Promissory Note.
10.40(7)	Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by Hudson RCI in an aggregate principal amount of $12,000,000.
10.41(7)	Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by HRC Holding Inc. in an aggregate principal amount of $10,100,000.
10.42(7)	Form of Agreement to Amend as series of Senior Subordinated Convertible Promissory Notes in an aggregate principal amount of $9,951,250.
10.43(7)	Form of Agreement to Amend certain promissory notes held by FSEP IV.
10.44(11)	Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and MW Post, as the administrative agent.
10.45(6)	Employment Agreement dated June 1, 2002 between Hudson RCI and Charles A. French.
10.46(6)	Employment Agreement dated June 1, 2002 between Hudson RCI and Jeffery D. Brown.
10.47(6)	Employment Agreement dated June 1, 2002 between Hudson RCI and Lougene Williams.
10.48(6)	Employment Agreement dated June 1, 2002 between Hudson RCI and Patrick G. Yount.
10.49(6)	Employment Agreement dated June 1, 2002 between Hudson RCI and Ola G. Magnusson.
10.50(6)	Hudson Respiratory Care Inc. Management Incentive Plan Summary.
14.1	Code of Ethics.
21.1(6)	Subsidiaries of Hudson RCI.
24.1	Power of Attorney (included on the signature pages hereof).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibit designated by the same number in the Form 8-K filed by the Company on August 6, 1999 (date of earliest event: July 22, 1999) (File No. 333-56097).

(2) Incorporated by reference to the exhibit designated by number 2.1 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097).

(3) Incorporated by reference to the exhibit designated by number 2.2 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097).

39

(4) Incorporated by reference to the exhibit designated by number 2.3 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097).

(5) Incorporated by reference to the exhibit designated by the same number in the Form S-4 filed by the Company on June 5, 1998 (File No. 333-56097).

(6) Incorporated by reference to the exhibit designated by the same number in the Form 10-K filed by Holding for the fiscal year ended December 31, 2002.

(7) Incorporated by reference to the exhibit designated by the same number in the Form 10-Q filed by Holding for the quarter ended September 30, 2003.

(8) Incorporated by reference to the exhibit designated by the same number in to the Form 10-K filed by the Company for the fiscal year ended December 25, 1998.

(9) Incorporated by reference to the exhibit designated by the same number in to the Form 10-K filed by the Company for the fiscal year ended December 31, 2001.

(10) Incorporated by reference to the exhibit designated by the same number in the Form 10-Q filed by the Company for the fiscal quarter ended June 30, 2002.

(11) Incorporated by reference to the exhibit designated as number 10.26 in the form 10-Q filed by Holding for the quarter ended September 30, 2003.

(b) Current Reports on Form 8-K.

On October 9, 2003, the Company filed a Current Report on Form 8-K under Item 5, announcing the refinancing of its credit facility.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	RIVER HOLDING CORP.
Date: March 16, 2004	By:	/s/ Patrick G. Yount
		Patrick G. Yount
		Chief Financial Officer and Secretary

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick G. Yount his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in and any all capacities, to sign any and all amendments to this Report on Form 10-K and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Charles A. French Charles A. French	Chief Executive Officer and Director (Principal Executive Officer)	March 16, 2004
/s/ Patrick G. Yount Patrick G. Yount	Chief Financial Officer and Secretary (Principal Financial Officer)	March 16, 2004
/s/ Helen Hudson Lovaas Helen Hudson Lovaas	Director	March 16, 2004
/s/ Ronald P. Spogli Ronald P. Spogli	Director	March 16, 2004
/s/ Charles P. Rullman Charles P. Rullman	Director	March 16, 2004
/s/ Jon D. Ralph Jon D. Ralph	Director	March 16, 2004
/s/ Sten Gibeck Sten Gibeck	Director	March 16, 2004

S-1

Supplemental Information to be Furnished With Reports Filed Pursuant to

Section 15(d) of the Act by Registrants Which Have Not Registered Securities

Pursuant to Section 12 of the Act

No annual report or proxy material has been sent to security holders.

RIVER HOLDING CORP. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors	F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002	F-3
Consolidated Statements of Operations and Comprehensive Operations for the years ended December 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2003, 2002 and 2001	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	F-7
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of

    River Holding Corp:

We have audited the accompanying consolidated balance sheets of River Holding Corp., (a Delaware Corporation) (the “Company”) and subsidiaries as of December 31, 2003 and December 31, 2002, and the related consolidated statements of operations and comprehensive operations, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of River Holding Corp. and subsidiaries as of December 31, 2003 and December 31, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for mandatorily redeemable preferred stock as a result of adopting Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” effective July 1, 2003.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill as a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.

DELOITTE & TOUCHE LLP

Costa Mesa, California

February 23, 2004

F-2

RIVER HOLDING CORP.

CONSOLIDATED BALANCE SHEETS

ASSETS

(amounts in thousands)

	December 31, 2003		December 31, 2002
CURRENT ASSETS:
Cash	$	6,682	$	6,425
Accounts receivable, less allowance for doubtful accounts of $1,156 and $1,331 at December 31, 2003 and December 31, 2002, respectively		25,107		24,214
Inventories, net		23,829		22,624
Other current assets		2,505		1,717
Total current assets		58,123		54,980
PROPERTY, PLANT AND EQUIPMENT, net		41,154		45,769
OTHER ASSETS:
Goodwill		41,410		34,137
Deferred financing and other costs, net of accumulated amortization of $9,318 and $7,107 at December 31, 2003 and December 31, 2002, respectively		6,457		7,888
Other assets		536		729
Total other assets		48,403		42,754
Total assets	$	147,680	$	143,503

See notes to consolidated financial statements

F-3

RIVER HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ DEFICIT

(amounts in thousands, except per share amounts)

	December 31, 2003			December 31, 2002
CURRENT LIABILITIES:
Current portion of bank notes payable	$	9,178		$	13,783
Accounts payable		9,175			10,379
Accrued liabilities		16,973			17,737
Total current liabilities		35,326			41,899
INTEREST PAYABLE TO AFFILIATES		9,760			4,655
NOTES PAYABLE TO AFFILIATES		39,317			39,317
BANK NOTES PAYABLE, net of current portion		54,377			55,792
SENIOR SUBORDINATED NOTES PAYABLE		115,000			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 556 and 497 shares issued and outstanding at December 31, 2003 and December 31, 2002, respectively; liquidation preference—$55,618 and $49,735 respectively		55,147			49,189
Accrued mandatorily redeemable preferred stock dividend, payable in kind		1,333			1,192
		56,480			50,381
OTHER NON-CURRENT LIABILITIES		2,316			1,871
Total liabilities		312,576			308,915
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS’ DEFICIT:
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at December 31, 2003 and December 31, 2002, respectively		3,960			3,524
Common stock, $0.01 par value; 42,000 shares authorized; 9,114 issued and 9,069 and 9,144 outstanding at December 31, 2003 and December 31, 2002		97,848			97,848
Additional paid-in capital		881			881
Treasury stock, at cost, 75 shares at December 31, 2003 (none at December 31, 2002)		(75	)		—
Cumulative translation adjustment		7,312			2,740
Accumulated deficit		(274,822	)		(270,405	)
Total stockholders’ deficit		(164,896	)		(165,412	)
Total liabilities and stockholders’ deficit	$	147,680		$	143,503

See notes to consolidated financial statements

F-4

RIVER HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS

(amounts in thousands)

	Year Ended
	December 31, 2003			December 31, 2002			December 31, 2001
NET SALES	$	184,595		$	171,959		$	158,068
COST OF SALES		104,834			104,762			111,270
Gross Profit		79,761			67,197			46,798
OPERATING EXPENSES:
Selling		20,964			20,370			20,337
Distribution		10,177			9,174			10,588
General and administrative		19,586			17,774			24,007
Amortization of goodwill		—			—			8,570
Impairment of goodwill		—			—			161,591
Impairment of fixed assets		—			—			4,712
Research and development		3,236			2,578			2,043
Provision for bad debts		139			845			2,826
		54,102			50,711			234,674
Income (loss) from operations		25,659			16,486			(187,876	)
OTHER EXPENSES:
Interest expense		24,612			20,875			20,542
Loss (gain) on sale of assets		95			(2,945	)		681
Other, net		(359	)		(193	)		882
Loss on early extinguishment of debt		573			—			—
		24,921			17,737			22,105
Income (loss) before provision for income taxes		738			(1,251	)		(209,981	)
PROVISION FOR INCOME TAXES		1,716			1,897			12,252
Net loss	$	(978	)	$	(3,148	)	$	(222,233	)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain		4,572			2,974			453
Comprehensive income (loss)	$	3,594		$	(174	)	$	(221,780	)

See notes to consolidated financial statements

F-5

RIVER HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(In thousands)

	Junior Preferred Stock			Common Stock			Additional Paid-In Capital		Treasury Stock				Cumulative Translation Adjustment			Accumulated Deficit			Total
	Shares	Amount		Shares	Amount				Shares	Amount
BALANCE, December 31, 2000				9,134	$	97,748							$	(687	)	$	(34,134	)	$	62,927
Issuance of common stock				10		100														100
Issuance of junior preferred stock	3	$	3,000																	3,000
Pay-in-kind junior preferred stock dividends			137														(137	)		—
Foreign currency translation gain														453						453
Issued or accrued pay-in-kind preferred stock dividends																	(4,566	)		(4,566	)
Accretion of preferred stock issuance costs																	(362	)		(362	)
Net loss																	(222,233	)		(222,233	)
BALANCE, December 31, 2001	3	$	3,137	9,144	$	97,848		—	—		—		$	(234	)	$	(261,432	)	$	(160,681	)
Pay-in-kind junior preferred stock dividends			387														(387	)		—
Foreign currency translation gain														2,974						2,974
Issued or accrued pay-in-kind preferred stock dividends																	(5,315	)		(5,315	)
Accretion of preferred stock issuance costs																	(123	)		(123	)
Issuance of warrants								881												881
Net loss																	(3,148	)		(3,148	)
BALANCE, December 31, 2002	3	$	3,524	9,144	$	97,848	$	881	—		—		$	2,740		$	(270,405	)	$	(165,412	)
Pay-in-kind junior preferred stock dividends			436														(436	)		—
Foreign currency translation gain														4,572						4,572
Issued or accrued pay-in-kind preferred stock dividends																	(2,928	)		(2,928	)
Accretion of preferred stock issuance costs																	(75	)		(75	)
Treasury stock purchase									75		(75	)								(75	)
Net loss																	(978	)		(978	)
BALANCE, December 31, 2003	3	$	3,960	9,144	$	97,848	$	881	75	$	(75	)	$	7,312		$	(274,822	)	$	(164,896	)

See notes to consolidated financial statements

F-6

RIVER HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amount in thousands)

	Year Ended
	December 31, 2003			December 31, 2002			December 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		(978	)		(3,148	)		(222,233	)
Adjustments to reconcile net loss to net cash provided by operating activities–
Depreciation and amortization		12,337			11,621			14,483
Amortization of deferred financing costs and other		1,663			1,786			6,756
Accrued mandatorily redeemable preferred stock dividends, payable in-kind		3,096			—			—
Interest payable to affiliates		5,105			3,060			1,595
Loss (gain) on disposal of property and equipment		95			(2,945	)		681
Loss on early extinguishment of debt		573			—			—
Change in deferred tax asset		—			—			11,279
Provision for bad debts		139			845			2,826
Provision for inventory obsolescence		479			566			1,923
Impairment of goodwill		—			—			161,591
Impairment of fixed assets		—			—			4,712
Change in operating assets and liabilities:
Accounts receivable		327			(4,844	)		6,916
Inventories		(839	)		2,957			15,381
Other current assets		(672	)		(398	)		257
Other assets		(174	)		96			503
Accounts payable		(1,572	)		(5,165	)		(4,614	)
Accrued liabilities		(1,394	)		1,438			2,198
Other non-current liabilities		501			392			1,310
Net cash provided by operating activities		18,686			6,261			5,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(7,518	)		(7,546	)		(9,029	)
Proceeds from sales of property, plant and equipment		22			7,167			12
Net cash used in investing activities		(7,496	)		(379	)		(9,017	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank notes payable		(21,790	)		(30,877	)		(21,209	)
Proceeds from bank borrowings		13,154			3,750			20,136
Payment of capital lease obligations		(52	)		(41	)		—
Repayment of notes payable to affiliates		—			—			(8,000	)
Proceeds from notes payable to affiliates		—			22,100			14,951
Net proceeds from sale of common and junior preferred stock, net of transaction costs		—			—			3,100
Purchase of treasury stock		(75	)		—			—
Bank overdrafts		—			—			(1,245	)
Additions of deferred financing costs		(780	)		(477	)		(403	)
Net cash (used in) provided by financing activities		(9,543	)		(5,545	)		7,330
Effect of exchange rate changes on cash		(1,390	)		(997	)		(322	)
NET INCREASE (DECREASE) IN CASH		257			(660	)		3,555
CASH, beginning of period		6,425			7,085			3,530
CASH, end of period	$	6,682		$	6,425		$	7,085
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	15,305		$	16,503		$	18,856
Income taxes (primarily foreign)	$	1,315		$	2,582		$	2,315
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind	$	3,365		$	5,702		$	4,703
Capital lease obligations incurred for purchase of equipment	$	—		$	47		$	295
Issuance of warrants in connection with debt	$	—		$	881		$	—

See notes to consolidated financial statements

F-7

RIVER HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

River Holding Corp. (“Holding” or “River”), is a Delaware corporation founded to purchase and hold a majority interest in Hudson Respiratory Care Inc. (“Hudson” or the “Company”). Hudson is a manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. Holding has no operations of its own, other than its investment in the Company. The Company’s respiratory care and anesthesia product lines include such products as oxygen masks, humidification systems, small volume nebulizers, incentive breathing exercisers, endotracheal tubes, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers, such as outpatient surgery centers, long-term care facilities, physician offices and home health care agencies. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company’s products are sold to distributors and alternate site service providers throughout the United States and internationally.

Reporting Requirements

Holding is privately owned and has no class of securities registered under the Securities Act of 1934 or any publicly traded equity securities. Holding complies with Securities and Exchange Commission (“SEC”) filing requirements on a voluntary basis as required in the indenture for its senior subordinated notes.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Holding and its majority-owned subsidiaries. Intercompany account balances and transactions have been eliminated in consolidation. Holding and its majority-owned subsidiaries are collectively referred to herein as River or Holding. Hudson and its wholly-owned subsidiaries are collectively referred to herein as Hudson or the Company.

Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of approximately $1.2 million and $1.3 million at December 31, 2003 and 2002, respectively, for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Management performs periodic analyses to evaluate the net realizable value of accounts receivable. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions.

Inventories

Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market and consisted of the following (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Raw materials		5,563			5,266
Work-in-process		5,253			4,983
Finished goods		14,286			13,926
		25,102			24,175
Provision for obsolescence		(1,273	)		(1,551	)
	$	23,829		$	22,624

F-8

Raw materials principally consist of bulk resins. Work-in-process and finished goods include raw materials, labor and overhead costs. Certain finished goods are purchased for resale and are not manufactured. Holding considers deterioration, obsolescence and historical trends in evaluating net realizable value of inventory.

Internal Software Development Costs

Holding capitalizes costs incurred to develop internal-use computer software in accordance with Statement of Position (“SOP”) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Such costs are amortized on a straight-line basis over the economic useful lives of the software, which range from three to five years. Holding applies the provisions of SOP 98-1 in assessing any potential impairment of its capitalized software costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major replacements are capitalized while maintenance costs and repairs are expensed in the year incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or term of the related lease, if shorter. Estimated useful lives range from 3 to 7 years for furniture and fixtures; 3 to 7 years for machinery, equipment and purchased software; and 31.5 years for buildings. Total depreciation expense related to property, plant and equipment including depreciation for heaters was $12.3 million, $11.6 million and $11.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Included in property, plant and equipment are heaters used at customer locations typically on a no-charge lease basis. The heaters support the sale of disposable products used in conjunction with the heaters and are depreciated over a 3 to 5 year life. The net book value of heaters was $6.7 million and $6.9 million as of December 31, 2003 and 2002, respectively.

Impairment of Long-Lived Assets

Holding reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to fair value and an impairment loss will be recognized.

Goodwill

Holding adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002 and discontinued amortization of goodwill and other intangible assets except those with finite lives. Prior to January 1, 2002, goodwill and other intangible assets were amortized under a straight-line method over their estimated useful lives. The following table presents the effects on previously reported net loss if Holding had adopted the non-amortization provisions of SFAS 142 as of the beginning of each periods (amounts in thousands):

	For the Year Ended December 31,
	2003			2002			2001
Reported net loss	$	(978	)	$	(3,148	)	$	(222,233	)
Add back: goodwill amortization		—			—			8,570
Adjusted net loss	$	(978	)	$	(3,148	)	$	(213,663	)

SFAS 142 provides that goodwill and other intangible assets with indefinite lives is no longer amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. Holding’s goodwill impairment test is conducted at a “reporting unit” level and compares each reporting unit’s fair value to its carrying value. Holding has defined its reporting units as; guarantor, primarily

F-9

United States, and non-guarantor, primarily international. The non-guarantor subsidiaries consist principally of Hudson AB and subsidiaries (whose operations are principally international). The measurement of fair value for each region is based on an evaluation of future discounted cash flows and is further tested using a multiple of earnings approach. Holding’s tests in 2003 and 2002 indicated that no impairment existed and, accordingly, no loss was recognized. At December 31, 2003 Holding completed its annual impairment test, which yielded similar results with no goodwill impairment indicated at any of Holding’s reporting units.

In the fourth quarter of 2001, as a result of significant losses from operations, Holding reassessed future cash flows and operating results and recorded a goodwill impairment charge of approximately $161.6 million.

The change in the goodwill amount for 2003 and 2002 was solely attributable to changes in foreign currency exchange rates.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ deficit except those resulting from investments by, and distributions to, stockholders. Accordingly, Holding’s comprehensive income includes net income (loss) and foreign currency adjustments that arise from the translation of Holding’s foreign financial statements into U.S. dollars. The cumulative translation adjustment is included in the accompanying consolidated statements of stockholders’ deficit.

Revenue Recognition

Holding recognizes revenue net of reserves when product is shipped and title passes to the customer as the earnings process is substantially complete at that time. Holding establishes reserves for sales returns for shipping errors or damaged goods, rebates and other allowances based on historical experience. Holding sells its products to its distributors based on a listed price. Distributors charge the service providers, or the distributor’s end customers, a contract price (which is determined by their group purchasing organization affiliation or individual contract price) plus a service margin. As is customary within the industry, Holding rebates the difference between the list price and the specific contract price to the distributor. Holding records revenue and receivables net of rebatable amounts, based on historical experience. In the event no rebate is payable, the rebate amount is reversed and recognized as revenue.

Advertising Costs

All advertising costs incurred by the Company are expensed in the period in which they were incurred.

Income Taxes

Holding applies the asset and liability method in recording income taxes, under which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally, deferred tax assets are evaluated for recoverability and a valuation allowance is established to appropriately reduce such assets to that amount which will more likely than not be realized.

Foreign Currency Translation

Holding uses the local currency of its foreign operating subsidiaries as the functional currency for such subsidiaries. Accordingly, all assets and liabilities at Holding’s subsidiaries located outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The resulting translation gains and losses are recorded as other comprehensive income (loss) in cumulative translation adjustment in the accompanying consolidated financial statements.

F-10

Concentration of Credit Risk

Holding sells its products primarily to customers in the United States and Europe. Historically, Holding has not experienced significant losses related to trade receivables from concentrations of individual customers or from groups of customers in any geographic area. Holding has three customers that collectively accounted for 39.4%, 39.3% and 30.5% of 2003, 2002 and 2001 net sales, respectively, and 33.0%, 31.8% and 35.6% of net receivables at December 31, 2003, 2002 and 2001, respectively. To the extent Holding loses one of its significant customers, the impact on Holding could be material.

Financial instruments that potentially subject Holding to significant concentrations of credit risk consist principally of cash and accounts receivable. Holding places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution.

Fair Value of Financial Instruments

The fair value of long-term debt is determined based on quoted market prices for issues listed on exchanges. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short maturity.

Use of 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.

Stock-Based Compensation

Holding accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Holding has adopted the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” No stock-based employee compensation expense is recognized in net income for any of the years presented. Had compensation expense for Holding’s stock-based compensation awards been recognized based on the fair value recognition provisions of SFAS 123, Holding’s net loss would have been adjusted to the pro forma amounts indicated below. See “Note 8 Deferred Compensation and Benefit Plans.”

	Year Ended December 31,
	2003			2002			2001
Net loss, as reported	$	(978	)	$	(3,148	)	$	(222,233	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards		(369	)		(40	)		—
Pro forma net loss	$	(1,347	)	$	(3,188	)	$	(222,233	)

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 updates and clarifies existing accounting pronouncements related to gains and losses from extinguishment of debt and requires that certain lease modifications be accounted for in the same manner as sale-leaseback transactions. Holding has adopted the provisions of SFAS 145 as of January 1, 2003. The adoption of this statement did not have a material impact on Holding’s consolidated financial statements.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which

F-11

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 EITF 94-3, a liability for an exit cost 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 adopted the provisions of SFAS 146 for exit and disposal activities effective January 1, 2003, as required. Such adoption did not have a material impact to the Holding’s consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”, which is being superseded. Holding adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002 and the recognition provisions effective January 1, 2003, as required. Such adoption did not have a material impact to Holding’s consolidated financial statements.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” an amendment of SFAS 123 “Accounting for Stock-Based Compensation.” SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. Holding has complied with the expanded financial statement disclosure requirements in its consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51. FIN 46 requires that a company consolidate variable interest entities if that company is subject to a majority of the risk of loss from the entity’s activities or the company receives a majority of the entity’s residual returns. FIN 46 also requires certain disclosure about variable interest entities in which the company has a significant interest, regardless of whether consolidation is required. The Company adopted the provisions of FIN 46 effective February 1, 2003, as required, and such adoption did not have a material impact on the Company’s consolidated financial statements since the Company currently has no variable interest entities. In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003, which among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004 with the exception of Special Purpose Entities (SPE’s). The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending December 15, 2003. Holding adopted the provisions of FIN 46R effective January 1, 2004 and such adoption did not have a material impact on Holding’s consolidated financial statements since Holding has no SPE’s.

In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends SFAS 133 for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS 149: (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, and (4) amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied prospectively. The adoption of SFAS 149 did not have a material impact on Holding’s consolidated financial statements.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS

F-12

150 is effective for financial instruments entered into or modified after May 31, 2003, and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. Holding adopted this standard as of July 1, 2003, and has classified its mandatorily redeemable preferred stock as a liability. From July 1, 2003 to December 31, 2003 Holding recorded $3.1 million in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.

In November 2003, FASB issued FASB Staff Position No. 150-3 (“FSS 150-3”), which deferred the effective dates for applying certain provisions of SFAS 150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies. For public entities, SFAS 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. For mandatorily redeemable non-controlling interests that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS 150 are deferred indefinitely. The measurement provisions of SFAS 150 are also deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 4, 2003. For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period.

Reclassifications

Certain amounts in prior periods have been reclassified to conform with the presentation in the current period.

3. Detail of Selected Balance Sheet Accounts

Property, Plant and Equipment

The following is a summary of property, plant and equipment (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Land	$	2,323		$	2,323
Buildings		7,457			6,800
Leasehold improvements		2,151			1,905
Machinery, equipment and purchased software		69,616			67,036
Furniture and fixtures		1,802			1,640
		83,349			79,704
Less — Accumulated depreciation and amortization		(44,508	)		(35,865	)
		38,841			43,839
Construction in process		2,313			1,930
Property, plant and equipment, net	$	41,154		$	45,769

Accrued Liabilities

Accrued liabilities consisted of the following (amounts in thousands):

	As of
	December 31, 2003		December 31, 2002
Payroll and related	$	7,895	$	5,917
Interest		2,269		2,498
Closure of manufacturing facility		176		1,829
Vacation		1,841		1,642
Taxes		158		423
Profit Sharing Plan		1,102		1,120
Medical self-insurance		1,068		1,160
GPO fees		650		1,473
Insurance		389		316
Freight		591		579
Other		834		780
	$	16,973	$	17,737

F-13

4. Long-Term Debt

Holding’s long-term debt obligations consist of the following (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Bank notes payable:
Revolving A facility	$	20,232		$	—
Term B facility		30,000			—
HRCI AB Facility		13,323			14,025
Revolving Credit Facility		—			49,300
Term Credit Facility		—			6,250
Interest payable to affiliates		9,760			4,655
Notes payable to affiliates		39,317			39,317
Senior subordinated notes payable		115,000			115,000
Mandatorily redeemable preferred stock		56,480			50,381
		284,112			278,928
Less—current portion		(9,178	)		(13,783	)
Long-term debt	$	274,934		$	265,145

Bank Notes Payable

On October 7, 2003, Holding refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. Holding recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving A Facility consist of a $5.6 million five year amortizing real estate loan, a $2.4 million three year amortizing equipment loan, a $6.0 million amortizing 2.5 year general facility and a $5.0 million letter of credit sub-facility.

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and the Company’s guarantor subsidiaries.

The Term B Facility consists of a $30.0 million non-amortizing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of Holding and all of the shares held by the Company’s guarantor subsidiaries. The Term B facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings (“HRC”), a wholly owned subsidiary.

Required reductions in Revolving Facility are equal to (amounts in thousands):

Year ending December 31	2004		2005		2006		2007
	$	3,680	$	3,680	$	2,080	$	40,792

F-14

Interest rates under the Revolving A Facility are based, at the option of Holding, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not Holding obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

	Margin
Period and Loan Type	Base Rate	Eurodollar
Revolving A Facility
Working Capital	(0.5)%-.5%	2.0%-3.0%
Real Estate Revolver	0.5%-1.5%	3.25%-4.0%
Equipment Revolver	0.0%-1.0%	2.5%-3.5%
General Revolver	1.5%	NA
Term B Facility	11% Fixed

The following summarizes interest rate data on the Revolving Facility:

	December 31, 2003
Revolving A Facility rate	4.55	%
Term B Facility rate	11.0	%

The following summarizes interest rate data on the Credit Facility:

	December 31, 2002
Revolving credit facility rate	5.938	%
Term credit facility rate	5.938 to 6.625	%

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. Holding is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test. As of December 31, 2003, Holding was in compliance with all terms and conditions of the Revolving Facility.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank Credit Facility with a new $19.2 million bank Credit Facility (the “HRCI AB Facility”). Outstanding under this facility totaled $13.3 million as of December 31, 2003. The HRCI AB Facility, which is denominated in Swedish Krona, consists of a $9.6 million amortizing term facility, a bank overdraft facility of $6.9 million and revolving credit which provides for additional borrowings up to the total credit limit of $19.2 million, provided, however, that $6.9 million must always fall due within the agreement period of one year. Borrowings may be made in Swedish Krona or other foreign currencies as requested by Hudson AB. The HRCI AB Facility bears interest at a margin of the applicable base (determined by the bank) rate plus 1.65% (4.40 % at December 31, 2003). The HRCI AB Facility is valid for one year periods (initial expiration of September 30, 2004) and renews automatically, provided that either party can terminate with six months prior notice. The HRCI AB Facility is guaranteed by the non-guarantor subsidiaries, see “Note 9 Geographic, Major Customer and Segment Information.” The facility requires Hudson AB to provide periodic reporting of financial results including annual statements as well as to maintain certain covenants including a minimum equity to assets ratio and minimum interest coverage ratio. As of December 31, 2003, Hudson AB was in compliance with all terms and conditions of the HRCI AB Facility.

F-15

At December 31, 2003 and 2002, borrowings under the HRCI AB Facility equaled $13.3 million and $14.0 million, respectively.

The interest rate on the HRCI AB Facility as of December 31, 2003 and 2002 was 4.40% and 6.66%, respectively.

The following summarizes future principal amounts payable on all of Holding’s debt as of December 31, 2003 (amounts in thousands):

2004	$	9,178
2005		6,429
2006		2,080
2007		40,792
2008		164,077
Thereafter		61,556
	$	284,112

Notes Payable to Affiliates

As of December 31, 2003, the Company and HRC had an aggregate of $39.3 million in notes payable to the majority shareholder of Holding’s, current shareholders of the Company and certain members of management. The following table summarizes these notes (amounts in thousands):

Issue Date	Maturity Date	Interest Rate		Note Amount		Warrants Issued In Connection With Note (shares)
April 2001	March 2008	10.0	%	$	6,451	—
August 2001	March 2008	10.0			8,500	—
May 2002	March 2008	12.0			12,000	12,000
Issued by Hudson					26,951	12,000
July 1999	March 2008	12.0			2,266	—
May 2002	March 2008	12.0			8,000	8,000
December 2002	March 2008	12.0			2,100	2,100
Issued by HRC					12,366	10,100
Total				$	39,317	22,100

All warrants, see “Note 10 Additional Paid In Capital,” including those issued in connection with HRC notes, are for the common stock of Hudson. The notes issued in April and August of 2001 have a conversion provision allowing the holder, at their demand, to exchange the notes for Company common stock at $10.00 per share.

The Notes issued by the Hudson and HRC are unsecured and rank pari passu to the Senior Subordinated Notes.

Accrued interest payable to affiliates totaled $9.8 million and $4.7 million at December 31, 2003, and 2002, respectively. Interest on the notes are not payable until the maturity date.

As of December 31, 2003 the fair value of the notes to affiliates approximates their face value.

F-16

Senior Subordinated Notes Payable

The Company has $115.0 million of senior subordinated notes (the “Notes”). The Notes are fully transferable and are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt, as defined, of the Company. The Notes bear interest at a rate equal to 9 ¹/8% per annum from the date of issuance of the Notes. Interest is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1998. The Notes mature on April 15, 2008 and will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003 at a redemption price of 100.0% to 104.6% of face value depending on the date of the redemption. The Notes are guaranteed jointly and severally by Hudson and its Mexican subsidiaries.

The fair value of the Company’s senior subordinated notes at December 31, 2003 and 2002 was approximately $103.5 million and $61.0 million, respectively. The fair value is estimated based on the quoted market prices for issues listed on exchanges and is not intended to, and does not, represent the underlying fair value of the Company.

Mandatorily Redeemable Preferred Stock

In connection with a recapitalization of the Company in April 1998, Holding issued 300,000 shares of mandatorily redeemable 11 ¹/2% senior exchangeable pay-in-kind (“PIK”) preferred stock due 2010. The liquidation preference of each share of Preferred Stock is $100 (the “Liquidation Preference”) plus unpaid dividends. Net proceeds from the issuance were $29.0 million. Accordingly, Holding is accreting the original issuance costs of $1,000,000 over a 10-year period to current redemption value on the consolidated financial statements through a charge to interest expense, effective July 1, 2003 (previously through a charge to accumulated deficit). As of December 31, 2003 and 2002, Holding had accreted to PIK preferred stock $529,000 and $450,000, respectively, of the issuance costs. The preferred stock is exchangeable for subsequent offerings of Company preferred stock or subordinated notes. Dividends are payable semi-annually in arrears on April 15 and October 15 each year. Dividends will be payable in cash, as amended, except on dividend payment dates occurring on or prior to April 15, 2005, for which Holding has the option to issue additional shares of preferred stock (excluding fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. As of December 31, 2003 556,179 shares have been issued. The stock is mandatorily redeemable on April 15, 2010 at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends. The preferred stock ranks junior in right of payment to all debt obligations of Holding and its subsidiaries.

At December 31, 2003 the redemption amount was $56.9 million, of which $55.6 million relates to issued shares and $1.3 million to accrued but not issued shares. The maximum amount Holding will pay on April 15, 2010, the mandatory redemption date will be $115.0 million and will be accreted at a rate per annum of 11 ½% with dividends being paid in kind and not in cash.

5. Commitments and Contingencies

Holding has capital and operating leases for certain facilities, automobiles and office equipment under non-cancelable leases, with the majority of the automobile leases having a term of one year with annual renewal provisions. Rental expense for the years ended December 31, 2003, 2002 and 2001 amounted to $4.2 million, $3.1 million and $4.7 million, respectively.

The following is a schedule, by year, of the future minimum payments under capital and operating leases, together with the present value of the net minimum payments as of December 31, 2003 (amounts in thousands). Capital lease amounts are included in other non-current liabilities on the accompanying consolidated balance sheet:

	Capital Leases		Operating Leases
Year ending December 31,
2004	$	71	$	2,993
2005		71		2,370
2006		12		1,123
2007		10		1,119
2008		—		1,095
Thereafter		—		1,297
Total minimum lease payments		164	$	9,997
Less amount representing interest		27
Total present value of minimum payment		137
Less current portion of such obligations		52
Long-term obligations with interest rate of 11.0%	$	85

F-17

Assets recorded under capital leases as of December 31, 2003 and 2002 are as follows (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Machinery and equipment	$	267		$	267
Less accumulated depreciation		(102	)		(64	)
Net assets recorded under capital leases	$	165		$	203

Self-Insurance

Holding self-insures the majority of its medical benefit programs and workers’ compensation whereby Holding directly assumes the liability for employee medical and dental claims presented, subject to per-claim and aggregate maximums. Reserves for medical claim losses (including retiree benefits) totaling approximately $1.1 million and $1.2 million at December 31, 2003 and 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheets. Holding maintains excess coverage on an aggregate claim basis. Effective November 1, 2001, Holding became self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $0.8 million and $0.4 million at December 31, 2003 and 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheets. Holding maintains excess coverage on an individual and aggregate claim basis. A third-party administrator processes all employee medical claims and requires Holding to collateralize a portion of its potential payment liability through the use of standby letters of credit. The standby letters of credit are issued for one-year periods with automatic annual extensions until such time the third-party administrator determines all outstanding claims for the policy period have been paid. As of December 31, 2003, Holding had issued two such standby letters of credit totaling approximately $1.2 million.

Legal

Holding is not party to any material lawsuits or other proceedings. While the results of Holding’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities arising from settlement or loss, if any, will have a material adverse effect on the financial position or results of operations of Holding.

Guarantees

Holding has issued a standby letter of credit totaling $0.1 million in support of an operating lease obligation. The letter of credit expires on September 24, 2004.

From time to time Holding enters into certain types of contracts that contingently require Holding to indemnify parties against third party claims. These contracts primarily relate to (i) certain real estate leases, under which Holding may be required to indemnify property owners for environmental or other liabilities and other claims arising from Holding’s use of the applicable premises; and (ii) certain agreements with Holding’s officers, directors and employees, under which Holding may be required to indemnify such persons for liabilities arising out of their employment relationships.

F-18

The terms of such obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on Holding’s consolidated balance sheets for the periods presented.

6. Junior Preferred Stock

In August 2001, Holding issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”) to existing shareholders of Holding for cash consideration of $3.0 million. Each share of the Junior Preferred Stock may be redeemed from time to time, in whole or in part, at the option of Holding at the 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. Each share of Junior Convertible Cumulative Preferred Stock is convertible, without any additional consideration by the holder thereof and at the option of the holder thereof, at any time after the date of issuance such shares into such number of fully paid and nonassessable shares of Company common stock as determined by dividing $1,000 by the conversion price in effect at the time of conversion. In addition, each holder of Junior Preferred Stock shall also receive in respect of each share converted all accrued and unpaid dividends on such share payable at the election of the holder, either (i) in a number of shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the conversion price in effect at the time of the conversion or (ii) in cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock. The initial conversion price at which the shares of common stock shall be deliverable upon conversion shall be $10.00 per share and shall be subject to adjustments for stock splits, stock or other dividends, combinations of stocks, mergers and reorganizations.

7. Income Taxes

Holding’s income (loss) before income tax provision was subject to taxes in the following jurisdictions for the following periods (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002			December 31, 2001
United States	$	(3,380	)	$	(5,775	)	$	(199,973	)
Foreign		4,118			4,524			(10,008	)
	$	738		$	(1,251	)	$	(209,981	)

The components of the deferred tax asset are (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Basis differences arising from Section 338(h)(10) election	$	53,480		$	59,031
Net operating loss carryforwards		53,670			47,171
Fixed assets		889			(717	)
Other		(1,536	)		979
		106,503			106,464
Valuation allowance		(106,503	)		(106,464	)
	$	—		$	—

As of December 31, 2003 and 2002, Holding had net deferred tax assets before any valuation allowance of $106.5 million. This asset relates primarily to basis differences in goodwill and net operating loss carryforwards for tax purposes. As of December 31, 2003, Holding had federal and state net operating loss carryforwards of approximately $128.8 million and $78.8 million, which begin to expire in 2018 and 2004, respectively.

F-19

Under SFAS 109, “Accounting for Income Taxes,” Holding is required to place a valuation allowance against any deferred tax assets unless it is more likely than not that the asset will be realized. In accordance with this standard, Holding has placed a valuation allowance against its deferred tax assets of approximately $106.5 million as of December 31, 2003.

The reconciliation of the actual tax expense to tax computed at the statutory federal (amounts in thousands):

	As of
	December 31, 2003		December 31, 2002			December 31, 2001
Income taxes at statutory rate	$	251	$	(426	)	$	(71,394	)
Other.		173		31			1,310
Foreign taxes		511		(484	)		4,478
Valuation allowance		781		2,776			74,224
State income taxes net of federal effect		—		—			3,634
Income tax expense	$	1,716	$	1,897		$	12,252

The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consists of the following (amounts in thousands):

	Year 2003
	United States		Foreign		Total
Current	$	—	$	1,716	$	1,716
Deferred		—		—		—
	$	—	$	1,716	$	1,716
	Year 2002
	United States		Foreign		Total
Current	$	—	$	1,662	$	1,662
Deferred		235		—		235
	$	235	$	1,662	$	1,897
	Year 2001
	United States		Foreign		Total
Current	$	—	$	959	$	959
Deferred		68,895		—		68,895
	$	68,895	$	959	$	69,854

8. Deferred Compensation and Benefit Plans

Profit Sharing and 401(k) Plans

In 2002, the Company froze its defined-contribution pension plan covering substantially all its domestic employees who are 21 years of age with two or more years of service. The plan was replaced by a new profit sharing plan that covers substantially all of its domestic employees who are 18 years of age with two or more years of service. Company contributions to the new plan will be made at the Company’s discretion. The 2002 plan year was funded with $1.0 million and the Company has provided $1.0 million for future contributions relating to the new plan in 2003.

The Company has a 401(k) plan covering substantially all of its employees who are 18 years of age with 30 days or more of service. Participants may contribute up to 50% of their base compensation to this plan, subject to certain Internal Revenue Code limitations, each year. The plan does not require matching contributions by the Company and to date, none have been made.

F-20

Deferred Compensation

The Company maintains a deferred compensation plan for certain key employees. As of December 31, 2003 no material amount of compensation has been deferred.

Stock Subscription Plans

In April 1998, Holding adopted an Employee Stock Subscription Plan and an Executive Stock Subscription Plan (collectively, the “Stock Subscription Plans”) pursuant to which executives of the Company purchased 800,000 shares of common stock of Holding valued at $10.00 per share. The Stock Subscription Plans provide for a repurchase option in favor of Holding upon termination of employment at stated repurchase prices. In addition, the Stock Subscription Plans provide for restrictions on the transferability of shares prior to the fifth anniversary of the recapitalization or Hudson’s initial public offering (IPO). The shares are also subject to a right of first refusal in favor of Holding, as well as obligations to sell at the request of Freeman Spogli (Holding’s majority shareholder) and co-sale rights if Freeman Spogli sells its shares to a third party. No additional shares of Holding common stock were sold under the Stock Subscription Plans in 2003 or 2002.

Shareholder Agreement

Helen Hudson Lovaas (the “Continuing Shareholder”) and Holding have entered into a Shareholders’ Agreement, as amended (the “Shareholders’ Agreement”). The Shareholder Agreement provides that (i) Holding and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances of the Company, (ii) in consideration for the contribution received from Holding for certain issuances of the common stock of Holding, the Company will issue equivalent shares of Company common stock to Holding, (iii) in the event of a sale of Company stock by Holding or Freeman Spogli, the Continuing Shareholder is obligated to sell all or part of her shares at the request of Holding and the Continuing Shareholder has the right to participate in such sale on a pro rata basis, (iv) the transferability of the shares is restricted for a two year period following the recapitalization and provides for a right of first offer on the Continuing Shareholder’s common stock and (v) in the event the Company participates in an IPO, the Company will exchange all of the Company’s existing common stock for newly issued common stock.

2001 Non-Qualified Stock Option Plan

In 2001, the Board of Directors of the Company approved adoption of a Stock Option plan for eligible employees, officers and consultants of the Company. The plan reserves for the issuance of up to 5,000,000 shares of Company common stock in the form of unqualified or incentive stock options. The Board of Directors shall determine the exercise price, which shall not be less than 100% and 85% of fair market value of the underlying stock for incentive and non-statutory options, respectively, on the date of grant. The option term and vesting periods will also be determined by the Board of Directors on the date of grant. A summary of the stock option activity for the year ended December 31, 2003 and 2002 is as follows:

	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2001	—		$	—
Options issued	3,550,000			1.00
Options cancelled	(50,000	)		1.00
Options exercised	—			—
Options outstanding at December 31, 2002	3,500,000		$	1.00
Options exercisable at December 31, 2002	2,625,000		$	1.00
Weighted average remaining life (years)	3.25
Options issued	800,000			1.30
Options cancelled	—			—
Options exercised	—			—
Options outstanding at December 31, 2003	4,300,000		$	1.02
Options exercisable at December 31, 2003	3,750,000		$	1.02
Weighted average remaining life (years)	3.03

F-21

For purposes of the pro forma disclosure presented in Note 2, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.00% and 2.83%, respectively; dividend yield of 0% for all years; expected lives of 3 years in 2003 and 4 years for 2002 and volatility of 50% for both years. See “Note 2 - Summary of Significant Accounting Policies - Stock-based Compensation.”

Retiree Medical Benefits

Six retirees were provided continued medical benefits under the Company’s existing medical benefits program. Based on the estimated obligations, a reserve of $0.3 million was recorded as of December 31, 2003 and 2002. As of January 1, 2003, the plan was frozen and no future retirees will participate in the plan.

9. Geographic, Major Customer and Segment Information

Holding presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. Holding has two operating segments: guarantor, primarily the United States and non-guarantor, primarily international. The non-guarantor subsidiaries consist principally of Hudson 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.

Holding sells respiratory care and anesthesia products to distributors and medical facilities throughout the United States and internationally. Operating results of Holding’s various product groups have been aggregated because of their common characteristics and their reliance on shared operating functions. Holding operates primarily in the United States and in Europe. During 2003, 2002 and 2001, Holding had foreign sales of approximately $53.4 million, $46.8 million and $40.8 million, respectively. International sales represented approximately 28.9%, 27.2% and 25.8% of total sales in 2003, 2002 and 2001, respectively.

Holding’s sales and percentage of sales by geographic region for the years ending December 31, 2003, 2002 and 2001 is as follows (amounts in thousands):

	Year Ended
	December 31, 2003				December 31, 2002				December 31, 2001
United States	$	131,182	71.1	%	$	125,141	72.8	%	$	117,483	74.3	%
Europe		30,174	16.3			24,595	14.3			19,982	12.7
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)		13,705	7.4			12,273	7.1			11,530	7.3
Canada		2,500	1.4			2,432	1.4			2,109	1.3
Other international		7,034	3.8			7,518	4.4			6,964	4.4
	$	184,595	100.0	%	$	171,959	100.0	%	$	158,068	100.0	%

F-22

Holding’s sales and percentage of sales by product group for the years ending December 31, 2003, 2002 and 2001 are as follows (amounts in thousands):

	Year Ended
	December 31, 2003				December 31, 2002				December 31, 2001
Oxygen Therapy	$	54,271	29.4	%	$	55,199	32.1	%	$	51,530	32.6	%
Airway Management		47,072	25.5			48,320	28.1			46,156	29.2
Humidification		44,857	24.3			40,410	23.5			34,143	21.6
Aerosol Therapy		38,396	20.8			28,029	16.3			26,239	16.6
	$	184,595	100.0	%	$	171,959	100.0	%	$	158,068	100.0	%

The following summarizes the net book value of fixed assets at the respective locations as of December 31, 2003 and 2002 (amounts in thousands):

	As of
	December 31, 2003		December 31, 2002
United States	$	26,743	$	31,612
Ensenada, Mexico		5,115		4,757
Tecate, Mexico		3,622		2,179
Stockholm, Sweden		1,213		528
Kuala Lampur, Malaysia		784		792
	$	37,477	$	39,868

F-23

Holding 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 and non-guarantor subsidiaries (amounts in thousands):

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

	December 31, 2003
	River		Guarantor			Non-Guarantor		Eliminations			Total
ASSETS
CURRENT ASSETS:
Cash	$	—	$	3,690		$	2,992	$	—		$	6,682
Accounts receivable		—		17,938			7,169		—			25,107
Intercompany receivables, net		—		—			1,694		(1,694	)		—
Inventories		—		20,419			4,605		(1,195	)		23,829
Other current assets		—		1,587			918		—			2,505
Total current assets		—		43,634			17,378		(2,889	)		58,123
PROPERTY, PLANT AND EQUIPMENT, NET		3,677		35,480			1,997		—			41,154
GOODWILL		—		—			41,410		—			41,410
DEFERRED FINANCING AND OTHER ASSETS, net		—		6,457			—		—			6,457
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost		—		28,636			4,000		(32,636	)		—
OTHER ASSETS		13		1,216			27		(720	)		536
Total other assets		13		36,309			45,437		(33,356	)		48,403
	$	3,690	$	115,423		$	64,812	$	(36,245	)	$	147,680
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of bank notes payable	$	—	$	3,680		$	5,498	$	—		$	9,178
Accounts payable		—		7,170			2,005		—			9,175
Intercompany payables, net		—		1,694			—		(1,694	)		—
Accrued liabilities		—		13,459			3,514		—			16,973
Total current liabilities		—		26,003			11,017		(1,694	)		35,326
INTEREST PAYABLE TO AFFILIATES		—		6,720			3,040		—			9,760
NOTES PAYABLE TO AFFILIATES		—		26,951			12,366		—			39,317
BANK NOTES PAYABLE, net of current portion		—		46,552			7,825		—			54,377
SENIOR SUBORDINATED NOTES PAYABLE		—		115,000			—		—			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK		—		56,480			—		—			56,480
OTHER NON-CURRENT LIABILITIES		671		229			2,136		(720	)		2,316
Total liabilities		671		277,935			36,384		(2,414	)		312,576
STOCKHOLDERS’ EQUITY (DEFICIT)		3,019		(162,512	)		28,428		(33,831	)		(164,896	)
	$	3,690	$	115,423		$	64,812	$	(36,245	)	$	147,680

F-24

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

	December 31, 2002
	River		Guarantor			Non-Guarantor		Eliminations			Total
ASSETS
CURRENT ASSETS:
Cash	$	—	$	3,568		$	2,857	$	—		$	6,425
Accounts receivable		—		17,207			7,007		—			24,214
Intercompany receivables, net		—		—			1,227		(1,227	)		—
Inventories		—		19,303			4,204		(883	)		22,624
Other current assets		—		1,162			555		—			1,717
Total current assets		—		41,240			15,850		(2,110	)		54,980
PROPERTY, PLANT AND EQUIPMENT, NET		5,901		38,548			1,320		—			45,769
GOODWILL		—		—			34,137		—			34,137
DEFERRED FINANCING AND OTHER ASSETS, net		—		7,888			—		—			7,888
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost		—		28,636			4,000		(32,636	)		—
OTHER ASSETS		13		1,064			—		(348	)		729
Total other assets		13		37,588			38,137		(32,984	)		42,754
	$	5,914	$	117,376		$	55,307	$	(35,094	)	$	143,503
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of bank notes payable	$	—	$	9,250		$	4,533	$	—		$	13,783
Accounts payable		—		8,540			1,839		—			10,379
Intercompany payables, net		—		1,227			—		(1,227	)		—
Accrued liabilities		—		14,704			3,033		—			17,737
Total current liabilities		—		33,721			9,405		(1,227	)		41,899
INTEREST PAYABLE TO AFFILIATES		—		3,322			1,333		—			4,655
NOTES PAYABLE TO AFFILIATES		—		26,951			12,366		—			39,317
BANK NOTES PAYABLE, net of current portion		—		46,300			9,492		—			55,792
SENIOR SUBORDINATED NOTES PAYABLE		—		115,000			—		—			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK		—		50,381			—		—			50,381
OTHER NON-CURRENT LIABILITIES		258		281			1,680		(348	)		1,871
Total liabilities		258		275,956			34,276		(1,575	)		308,915
STOCKHOLDERS’ EQUITY (DEFICIT)		5,656		(158,580	)		21,031		(33,519	)		(165,412	)
	$	5,914	$	117,376		$	55,307	$	(35,094	)	$	143,503

F-25

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Year Ended December 31, 2003
	River			Guarantor			Non-Guarantor			Eliminations			Total
NET SALES	$	—		$	159,539		$	42,280		$	(17,224	)	$	184,595
COST OF SALES		2,224			99,005			20,517			(16,912	)		104,834
Gross Profit		(2,224	)		60,534			21,763			(312	)		79,761
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		338			36,893			13,635			—			50,866
Research and development		—			1,859			1,377			—			3,236
		338			38,752			15,012			—			54,102
Income (loss) from operations		(2,562	)		21,782			6,751			(312	)		25,659
INTEREST EXPENSE AND OTHER, net:		—			22,288			2,633			—			24,921
(Loss) income before provision for income taxes		(2,562	)		(506	)		4,118			(312	)		738
PROVISION FOR INCOME TAXES		—			349			1,367			—			1,716
Net (loss) income	$	(2,562	)	$	(855	)	$	2,751		$	(312	)	$	(978	)
	Year Ended December 31, 2002
	River			Guarantor			Non-Guarantor			Eliminations			Total
NET SALES	$	—		$	150,044		$	36,766		$	(14,851	)	$	171,959
COST OF SALES		2,251			99,206			18,551			(15,246	)		104,762
Gross Profit		(2,251	)		50,838			18,215			395			67,197
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		40			37,280			10,813			—			48,133
Research and development		—			1,653			925			—			2,578
		40			38,933			11,738			—			50,711
Income from (loss) operations		(2,291	)		11,905			6,477			395			16,486
INTEREST EXPENSE AND OTHER, net:		(807	)		16,591			1,953			—			17,737
(Loss) income before provision for income taxes		(1,484	)		(4,686	)		4,524			395			(1,251	)
PROVISION FOR INCOME TAXES		—			207			1,690			—			1,897
Net (loss) income	$	(1,484	)	$	(4,893	)	$	2,834		$	395		$	(3,148	)
	Year Ended December 31, 2001
	River			Guarantor			Non-Guarantor			Eliminations			Total
NET SALES	$	—		$	144,511		$	28,319		$	(14,762	)	$	158,068
COST OF SALES		2,260			106,745			15,749			(13,484	)		111,270
Gross Profit		(2,260	)		37,766			12,570			(1,278	)		46,798
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		118			47,257			10,383			—			57,758
Amortization of goodwill		5,080			1,561			1,929			—			8,570
Impairment of goodwill		128,463			26,217			6,911			—			161,591
Impairment of fixed assets		243			4,469			—			—			4,712
Research and development		—			1,015			1,028			—			2,043
		133,904			80,519			20,251			—			234,674
Loss from operations		(136,164	)		(42,753	)		(7,681	)		(1,278	)		(187,876	)
INTEREST EXPENSE AND OTHER, net:		—			19,895			2,327			(117	)		22,105
Loss before provision for income taxes		(136,164	)		(62,648	)		(10,008	)		(1,161	)		(209,981	)
PROVISION (BENEFIT) FOR INCOME TAXES		(57,602	)		69,097			757			—			12,252
Net loss	$	(78,562	)	$	(131,745	)	$	(10,765	)	$	(1,161	)	$	(222,233	)

F-26

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

	Year Ended December 31, 2003
	River			Guarantor			Non-Guarantor			Total
Net cash provided by operating activities	$	75		$	12,626		$	5,985		$	18,686
Net cash used in investing activities		—			(6,280	)		(1,216	)		(7,496	)
Net cash used in financing activities		(75	)		(6,150	)		(3,318	)		(9,543	)
Effect of exchange rate changes on cash		—			(74	)		(1,316	)		(1,390	)
NET INCREASE IN CASH		—			122			135			257
CASH, beginning of period		—			3,568			2,857			6,425
CASH, end of period	$	—		$	3,690		$	2,992		$	6,682
	Year Ended December 31, 2002
	River			Guarantor			Non-Guarantor			Total
Net cash provided by (used in) operating activities	$	—		$	8,314		$	(2,053	)	$	6,261
Net cash provided by (used in) investing activities		—			409			(788	)		(379	)
Net cash provided by (used in) financing activities		—			(9,968	)		4,423			(5,545	)
Effect of exchange rate changes on cash		—			100			(1,097	)		(997	)
NET INCREASE (DECREASE) IN CASH		—			(1,145	)		485			(660	)
CASH, beginning of period		—			4,713			2,372			7,085
CASH, end of period	$	—		$	3,568		$	2,857		$	6,425
	Year Ended December 31, 2001
	River			Guarantor			Non-Guarantor			Total
Net cash provided by operating activities	$	—		$	3,740		$	1,824		$	5,564
Net cash used in investing activities		—			(8,366	)		(651	)		(9,017	)
Net cash provided by (used in) financing activities		—			8,902			(1,572	)		7,330
Effect of exchange rate changes on cash		—			—			(322	)		(322	)
NET INCREASE (DECREASE) IN CASH		—			4,276			(721	)		3,555
CASH, beginning of period		—			437			3,093			3,530
CASH, end of period	$	—		$	4,713		$	2,372		$	7,085

10. Equity

Treasury Stock

During 2003, Holding repurchased 75,000 shares of its common stock for $75,000. All repurchased shares are being held in treasury.

Additional Paid-In Capital

In May 2002, in conjunction with the 2002 debt restructuring the Company issued to Holding’s majority stockholder and other shareholders warrants to purchase 20 million shares of common stock. Additionally, in December 2002, the Company issued to other existing shareholders warrants to purchase 2.1 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 $0.9 million, based on the Black-Scholes 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.

F-27

11. Unaudited Quarterly Financial Information

The following is unaudited summarized quarterly financial data (amounts in thousands):

	2003 Quarter Ended
	March 31			June 30			September 30			December 31
Net sales	$	45,879		$	45,268		$	44,566		$	48,882
Gross profit		19,293			20,045			19,103			21,320
Net income (loss)		(46	)		1,138			(1,827	)		(243	)
	2002 Quarter Ended
	March 31			June 30			September 30			December 31
Net sales	$	43,292		$	41,728		$	42,144		$	44,795
Gross profit		17,495			17,993			15,451			16,258
Net income (loss)		(211	)		(588	)		(3,111	)		762

F-28

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors	F-30
Consolidated Balance Sheets as of December 31, 2003 and 2002	F-31
Consolidated Statements of Operations and Comprehensive Operations for the years ended December 31, 2003, 2002 and 2001	F-33
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2003, 2002 and 2001	F-34
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	F-35
Notes to Consolidated Financial Statements	F-36

F-29

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of

Hudson Respiratory Care Inc.:

We have audited the accompanying consolidated balance sheets of Hudson Respiratory Care Inc., (a California Corporation and a majority-owned subsidiary of River Holding Corp.) (the “Company”) and subsidiaries as of December 31, 2003 and December 31, 2002, and the related consolidated statements of operations and comprehensive operations, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hudson Respiratory Care Inc. and subsidiaries as of December 31, 2003 and December 31, 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for mandatorily-redeemable preferred stock as a result of adopting Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” effective July 1, 2003.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill as a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.

DELOITTE & TOUCHE LLP

Costa Mesa, California

February 23, 2004

F-30

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

CONSOLIDATED BALANCE SHEETS

ASSETS

(amounts in thousands)

	December 31, 2003		December 31, 2002
CURRENT ASSETS:
Cash	$	6,682	$	6,425
Accounts receivable, less allowance for doubtful accounts of $1,156 and $1,331 at December 31, 2003 and December 31, 2002, respectively		25,107		24,214
Inventories, net		23,829		22,624
Other current assets		2,505		1,717
Total current assets		58,123		54,980
PROPERTY, PLANT AND EQUIPMENT, net		37,477		39,868
OTHER ASSETS:
Goodwill		41,410		34,137
Deferred financing and other costs, net of accumulated amortization of $9,318 and $7,107 at December 31, 2003 and December 31, 2002, respectively		6,457		7,888
Other assets		1,243		1,064
Total other assets		49,110		43,089
Total assets	$	144,710	$	137,937

See notes to consolidated financial statements

F-31

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ DEFICIT

(amounts in thousands, except per share amounts)

	December 31, 2003			December 31, 2002
CURRENT LIABILITIES:
Current portion of bank notes payable	$	9,178		$	13,783
Accounts payable		9,175			10,379
Accrued liabilities		16,973			17,737
Total current liabilities		35,326			41,899
INTEREST PAYABLE TO AFFILIATES		9,760			4,655
NOTES PAYABLE TO AFFILIATES		39,317			39,317
BANK NOTES PAYABLE, net of current portion		54,377			55,792
SENIOR SUBORDINATED NOTES PAYABLE		115,000			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 556 and 497 shares issued and outstanding at December 31, 2003 and December 31, 2002, respectively; liquidation preference — $55,618 and $49,735 respectively		55,147			49,189
Accrued mandatorily redeemable preferred stock dividend, payable in kind		1,333			1,192
		56,480			50,381
OTHER NON-CURRENT LIABILITIES		2,365			1,961
Total liabilities		312,625			309,005
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS’ DEFICIT:
Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at December 31, 2003 and December 31, 2002, respectively		3,960			3,524
Common stock, $0.01 par value; 42,000 shares authorized; 10,654 issued and outstanding at December 31, 2003 and December 31, 2002		98,258			98,258
Additional paid in capital		881			881
Cumulative translation adjustment		6,848			2,276
Accumulated deficit		(277,862	)		(276,007	)
Total stockholders’ deficit		(167,915	)		(171,068	)
Total liabilities and stockholders’ deficit	$	144,710		$	137,937

See notes to consolidated financial statements

F-32

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS

(amounts in thousands)

	Year Ended
	December 31, 2003			December 31, 2002			December 31, 2001
NET SALES	$	184,595		$	171,959		$	158,068
COST OF SALES		102,610			102,511			109,010
Gross Profit		81,985			69,448			49,058
OPERATING EXPENSES:
Selling		20,964			20,370			20,337
Distribution		10,177			9,174			10,588
General and administrative		19,248			17,704			23,889
Amortization of goodwill		—			—			3,490
Impairment of goodwill		—			—			33,128
Impairment of fixed assets		—			—			4,469
Research and development		3,236			2,578			2,043
Provision for bad debts		139			845			2,826
		53,764			50,671			100,770
Income (loss) from operations		28,221			18,777			(51,712	)
OTHER EXPENSES:
Interest expense		24,612			20,875			20,542
Loss (gain) on sale of assets		95			(2,138	)		681
Other, net		(359	)		(193	)		882
Loss on early extinguishment of debt		573			—			—
		24,921			18,544			22,105
Income (loss) before provision for income taxes		3,300			233			(73,817	)
PROVISION FOR INCOME TAXES		1,716			1,897			69,854
Net income (loss)	$	1,584		$	(1,664	)	$	(143,671	)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain		4,572			2,974			453
Comprehensive income (loss)	$	6,156		$	1,310		$	(143,218	)

See notes to consolidated financial statements

F-33

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(a majority-owned subsidiary of River Holding Corp.)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(In thousands)

	Junior Preferred Stock			Common Stock			Additional Paid-In Capital		Cumulative Translation Adjustment			Accumulated Deficit			Total
	Shares	Amount		Shares	Amount
BALANCE, December 31, 2000				10,644	$	98,158			$	(1,151	)	$	(119,782	)	$	(22,775	)
Issuance of common stock				10		100										100
Issuance of junior preferred stock	3	$	3,000													3,000
Pay-in-kind junior preferred stock dividends			137										(137	)		—
Foreign currency translation gain										453						453
Issued or accrued pay-in-kind preferred stock dividends													(4,566	)		(4,566	)
Accretion of preferred stock issuance costs													(362	)		(362	)
Net loss													(143,671	)		(143,671	)
BALANCE, December 31, 2001	3	$	3,137	10,654	$	98,258		—	$	(698	)	$	(268,518	)	$	(167,821	)
Pay-in-kind junior preferred stock dividends			387										(387	)		—
Foreign currency translation gain										2,974						2,974
Issued or accrued pay-in-kind preferred stock dividends													(5,315	)		(5,315	)
Accretion of preferred stock issuance costs													(123	)		(123	)
Issuance of warrants								881								881
Net loss													(1,664	)		(1,664	)
BALANCE, December 31, 2002	3	$	3,524	10,654	$	98,258	$	881	$	2,276		$	(276,007	)	$	(171,068	)
Pay-in-kind junior preferred stock dividends			436										(436	)		—
Foreign currency translation gain										4,572						4,572
Issued or accrued pay-in-kind preferred stock dividends													(2,928	)		(2,928	)
Accretion of preferred stock issuance costs													(75	)		(75	)
Net income													1,584			1,584
BALANCE, December 31, 2003	3	$	3,960	10,654	$	98,258	$	881	$	6,848		$	(277,862	)	$	(167,915	)

See notes to consolidated financial statements

F-34

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amount in thousands)

	Year Ended
	December 31, 2003			December 31, 2002			December 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		1,584			(1,664	)		(143,671	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities–
Depreciation and amortization		10,113			9,370			12,223
Amortization of deferred financing costs and other		1,663			1,786			1,676
Accrued mandatorily redeemable preferred stock dividends, payable in-kind		3,096			—			—
Interest payable to affiliates		5,105			3,060			1,595
Loss (gain) on disposal of property and equipment		95			(2,138	)		681
Loss on early extinguishment of debt		573			—			—
Change in deferred tax asset		—			—			68,881
Provision for bad debts		139			845			2,826
Provision for inventory obsolescence		479			566			1,923
Impairment of goodwill		—			—			33,128
Impairment of fixed assets		—			—			4,469
Change in operating assets and liabilities:
Accounts receivable		327			(4,844	)		6,916
Inventories		(839	)		2,957			15,381
Other current assets		(672	)		(398	)		257
Other assets		(174	)		96			503
Accounts payable		(1,572	)		(5,165	)		(4,614	)
Accrued liabilities		(1,394	)		1,398			2,080
Other non-current liabilities		88			392			1,310
Net cash provided by operating activities		18,611			6,261			5,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(7,518	)		(7,546	)		(9,029	)
Proceeds from sales of property, plant and equipment		22			7,167			12
Net cash used in investing activities		(7,496	)		(379	)		(9,017	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank notes payable		(21,790	)		(30,877	)		(21,209	)
Proceeds from bank borrowings		13,154			3,750			20,136
Payment of capital lease obligations		(52	)		(41	)		—
Repayment of notes payable to affiliates		—			—			(8,000	)
Proceeds from notes payable to affiliates		—			22,100			14,951
Net proceeds from sale of common and junior preferred stock, net of transaction costs		—			—			3,100
Bank overdrafts		—			—			(1,245	)
Additions of deferred financing costs		(780	)		(477	)		(403	)
Net cash (used in) provided by financing activities		(9,468	)		(5,545	)		7,330
Effect of exchange rate changes on cash		(1,390	)		(997	)		(322	)
NET INCREASE (DECREASE) IN CASH		257			(660	)		3,555
CASH, beginning of period		6,425			7,085			3,530
CASH, end of period	$	6,682		$	6,425		$	7,085
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	15,305		$	16,503		$	18,856
Income taxes (primarily foreign)	$	1,315		$	2,582		$	2,315
NON-CASH FINANCING ACTIVITIES:
Preferred dividends accrued or paid-in-kind	$	3,365		$	5,702		$	4,703
Capital lease obligations incurred for purchase of equipment	$	—		$	47		$	295
Issuance of warrants in connection with debt	$	—		$	881		$	—

See notes to consolidated financial statements

F-35

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

Hudson Respiratory Care Inc. (“Hudson” or the “Company”), a California corporation founded in 1945, is a manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company is a majority-owned subsidiary of River Holding Corp., a Delaware corporation (“Holding”). Holding has no operations of its own, other than its investment in the Company. The Company’s respiratory care and anesthesia product lines include such products as oxygen masks, humidification systems, small volume nebulizers, incentive breathing exercisers, endotracheal tubes, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers, such as outpatient surgery centers, long-term care facilities, physician offices and home health care agencies. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company’s products are sold to distributors and alternate site service providers throughout the United States and internationally.

Reporting Requirements

The Company is privately owned and has no class of securities registered under the Securities Act of 1934 or any publicly traded equity securities. The Company complies with Securities and Exchange Commission (“SEC”) filing requirements on a voluntary basis as required in the indenture for its senior subordinated notes.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Hudson and its wholly owned subsidiaries. Intercompany account balances and transactions have been eliminated in consolidation. Hudson and its wholly owned subsidiaries are collectively referred to herein as the Company.

Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of approximately $1.2 million and $1.3 million at December 31, 2003 and 2002, respectively, for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Management performs periodic analyses to evaluate the net realizable value of accounts receivable. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions.

Inventories

Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market and consisted of the following (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Raw materials		5,563			5,266
Work-in-process		5,253			4,983
Finished goods		14,286			13,926
		25,102			24,175
Provision for obsolescence		(1,273	)		(1,551	)
	$	23,829		$	22,624

F-36

Raw materials principally consist of bulk resins. Work-in-process and finished goods include raw materials, labor and overhead costs. Certain finished goods are purchased for resale and are not manufactured. The Company considers deterioration, obsolescence and historical trends in evaluating net realizable value of inventory.

Internal Software Development Costs

The Company capitalizes costs incurred to develop internal-use computer software in accordance with Statement of Position (“SOP”) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Such costs are amortized on a straight-line basis over the economic useful lives of the software, which range from three to five years. The Company applies the provisions of SOP 98-1 in assessing any potential impairment of its capitalized software costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major replacements are capitalized while maintenance costs and repairs are expensed in the year incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or term of the related lease, if shorter. Estimated useful lives range from 3 to 7 years for furniture and fixtures; 3 to 7 years for machinery, equipment and purchased software; and 31.5 years for buildings. Total depreciation expense related to property, plant and equipment including depreciation for heaters was $10.1 million, $9.4 million and $12.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Included in property, plant and equipment are heaters used at customer locations typically on a no-charge lease basis. The heaters support the sale of disposable products used in conjunction with the heaters and are depreciated over a 3 to 5 year life. The net book value of heaters was $6.7 million and $6.9 million as of December 31, 2003 and 2002, respectively.

Impairment of Long-Lived Assets

The Company reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to fair value and an impairment loss will be recognized.

Goodwill

The Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002 and discontinued amortization of goodwill and other intangible assets except those with finite lives. Prior to January 1, 2002, goodwill and other intangible assets were amortized under a straight-line method over their estimated useful lives. The following table presents the effects on previously reported net income (loss) if the Company had adopted the non-amortization provisions of SFAS 142 as of the beginning of each periods (amounts in thousands):

	For the Year Ended December 31,
	2003		2002			2001
Reported net income (loss)	$	1,584	$	(1,664	)	$	(143,671	)
Add back: goodwill amortization		—		—			3,490
Adjusted net income (loss)	$	1,584	$	(1,664	)	$	(140,181	)

SFAS 142 provides that goodwill and other intangible assets with indefinite lives is no longer amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company’s goodwill impairment test is conducted at a “reporting unit” level and compares each reporting unit’s fair value to its carrying value. The Company has defined its reporting units as; guarantor, primarily United States, and non-guarantor, primarily international. The non-guarantor subsidiaries consist principally of

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Hudson AB and subsidiaries (whose operations are principally international). The measurement of fair value for each region is based on an evaluation of future discounted cash flows and is further tested using a multiple of earnings approach. The Company’s tests in 2003 and 2002 indicated that no impairment existed and, accordingly, no loss was recognized. At December 31, 2003 the Company completed its annual impairment test, which yielded similar results with no goodwill impairment indicated at any of Hudson’s reporting units.

In the fourth quarter of 2001, as a result of significant losses from operations, the Company reassessed future cash flows and operating results and recorded a goodwill impairment charge of approximately $33.1 million.

The change in the goodwill amount for 2003 and 2002 was solely attributable to changes in foreign currency exchange rates.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ deficit except those resulting from investments by, and distributions to, stockholders. Accordingly, the Company’s comprehensive income includes net income (loss) and foreign currency adjustments that arise from the translation of the Company’s foreign financial statements into U.S. dollars. The cumulative translation adjustment is included in the accompanying consolidated statements of stockholders’ deficit.

Revenue Recognition

The Company recognizes revenue net of reserves when product is shipped and title passes to the customer as the earnings process is substantially complete at that time. The Company establishes reserves for sales returns for shipping errors or damaged goods, rebates and other allowances based on historical experience. The Company sells its products to its distributors based on a listed price. Distributors charge the service providers, or the distributor’s end customers, a contract price (which is determined by their group purchasing organization affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between the list price and the specific contract price to the distributor. The Company records revenue and receivables net of rebatable amounts, based on historical experience. In the event no rebate is payable, the rebate amount is reversed and recognized as revenue.

Advertising Costs

All advertising costs incurred by the Company are expensed in the period in which they were incurred.

Income Taxes

The Company applies the asset and liability method in recording income taxes, under which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally, deferred tax assets are evaluated for recoverability and a valuation allowance is established to appropriately reduce such assets to that amount which will more likely than not be realized.

Foreign Currency Translation

The Company uses the local currency of its foreign operating subsidiaries as the functional currency for such subsidiaries. Accordingly, all assets and liabilities at the Company’s subsidiaries located outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The resulting translation gains and losses are recorded as other comprehensive income (loss) in cumulative translation adjustment in the accompanying consolidated financial statements.

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Concentration of Credit Risk

The Company sells its products primarily to customers in the United States and Europe. Historically, the Company has not experienced significant losses related to trade receivables from concentrations of individual customers or from groups of customers in any geographic area. The Company has three customers that collectively accounted for 39.4%, 39.3% and 30.5% of 2003, 2002 and 2001 net sales, respectively, and 33.0%, 31.8% and 35.6% of net receivables at December 31, 2003, 2002 and 2001, respectively. To the extent the Company loses one of its significant customers, the impact on the Company could be material.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution.

Fair Value of Financial Instruments

The fair value of long-term debt is determined based on quoted market prices for issues listed on exchanges. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short maturity.

Use of 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.

Stock-Based Compensation

The Company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement 123.” No stock-based employee compensation expense is recognized in net income for any of the years presented. Had compensation expense for the Company’s stock-based compensation awards been recognized based on the fair value recognition provisions of SFAS 123, the Company’s net income would have been adjusted to the pro forma amounts indicated below. See “Note 8 Deferred Compensation and Benefit Plans.”

	Year Ended December 31,
	2003			2002			2001
Net income (loss), as reported	$	1,584		$	(1,664	)	$	(143,671	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards		(369	)		(40	)		—
Pro forma net income (loss)	$	1,215		$	(1,704	)	$	(143,671	)

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 updates and clarifies existing accounting pronouncements related to gains and losses from extinguishment of debt and requires that certain lease modifications be accounted for in the same manner as sale-leaseback transactions. The Company has adopted the provisions of SFAS 145 as of January 1, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

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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 EITF 94-3, a liability for an exit cost 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 adopted the provisions of SFAS 146 for exit and disposal activities effective January 1, 2003, as required. Such adoption did not have a material impact to the Company’s consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002 and the recognition provisions effective January 1, 2003, as required. Such adoption did not have a material impact to the Company’s consolidated financial statements.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” an amendment of SFAS 123 “Accounting for Stock-Based Compensation.” SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The Company has complied with the expanded financial statement disclosure requirements in its consolidated financial statements.

In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends SFAS 133 for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS 149: (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied prospectively. The adoption of SFAS 149 did not have a material impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51. FIN 46 requires that a company consolidate variable interest entities if that company is subject to a majority of the risk of loss from the entity’s activities or the company receives a majority of the entity’s residual returns. FIN 46 also requires certain disclosure about variable interest entities in which the company has a significant interest, regardless of whether consolidation is required. The Company adopted the provisions of FIN 46 effective February 1, 2003, as required, and such adoption did not have a material impact on the Company’s consolidated financial statements since the Company currently has no variable interest entities. In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003, which among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004 with the exception of Special Purpose Entities (SPE’s). The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending December 15, 2003. The Company adopted the provisions of FIN 46R effective January 1, 2004 and such adoption did not have a material impact on the Company’s consolidated financial statements since the Company has no SPE’s.

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In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. The Company adopted this standard on July 1, 2003, and has classified its mandatorily redeemable preferred stock as a liability. From July 1, 2003 to December 31, 2003, the Company recorded $3.1 million in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.

In November 2003, FASB issued FASB Staff Position No. 150-3 (“FSS 150-3”), which deferred the effective dates for applying certain provisions of SFAS 150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies. For public entities, SFAS 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. For mandatorily redeemable non-controlling interests that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS 150 are deferred indefinitely. The measurement provisions of SFAS 150 are also deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 4, 2003. For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period.

Reclassifications

Certain amounts in prior periods have been reclassified to conform with the presentation in the current period.

3. Detail of Selected Balance Sheet Accounts

Property, Plant and Equipment

The following is a summary of property, plant and equipment (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Land	$	444		$	444
Buildings		11,057			10,400
Leasehold improvements		3,177			2,931
Machinery, equipment and purchased software		98,327			95,747
Furniture and fixtures		2,764			2,602
		115,769			112,124
Less — Accumulated depreciation and amortization		(80,605	)		(74,186	)
		35,164			37,938
Construction in process		2,313			1,930
Property, plant and equipment, net	$	37,477		$	39,868

Accrued Liabilities

Accrued liabilities consisted of the following (amounts in thousands):

	As of
	December 31, 2003		December 31, 2002
Payroll and related	$	7,895	$	5,917
Interest		2,269		2,498
Closure of manufacturing facility		176		1,829
Vacation		1,841		1,642
Taxes		158		423
Profit Sharing Plan		1,102		1,120
Medical self-insurance		1,068		1,160
GPO fees		650		1,473
Insurance		389		316
Freight		591		579
Other		834		780
	$	16,973	$	17,737

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4. Long-Term Debt

The Company’s long-term debt obligations consist of the following (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Bank notes payable
Revolving A facility	$	20,232		$	—
Term B facility		30,000			—
HRCI AB facility		13,323			14,025
Revolving Credit Facility		—			49,300
Term Credit Facility		—			6,250
Interest payable to affiliates		9,760			4,655
Notes payable to affiliates		39,317			39,317
Senior subordinated notes payable		115,000			115,000
Mandatorily redeemable preferred stock		56,480			50,381
		284,112			278,928
Less—current portion		(9,178	)		(13,783	)
Long-term debt	$	274,934		$	265,145

Bank Notes Payable

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Term B Facility. Both credit facilities mature on October 1, 2007. The Company recorded a loss on the extinguishment of its existing Credit Facility of $0.6 million in the quarter ending December 31, 2003.

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving A Facility consist of a $5.6 million five year amortizing real estate loan, a $2.4 million three year amortizing equipment loan, a $6.0 million amortizing 2.5 year general facility and a $5.0 million letter of credit sub-facility.

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and the guarantor subsidiaries.

The Term B Facility consists of a $30.0 million non-amortizing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Term B Facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings (“HRC”), a wholly owned subsidiary.

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Required reductions in the Revolving Facility are equal to (amounts in thousands):

Year ending December 31	2004		2005		2006		2007
	$	3,680	$	3,680	$	2,080	$	40,792

Interest rates under the Revolving A Facility are based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not the Company obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

	Margin
Period and Loan Type	Base Rate	Eurodollar
Revolving A Facility
Working Capital	(0.5)%-.5%	2.0%-3.0%
Real Estate Revolver	0.5%-1.5%	3.25%-4.0%
Equipment Revolver	0.0%-1.0%	2.5%-3.5%
General Revolver	1.5%	NA
Term B Facility	11% Fixed

The following summarizes interest rate data on the Revolving Facility:

	December 31, 2003
Revolving A Facility rate	4.55	%
Term B Facility rate	11.0	%

The following summarizes interest rate data on the Credit Facility:

	December 31, 2002
Revolving credit facility rate	5.938%
Term credit facility rate	5.938 to 6.625%

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test. As of December 31, 2003, the Company was in compliance with all terms and conditions of the Revolving Facility.

On October 9, 2003, the Company’s European Subsidiary, Hudson AB refinanced its existing bank Credit Facility with a new $19.2 million bank Credit Facility (the “HRCI AB Facility”). Outstanding under this facility totaled $13.3 million as of December 31, 2003. The HRCI AB Facility, which is denominated in Swedish Krona, consists of a $9.6 million amortizing term facility, a bank overdraft facility of $6.9 million and revolving credit which provides for additional borrowings up to the total credit limit of $19.2 million, provided, however, that $6.9 million must always fall due within the agreement period of one year. Borrowings may be made in Swedish Krona or other foreign currencies as requested by Hudson AB. The HRCI AB Facility bears interest at a margin of the

F-43

applicable base (determined by the bank) rate plus 1.65% (4.40 % at December 31, 2003). The HRCI AB Facility is valid for one year periods (initial expiration of September 30, 2004) and renews automatically, provided that either party can terminate with six months’ prior notice. The HRCI AB Facility is guaranteed by the non-guarantor subsidiaries, see “Note 9 Geographic, Major Customer and Segment Information.” The HRCI AB Facility requires Hudson AB to provide periodic reporting of financial results including annual statements as well as to maintain certain covenants including a minimum equity to assets ratio and minimum interest coverage ratio. As of December 31, 2003, Hudson AB was in compliance with all terms and conditions of the HRCI AB Facility.

At December 31, 2003 and 2002, borrowings under the HRCI AB Facility equaled $13.3 million and $14.0 million, respectively.

The interest rate on the HRCI AB Facility as of December 31, 2003 and 2002 was 4.40% and 6.66%, respectively.

The following summarizes future principal amounts payable on all of the Company’s debt as of December 31, 2003 (amounts in thousands):

2004	$	9,178
2005		6,429
2006		2,080
2007		40,792
2008		164,077
Thereafter		61,556
	$	284,112

Notes Payable to Affiliates

As of December 31, 2003, the Company and HRC had an aggregate of $39.3 million in notes payable to the majority shareholder of the Company’s parent, current shareholders of the Company and certain members of management. The following table summarizes these notes (amounts in thousands):

Issue Date	Maturity Date	Interest Rate		Note Amount		Warrants Issued In Connection With Note (shares)
April 2001	March 2008	10.0	%	$	6,451	—
August 2001	March 2008	10.0			8,500	—
May 2002	March 2008	12.0			12,000	12,000
Issued by Hudson					26,951	12,000
July 1999	March 2008	12.0			2,266	—
May 2002	March 2008	12.0			8,000	8,000
December 2002	March 2008	12.0			2,100	2,100
Issued by HRC					12,366	10,100
Total				$	39,317	22,100

All warrants, see “Note 10 Additional Paid In Capital,” including those issued in connection with HRC notes, are for the common stock of Hudson. The notes issued in April and August of 2001 have a conversion provision allowing the holder, at their demand, to exchange the notes for Company common stock at $10.00 per share.

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The Notes issued by the Hudson and HRC are unsecured and rank pari passu to the Senior Subordinated Notes.

Accrued interest payable to affiliates totaled $9.8 million and $4.7 million at December 31, 2003 and 2002, respectively. Interest on the notes are not payable until the maturity date.

As of December 31, 2003 the fair value of the notes to affiliates approximates their face value.

Senior Subordinated Notes Payable

The Company has $115.0 million of senior subordinated notes (the “Notes”). The Notes are fully transferable and are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt, as defined, of the Company. The Notes bear interest at a rate equal to 9 ¹/8% per annum from the date of issuance of the Notes. Interest is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1998. The Notes mature on April 15, 2008 and will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003 at a redemption price of 100.0% to 104.6% of face value depending on the date of the redemption. The Notes are guaranteed jointly and severally by Hudson and its Mexican subsidiaries.

The fair value of the Company’s senior subordinated notes at December 31, 2003 and 2002 was approximately $103.5 million and $61.0 million, respectively. The fair value is estimated based on the quoted market prices for issues listed on exchanges and is not intended to, and does not, represent the underlying fair value of the Company.

Mandatorily Redeemable Preferred Stock

As of December 31, 2003, the Company has issued to its parent River Holding Corp (“Holding”), 556,179 shares (including shares issued as payment in-kind dividends) of its 11 ¹/2% Senior PIK Preferred Stock due 2010 (the “Company Preferred Stock”). Dividends on the Preferred Stock accrue from the date of issuance and are payable semi-annually in arrears on April 15 and October 15 of each year (each a “Dividend Payment Date”), at a rate per annum of 11 ¹/2% of the liquidation preference per share. The liquidation preference of each share of Preferred Stock is $100 (the “Liquidation Preference”) plus unpaid dividends. Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2005, dividends may be paid, at the Company’s option, by the issuance of additional shares of Company Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends. The Company’s revolving facility currently prohibits the Company from paying any cash dividends on the Company Preferred Stock. After April 15, 2003, the Company Preferred Stock is redeemable at the Company’s option in whole or in part, at a premium of the Liquidation Preference plus accumulated and unpaid dividends, if any, to the date of redemption. The Company is required to redeem the Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends. The preferred stock ranks junior in right of payment to all debt obligations of the Company and its subsidiaries.

At December 31, 2003 the redemption amount was $56.9 million, of which $55.6 million relates to issued shares and $1.3 million to accrued but not issued shares. The maximum amount the Company will pay on April 15, 2010, the mandatory redemption date will be $115.0 million and will be accreted at a rate per annum of 11 ¹/2% with dividends being paid in kind and not in cash.

5. Commitments and Contingencies

The Company has capital and operating leases for certain facilities, automobiles and office equipment under non-cancelable leases, with the majority of the automobile leases having a term of one year with annual renewal provisions. Rental expense for the years ended December 31, 2003, 2002 and 2001 amounted to $4.2 million, $3.1 million and $4.7 million, respectively.

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The following is a schedule, by year, of the future minimum payments under capital and operating leases, together with the present value of the net minimum payments as of December 31, 2003 (amounts in thousands). Capital lease amounts are included in other non-current liabilities on the accompanying consolidated balance sheet:

	Capital Leases		Operating Leases
Year ending December 31,
2004	$	71	$	2,993
2005		71		2,370
2006		12		1,123
2007		10		1,119
2008		—		1,095
Thereafter		—		1,297
Total minimum lease payments		164	$	9,997
Less amount representing interest		27
Total present value of minimum payment		137
Less current portion of such obligations		52
Long-term obligations with interest rate of 11.0%	$	85

Assets recorded under capital leases as of December 31, 2003 and 2002 are as follows (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Machinery and equipment	$	267		$	267
Less accumulated depreciation		(102	)		(64	)
Net assets recorded under capital leases	$	165		$	203

Self-Insurance

The Company self-insures the majority of its medical benefit programs and workers’ compensation whereby the Company directly assumes the liability for employee medical and dental claims presented, subject to per-claim and aggregate maximums. Reserves for medical claim losses (including retiree benefits) totaling approximately $1.1 million and $1.2 million at December 31, 2003 and 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheets. The Company maintains excess coverage on an aggregate claim basis. Effective November 1, 2001, the Company became self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $0.8 million and $0.4 million at December 31, 2003 and 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheets. Holding maintains excess coverage on an individual and aggregate claim basis. A third-party administrator processes all employee medical claims and requires the Company to collateralize a portion of its potential payment liability through the use of standby letters of credit. The standby letters of credit are issued for one-year periods with automatic annual extensions until such time the third-party administrator determines all outstanding claims for the policy period have been paid. As of December 31, 2003, the Company had issued two such standby letters of credit totaling approximately $1.2 million.

Legal

The Company is not party to any material lawsuits or other proceedings. While the results of the Company’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities arising from settlement or loss, if any, will have a material adverse effect on the financial position or results of operations of the Company.

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Guarantees

The Company has issued a standby letter of credit totaling $0.1 million in support of an operating lease obligation. The letter of credit expires on September 24, 2004.

From time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental or other liabilities and other claims arising from the Company’s use of the applicable premises; and (ii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationships.

The terms of such obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on the Company’s consolidated balance sheets for the periods presented.

6. Junior Preferred Stock

In August 2001, the Company issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”) to Holding for cash consideration of $3.0 million. 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 the 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. Each share of Junior Convertible Cumulative Preferred Stock is convertible, without any additional consideration by the holder thereof and at the option of the holder thereof, at any time after the date of issuance such shares into such number of fully paid and nonassessable shares of Company common stock as determined by dividing $1,000 by the conversion price in effect at the time of conversion. In addition, each holder of Junior Preferred Stock shall also receive in respect of each share converted all accrued and unpaid dividends on such share payable at the election of the holder, either (i) in a number of shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the conversion price in effect at the time of the conversion or (ii) in cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock. The initial conversion price at which the shares of common stock shall be deliverable upon conversion shall be $10.00 per share and shall be subject to adjustments for stock splits, stock or other dividends, combinations of stocks, mergers and reorganizations.

7. Income Taxes

The Company is included in the consolidated income tax returns of its parent. The Company provides for income taxes on a stand-alone basis in accordance with the asset and liability method pursuant to an informal tax-sharing agreement.

The Company’s income (loss) before income tax provision was subject to taxes in the following jurisdictions for the following periods (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002			December 31, 2001
United States	$	(818	)	$	(4,291	)	$	(63,809	)
Foreign		4,118			4,524			(10,008	)
	$	3,300		$	233		$	(73,817	)

F-47

The components of the deferred tax asset are (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002
Basis differences arising from Section 338(h)(10) election	$	53,480		$	60,674
Net operating loss carryforwards		53,538			47,308
Other		580			633
		107,598			108,615
Valuation allowance		(107,598	)		(108,615	)
	$	—		$	—

As of December 31, 2003 and 2002, the Company had net deferred tax assets before any valuation allowance of $107.6 million and $108.6 million, respectively. This asset relates primarily to basis differences in goodwill and net operating loss carryforwards for tax purposes. As of December 31, 2003, the Company had federal and state net operating loss carryforwards of approximately $128.4 million and $78.4 million, which begin to expire in 2018 and 2004, respectively.

Under SFAS 109, “Accounting for Income Taxes,” the Company is required to place a valuation allowance against any deferred tax assets unless it is more likely than not that the asset will be realized. In accordance with this standard, the Company has placed a valuation allowance against its deferred tax assets of approximately $107.6 million as of December 31, 2003.

The reconciliation of the actual tax expense to tax computed at the statutory federal (amounts in thousands):

	As of
	December 31, 2003			December 31, 2002			December 31, 2001
Income taxes at statutory rate	$	1,122		$	80		$	(25,098	)
Other.		173			31			4,298
Foreign taxes		511			(484	)		959
Valuation allowance		(90	)		2,270			89,695
Income tax expense	$	1,716		$	1,897		$	69,854

The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consists of the following (amounts in thousands):

	Year 2003
	United States		Foreign		Total
Current	$	—	$	1,716	$	1,716
Deferred		—		—		—
	$	—	$	1,716	$	1,716
	Year 2002
	United States		Foreign		Total
Current	$	—	$	1,662	$	1,662
Deferred		235		—		235
	$	235	$	1,662	$	1,897
	Year 2001
	United States		Foreign		Total
Current	$	—	$	959	$	959
Deferred		68,895		—		68,895
	$	68,895	$	959	$	69,854

F-48

8. Deferred Compensation and Benefit Plans

Profit Sharing and 401(k) Plans

In 2002, the Company froze its defined-contribution pension plan covering substantially all its domestic employees who are 21 years of age with two or more years of service. The plan was replaced by a new profit sharing plan that covers substantially all of its domestic employees who are 18 years of age with two or more years of service. Company contributions to the new plan will be made at the Company’s discretion. The 2002 plan year was funded with $1.0 million and the Company has provided $1.0 million for future contributions relating to the new plan in 2003.

The Company has a 401(k) plan covering substantially all of its employees who are 18 years of age with 30 days or more of service. Participants may contribute up to 50% of their base compensation to this plan, subject to certain Internal Revenue Code limitations, each year. The plan does not require matching contributions by the Company; and to date, none have been made.

Deferred Compensation

The Company maintains a deferred compensation plan for certain key employees. As of December 31, 2003 no material amount of compensation has been deferred.

Stock Subscription Plans

In April 1998, Holding adopted an Employee Stock Subscription Plan and an Executive Stock Subscription Plan (collectively, the “Stock Subscription Plans”) pursuant to which executives of the Company purchased 800,000 shares of common stock of Holding valued at $10.00 per share. The Stock Subscription Plans provide for a repurchase option in favor of Holding upon termination of employment at stated repurchase prices. In addition, the Stock Subscription Plans provide for restrictions on the transferability of shares prior to the fifth anniversary of the recapitalization or Hudson’s initial public offering (IPO). The shares are also subject to a right of first refusal in favor of Holding, as well as obligations to sell at the request of Freeman Spogli (the Company’s majority Shareholder) and co-sale rights if Freeman Spogli sells its shares to a third party. No additional shares of Holding common stock were sold under the Stock Subscription Plans in 2003 or 2002.

Shareholder Agreement

Helen Hudson Lovaas (The “Continuing Shareholder”) and Holding have entered into a Shareholders’ Agreement, as amended (the “Shareholders’ Agreement”). The Shareholder Agreement provides that i) Holding and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances, ii) in consideration for the contribution of consideration received from Holding for certain issuances of the common stock of Holding, the Company will issue equivalent shares of Company common stock to Holding, iii) in the event of a sale of Company stock by Holding or Freeman Spogli, the Continuing Shareholder is obligated to sell all or part of her shares at the request of Holding and the Continuing Shareholder has the right to participate in such sale on a pro rata basis, iv) the restriction on the transferability of the shares for a two year period following the recapitalization and provides for a right of first offer on the Continuing Shareholder’s common stock and v) in the event the Company participates in an IPO, the Company will exchange all of the Company’s existing common stock for newly issued common stock.

F-49

2001 Non-Qualified Stock Option Plan

In 2001, the Board of Directors of the Company approved adoption of a Stock Option plan for eligible employees, officers and consultants of the Company. The plan reserves for the issuance of up to 5,000,000 shares of Company common stock in the form of unqualified or incentive stock options. The Board of Directors shall determine the exercise price, which shall not be less than 100% and 85% of fair market value of the underlying stock for incentive and non-statutory options, respectively on the date of grant. The option term and vesting periods will also be determined by the Board of Directors on the date of grant. A summary of the stock option activity for the years ended December 31, 2003 and 2002 is as follows:

	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2001	—		$	—
Options issued	3,550,000			1.00
Options cancelled	(50,000	)		1.00
Options exercised	—			—
Options outstanding at December 31, 2002	3,500,000		$	1.00
Options exercisable at December 31, 2002	2,625,000		$	1.00
Weighted average remaining life (years)	3.25
Options issued	800,000			1.30
Options cancelled	—			—
Options exercised	—			—
Options outstanding at December 31, 2003	4,300,000		$	1.02
Options exercisable at December 31, 2003	3,750,000		$	1.02
Weighted average remaining life (years)	3.03

For purposes of the pro forma disclosure presented in Note 2, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.00% and 2.83%, respectively; dividend yield of 0% for all years; expected lives of 3 years in 2003 and 4 years for 2002 and volatility of 50% for both years. See “Note 2 - Summary of Significant Accounting Policies - Stock-based Compensation.”

Retiree Medical Benefits

Six retirees were provided continued medical benefits under the Company’s existing medical benefits program. Based on the estimated obligations, a reserve of $0.3 million was recorded as of December 31, 2003 and 2002. As of January 1, 2003, the plan was frozen and no future retirees will participate in the plan.

9. Geographic, Major Customer and Segment Information

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: guarantor, primarily the United States and non-guarantor, primarily international. The non-guarantor subsidiaries consist principally of Hudson 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 sells respiratory care and anesthesia products to distributors and medical facilities throughout the United States and internationally. Operating results of the Company’s various product groups have been aggregated because of their common characteristics and their reliance on shared operating functions. The Company operates primarily in the United States and in Europe. During 2003, 2002 and 2001, the Company had foreign sales of approximately $53.4 million, $46.8 million and $40.8 million respectively. International sales represented approximately 28.9%, 27.2% and 25.8% of total sales in 2003, 2002 and 2001, respectively.

F-50

The Company’s sales and percentage of sales by geographic region for the years ending December 31, 2003, 2002 and 2001 are as follows (amounts in thousands):

	Year Ended
	December 31, 2003				December 31, 2002				December 31, 2001
United States	$	131,182	71.1	%	$	125,141	72.8	%	$	117,483	74.3	%
Europe		30,174	16.3			24,595	14.3			19,982	12.7
Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)		13,705	7.4			12,273	7.1			11,530	7.3
Canada		2,500	1.4			2,432	1.4			2,109	1.3
Other international		7,034	3.8			7,518	4.4			6,964	4.4
	$	184,595	100.0	%	$	171,959	100.0	%	$	158,068	100.0	%

The Company’s sales and percentage of sales by product group for the years ending December 31, 2003, 2002 and 2001 is as follows (amounts in thousands):

	Year Ended
	December 31, 2003				December 31, 2002				December 31, 2001
Oxygen Therapy	$	54,270	29.4	%	$	55,199	32.1	%	$	51,530	32.6	%
Airway Management		47,072	25.5			48,321	28.1			46,156	29.2
Humidification		44,857	24.3			40,410	23.5			34,143	21.6
Aerosol Therapy		38,396	20.8			28,029	16.3			26,239	16.6
	$	184,595	100.0	%	$	171,959	100.0	%	$	158,068	100.0	%

The following summarizes the net book value of fixed assets at the respective locations as of December 31, 2003 and 2002 (amounts in thousands):

	As of
	December 31, 2003		December 31, 2002
United States	$	26,743	$	31,612
Ensenada, Mexico		5,115		4,757
Tecate, Mexico		3,622		2,179
Stockholm, Sweden		1,213		528
Kuala Lampur, Malaysia		784		792
	$	37,477	$	39,868

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 and non-guarantor subsidiaries (amounts in thousands):

F-51

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

	December 31, 2003
	Guarantor			Non - Guarantor		Eliminations			Total
ASSETS
CURRENT ASSETS:
Cash	$	3,690		$	2,992	$	—		$	6,682
Accounts receivable		17,938			7,169		—			25,107
Intercompany receivables, net		—			1,694		(1,694	)		—
Inventories		20,419			4,605		(1,195	)		23,829
Other current assets		1,587			918		—			2,505
Total current assets		43,634			17,378		(2,889	)		58,123
PROPERTY, PLANT AND EQUIPMENT, NET		35,480			1,997		—			37,477
GOODWILL		—			41,410		—			41,410
DEFERRED FINANCING AND OTHER ASSETS, net		6,457			—		—			6,457
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost		28,636			4,000		(32,636	)		—
OTHER ASSETS		1,216			27		—			1,243
Total other assets		36,309			45,437		(32,636	)		49,110
	$	115,423		$	64,812	$	(35,525	)	$	144,710
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of bank notes payable	$	3,680		$	5,498	$	—		$	9,178
Accounts payable		7,170			2,005		—			9,175
Intercompany payables, net		1,694			—		(1,694	)		—
Accrued liabilities		13,459			3,514		—			16,973
Total current liabilities		26,003			11,017		(1,694	)		35,326
INTEREST PAYABLE TO AFFILIATES		6,720			3,040		—			9,760
NOTES PAYABLE TO AFFILIATES		26,951			12,366		—			39,317
BANK NOTES PAYABLE, net of current portion		46,552			7,825		—			54,377
SENIOR SUBORDINATED NOTES PAYABLE		115,000			—		—			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK		56,480			—		—			56,480
OTHER NON-CURRENT LIABILITIES		229			2,136		—			2,365
Total liabilities		277,935			36,384		(1,694	)		312,625
STOCKHOLDERS’ EQUITY (DEFICIT)		(162,512	)		28,428		(33,831	)		(167,915	)
	$	115,423		$	64,812	$	(35,525	)	$	144,710

F-52

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

	December 31, 2002
	Guarantor			Non- Guarantor		Eliminations			Total
ASSETS
CURRENT ASSETS:
Cash	$	3,568		$	2,857	$	—		$	6,425
Accounts receivable		17,207			7,007		—			24,214
Intercompany receivables, net		—			1,227		(1,227	)		—
Inventories		19,303			4,204		(883	)		22,624
Other current assets		1,162			555		—			1,717
Total current assets		41,240			15,850		(2,110	)		54,980
PROPERTY, PLANT AND EQUIPMENT, NET		38,548			1,320		—			39,868
GOODWILL		—			34,137		—			34,137
DEFERRED FINANCING AND OTHER ASSETS, net		7,888			—		—			7,888
INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost		28,636			4,000		(32,636	)		—
OTHER ASSETS		1,064			—		—			1,064
Total other assets		37,588			38,137		(32,636	)		43,089
	$	117,376		$	55,307	$	(34,746	)	$	137,937
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of bank notes payable	$	9,250		$	4,533	$	—		$	13,783
Accounts payable		8,540			1,839		—			10,379
Intercompany payables, net		1,227			—		(1,227	)		—
Accrued liabilities		14,704			3,033		—			17,737
Total current liabilities		33,721			9,405		(1,227	)		41,899
INTEREST PAYABLE TO AFFILIATES		3,322			1,333		—			4,655
NOTES PAYABLE TO AFFILIATES		26,951			12,366		—			39,317
BANK NOTES PAYABLE, net of current portion		46,300			9,492		—			55,792
SENIOR SUBORDINATED NOTES PAYABLE		115,000			—		—			115,000
MANDATORILY REDEEMABLE PREFERRED STOCK		50,381			—		—			50,381
OTHER NON-CURRENT LIABILITIES		281			1,680		—			1,961
Total liabilities		275,956			34,276		(1,227	)		309,005
STOCKHOLDERS’ EQUITY (DEFICIT)		(158,580	)		21,031		(33,519	)		(171,068	)
	$	117,376		$	55,307	$	(34,746	)	$	137,937

F-53

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Year Ended December 31, 2003
	Guarantor			Non- Guarantor			Eliminations			Total
NET SALES	$	159,539		$	42,280		$	(17,224	)	$	184,595
COST OF SALES		99,005			20,517			(16,912	)		102,610
Gross Profit		60,534			21,763			(312	)		81,985
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		36,893			13,635			—			50,528
Research and development		1,859			1,377			—			3,236
		38,752			15,012			—			53,764
Income from operations		21,782			6,751			(312	)		28,221
INTEREST EXPENSE AND OTHER, net:		22,288			2,633			—			24,921
(Loss) income before provision for income taxes		(506	)		4,118			(312	)		3,300
PROVISION FOR INCOME TAXES		349			1,367			—			1,716
Net (loss) income	$	(855	)	$	2,751		$	(312	)	$	1,584
	Year Ended December 31, 2002
	Guarantor			Non- Guarantor			Eliminations			Total
NET SALES	$	150,044		$	36,766		$	(14,851	)	$	171,959
COST OF SALES		99,206			18,551			(15,246	)		102,511
Gross Profit		50,838			18,215			395			69,448
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		37,280			10,813			—			48,093
Research and development		1,653			925			—			2,578
		38,933			11,738			—			50,671
Income from operations		11,905			6,477			395			18,777
INTEREST EXPENSE AND OTHER, net:		16,591			1,953			—			18,544
(Loss) income before provision for income taxes		(4,686	)		4,524			395			233
PROVISION FOR INCOME TAXES		207			1,690			—			1,897
Net (loss) income	$	(4,893	)	$	2,834		$	395		$	(1,664	)
	Year Ended December 31, 2001
	Guarantor			Non- Guarantor			Eliminations			Total
NET SALES	$	144,511		$	28,319		$	(14,762	)	$	158,068
COST OF SALES		106,745			15,749			(13,484	)		109,010
Gross Profit		37,766			12,570			(1,278	)		49,058
OPERATING EXPENSES:
Selling, distribution, general and administrative, incl. provision for bad debts		47,257			10,383			—			57,640
Amortization of goodwill		1,561			1,929			—			3,490
Impairment of goodwill		26,217			6,911			—			33,128
Impairment of fixed assets		4,469			—			—			4,469
Research and development		1,015			1,028			—			2,043
		80,519			20,251			—			100,770
Loss from operations		(42,753	)		(7,681	)		(1,278	)		(51,712	)
INTEREST EXPENSE AND OTHER, net:		19,895			2,327			(117	)		22,105
Loss before provision for income taxes		(62,648	)		(10,008	)		(1,161	)		(73,817	)
PROVISION FOR INCOME TAXES		69,097			757			—			69,854
Net loss	$	(131,745	)	$	(10,765	)	$	(1,161	)	$	(143,671	)

F-54

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

	Year Ended December 31, 2003
	Guarantor			Non- Guarantor			Total
Net cash provided by operating activities	$	12,626		$	5,985		$	18,611
Net cash used in investing activities		(6,280	)		(1,216	)		(7,496	)
Net cash used in financing activities		(6,150	)		(3,318	)		(9,468	)
Effect of exchange rate changes on cash		(74	)		(1,316	)		(1,390	)
NET INCREASE IN CASH		122			135			257
CASH, beginning of period		3,568			2,857			6,425
CASH, end of period	$	3,690		$	2,992		$	6,682
	Year Ended December 31, 2002
	Guarantor			Non- Guarantor			Total
Net cash provided by (used in) operating activities	$	8,314		$	(2,053	)	$	6,261
Net cash provided by (used in) investing activities		409			(788	)		(379	)
Net cash provided by (used in) financing activities		(9,968	)		4,423			(5,545	)
Effect of exchange rate changes on cash		100			(1,097	)		(997	)
NET INCREASE (DECREASE) IN CASH		(1,145	)		485			(660	)
CASH, beginning of period		4,713			2,372			7,085
CASH, end of period	$	3,568		$	2,857		$	6,425
	Year Ended December 31, 2001
	Guarantor			Non- Guarantor			Total
Net cash provided by operating activities	$	3,740		$	1,824		$	5,564
Net cash used in investing activities		(8,366	)		(651	)		(9,017	)
Net cash provided by (used in) financing activities		8,902			(1,572	)		7,330
Effect of exchange rate changes on cash		—			(322	)		(322	)
NET INCREASE (DECREASE) IN CASH		4,276			(721	)		3,555
CASH, beginning of period		437			3,093			3,530
CASH, end of period	$	4,713		$	2,372		$	7,085

10. Additional Paid-In Capital

In May 2002, in conjunction with the 2002 debt restructuring the Company issued to Holding’s majority stockholder and other shareholders warrants to purchase 20 million shares of common stock. Additionally, in December 2002, the Company issued to other existing shareholders warrants to purchase 2.1 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 $0.9 million, based on the Black-Scholes 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.

F-55

11. Unaudited Quarterly Financial Information

The following is unaudited summarized quarterly financial data (amounts in thousands):

	2003 Quarter Ended
	March 31		June 30			September 30			December 31
Net sales	$	45,879	$	45,268		$	44,566		$	48,882
Gross profit		19,849		20,045			19,659			22,432
Net income (loss)		510		1,138			(1,021	)		957
	2002 Quarter Ended
	March 31		June 30			September 30			December 31
Net sales	$	43,292	$	41,728		$	42,144		$	44,795
Gross profit		18,060		17,993			16,016			17,379
Net income (loss)		354		(588	)		(2,546	)		1,116

F-56

RIVER HOLDING CORP. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

(Amounts in thousands)

	Balance at Beginning of Period			Charges to Expenses			Write-offs		Balance at End of Period
Description
For the Year Ended December 31, 2003:
Allowance for doubtful accounts receivable	$	(1,331	)	$	(139	)	$	314	$	(1,156	)
Reserve for inventory obsolescence		(1,551	)		(479	)		757		(1,273	)
For the Year Ended December 31, 2002:
Allowance for doubtful accounts receivable	$	(1,801	)	$	(845	)	$	1,315	$	(1,331	)
Reserve for inventory obsolescence		(2,032	)		(566	)		1,047		(1,551	)
For the Year Ended December 31, 2001:
Allowance for doubtful accounts receivable	$	(3,500	)	$	(2,826	)	$	4,525	$	(1,801	)
Reserve for inventory obsolescence		(500	)		(1,923	)		391		(2,032	)

EX-3.1

EXHIBIT 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

HUDSON RESPIRATORY CARE INC.

Richard W. Johansen and Jay R. Ogram certify that:

1. They are the President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the “CORPORATION”).

2. The Amended and Restated Articles of Incorporation of the Corporation are amended and restated to read as follows:

I

NAME OF CORPORATION

The name of the Corporation shall be:

Hudson Respiratory Care Inc.

II

PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.

III

AUTHORIZED CAPITAL STOCK

The Corporation is authorized to issue two classes of shares of stock to be designated, respectively, “COMMON STOCK” and “PREFERRED STOCK;” the total number of such shares shall be seventeen million (17,000,000); the total number of Common Stock shall be fifteen million (15,000,000), each having a par value of one-cent ($.01); and the total number of Preferred Stock shall be two million (2,000,000), each having a par value of one-cent ($.01).

Upon amendment and restatement of the Amended and Restated Articles of Incorporation as herein set forth, each outstanding share of Common Stock is split up and converted into two hundred and forty-five (245) shares of Common Stock.

The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby vested with authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred

Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had before the adoption of the resolution or resolutions originally fixing the number of such shares.

IV

LIMITATION ON DIRECTOR LIABILITY

The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

V

INDEMNIFICATION OF AGENTS

The Corporation is authorized to provide indemnification of its agents (as such term is defined in Section 317 of the California General Corporation Law) to the fullest extent permissible under California law.

3. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation.

4. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the Corporation is fifty-nine thousand and fifty-six (59,056). The number of shares voting in favor of the amendment and restatement was fifty-nine thousand and fifty-six (59,056) and this number equaled or exceeded the vote required. The percentage vote required was more than 50%.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Date: March 23, 1998

/s/ Richard W. Johansen

Richard W. Johansen

President

/s/ Jay R. Ogram

Jay R. Ogram

Secretary

[SEAL APPEARS HERE]

CERTIFICATE OF AMENDMENT

OF

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

HUDSON RESPIRATORY CARE INC.

Charles A. French and Patrick Yount certify that:

1. They are the duly elected and acting president and secretary, respectively, of Hudson Respiratory Care Inc., a California corporation.

2. The Amended and Restated Articles of Incorporation of the Corporation shall be amended by amending the first paragraph of Article III to read as follows:

“The Corporation is authorized to issue two classes of shares of stock to be designated respectively, “Common Stock” and “Preferred Stock;” the total number of such shares shall be forty million (40,000,000); the total number of Common Stock shall be thirty-seven million (37,000,000) and the total number of Preferred Stock shall be three million (3,000,000).”

3. The foregoing amendment to the Amended and Restated Articles of Incorporation has been duly approved by the board of directors of the Corporation.

4. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of the corporation is 10,654,293 shares of Common Stock, and 529,028 shares of Preferred Stock consisting of 526,028 shares of Senior PIK Preferred Stock and 3,000 shares of Junior Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of Preferred Stock, voting separately as a class.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Date: May 16, 2003	/s/ Charles A. French Charles A. French, President
	/s/ Patrick Yount Patrick Yount, Secretary

CERTIFICATE OF AMENDMENT

OF

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

HUDSON RESPIRATORY CARE INC.

Charles A. French and Patrick Yount certify that:

1. They are the duly elected and acting president and secretary, respectively, of Hudson Respiratory Care Inc., a California corporation.

2. The Amended and Restated Articles of Incorporation of the Corporation shall be amended by amending the first paragraph of Article III to read as follows:

“The Corporation is authorized to issue two classes of shares of stock to be designated respectively, “Common Stock” and “Preferred Stock;” the total number of such shares shall be forty-five million (45,000,000); the total number of Common Stock shall be forty-two million (42,000,000) and the total number of Preferred Stock shall be three million (3,000,000).”

3. The foregoing amendment to the Amended and Restated Articles of Incorporation has been duly approved by the board of directors of the Corporation.

4. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of the corporation is 10,654,293 shares of Common Stock, and 559,266 shares of Preferred Stock consisting of 556,266 shares of Senior PIK Preferred Stock and 3,000 shares of Junior Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of Preferred Stock, voting separately as a class.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Date: October 24, 2003	/s/ Charles A. French Charles A. French, President
	/s/ Patrick Yount Patrick Yount, Secretary

CERTIFICATE OF DETERMINATION

OF

HUDSON RESPIRATORY CARE INC.

Richard W. Johansen and Jay R. Ogram hereby certify as follows:

1. They are the President and Chief Financial Officer, respectively, of Hudson Respiratory Care Inc., a California corporation (the “Company”).

2. The number of shares of 11 ¹/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued.

3. The number of shares of 11 ¹/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued.

4. The Board of Directors of the Company has duly adopted the following resolution:

“WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish two series of Preferred Stock as follows:

(a) The designation of such series of Preferred Stock are (i) the 11 ¹/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the “Initial Company Preferred Stock”), and the number of shares of such Initial Company Preferred Stock is 600,000, and (ii) the 11 ¹/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the “Series B Stock”), and the number of shares of such Series B Stock is 600,000. The Initial Company Preferred Stock and the Series B Stock are referred to as the “Company Preferred Stock.” The liquidation preference of the Company Preferred Stock shall be $100 per share (the “Liquidation Preference”).

The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, granted to and imposed upon the Company Preferred Stock and the holders thereof (the “Holders”) shall be as set forth below.

(b) Ranking. The Initial Company Preferred Stock and the Series B Stock will each rank on a parity with the other in all respects. The Company Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Company and to each other class of Capital Stock and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with common stock of the Company, as “Junior Stock”) and (ii) on a parity with each other class of Capital Stock or series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such series will rank on a parity with the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as “Parity Stock”).

The Company Preferred Stock and the Company’s 11 ¹/2% Senior PIK Preferred Stock due 2010, $.01 par value (the “Senior PIK Preferred Stock”), will each rank on a parity with the other in all respects.

(c) Dividends. (i) Holders of the outstanding shares of Company Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, cumulative preferential dividends on each share of the Company Preferred Stock at a rate per annum equal to 11 ¹/2% of the Liquidation Preference of such share, payable semi-annually in arrears (each such semi-annual period being herein called a “Dividend Period”) in the manner set forth below. In addition to the dividends described in

the preceding sentence, holders of outstanding shares of Company Preferred Stock will be entitled to additional dividends (the “Additional Dividends”), when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, with respect to the shares of Company Preferred Stock, which Additional Dividends shall accrue as follows if any of the following events occur (each such event in clauses (A), (B), (C),and (D) below being herein called a “Registration Default”): (A) if on or prior to June 6, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Securities and Exchange Commission (the “SEC”); (B) if on or prior to September 5, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective by the SEC; (C) if on or prior to October 5, 1998, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective; or (D) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable (in each case except as permitted below) in connection with resales of the Company Preferred Stock in accordance with and during the periods specified herein.

Additional Dividends shall accrue on the shares of Company Preferred Stock from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured. Such Additional Dividends will accrue at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall the amount of such Additional Dividends exceed 1.00% per annum.

A Registration Default referred to in clause (C) of this paragraph (c)(i) shall be deemed not to have occurred and be continuing in relation to a Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to the Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events with respect to the Company that would need to be described in the Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company proceeds promptly and in good faith to amend or supplement the Registration Statement and related prospectus to describe such events unless the Company has determined in good faith that there are material legal or commercial impediments in doing so; provided, however, that in any case if such Registration Default occurs for a continuous period in excess of 45 days, Additional Dividends shall be payable in accordance with the immediately preceding paragraphs of this paragraph (c)(i) from the day such Registration Default initially occurs to but excluding the date on which such Registration Default is cured and provided, further, that not more than one Registration Default shall be deemed to have occurred pursuant to clause (y) of this paragraph during any 365-day period.

Additional Dividends will not accrue with respect to a Registration Default referred to in clause (D) of this paragraph (c)(i) occurring solely as a result of the determination by the SEC that an Exchange Offer Registration Statement filed prior to the issuance of the Initial Company Preferred Stock may not register Company Preferred Stock if (x) the Company, within 30 days of the issuance of the Initial Company Preferred Stock, files an additional Exchange Offer Registration Statement (the “Supplemental Exchange Offer Registration Statement”) with the SEC, (y) on or prior to the 90th day following the issuance of the Initial Company Preferred Stock the Supplemental Exchange Offer Registration Statement or an additional Shelf Registration Statement (the “Supplemental Shelf Registration Statement”) has been declared effective by the SEC and (z) on or prior to the 120th day following the issuance of the Initial Company Preferred Stock the Registered Exchange Offer has been consummated or the Supplemental Shelf Registration Statement has been declared effective.

Any amounts of Additional Dividends due pursuant to clauses (A), (B), (C) or (D) of this paragraph (c)(i) or pursuant to the proviso contained in the preceding sentence will be payable on the regular dividend payment dates with respect to the Company Preferred Stock and on the same terms and conditions and subject to the same limitations as pertain at such time for the payment of regular dividends. The amount of Additional Dividends will be determined by multiplying the applicable Additional Dividends rate by the aggregate Liquidation Preference of the outstanding shares of Company Preferred Stock, multiplied by a fraction, the numerator of which is the number of days such Additional Dividend rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360.

All dividends on the Company Preferred Stock, including Additional Dividends, to the extent accrued, shall be cumulative, whether or not the Company has earnings or profits, whether or not there are funds legally available for the payments of such dividends and whether or not dividends are declared, on a daily basis from the Issue Date or, in the case of additional shares of Company Preferred Stock issued in payment of a dividend, from the date of issuance of such additional shares of Company Preferred Stock, and shall be payable semi-annually in arrears on each April 15 and October 15 (each, a “Dividend Payment Date”), commencing on October 15, 1998,

to holders of record on the April 1 and October 1 immediately preceding the relevant Dividend Payment Date. Any dividend on the Company Preferred Stock payable pursuant to this paragraph (c)(i) on or prior to April 15, 2003 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Company Preferred Stock (the “Additional Shares”) equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2003, all dividends shall be payable solely in cash.

(ii) All dividends paid with respect to shares of the Company Preferred Stock pursuant to this paragraph (c) shall be paid pro rata to the Holders entitled thereto.

(iii) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Company Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Company Preferred Stock.

(iv) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Company Preferred Stock. If full dividends are not so paid, the Company Preferred Stock will share dividends pro rata with the Parity Stock.

(v) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Company Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term “dividend” does not include dividends payable solely in shares of Junior Stock on Junior Stock.

(vi) Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption or any mandatory repurchase may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company.

(vii) Dividends payable on the Company Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Company Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two.

(d) Liquidation Preference. (i) Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each Holder of the Company Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, an amount equal to the Liquidation Preference per share of Company Preferred Stock held by such Holder, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (whether or not declared and including Additional Dividends, if any) thereon to the date fixed for liquidation, dissolution or winding-up (including, without duplication, an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up that would have been payable had the Company Preferred Stock been the subject of an Optional Redemption on such date) before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the holders of the Company Preferred Stock and all Parity Stock are not paid in full, the holders of the Company Preferred Stock and the Parity Stock will share equally and ratably (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of the Company Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. After payment of the full amount of the Liquidation Preference of the outstanding shares of Company Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Company Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company.

(ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company.

(e) Redemption. (i) Optional Redemption. (A) Except as set forth in clause (B) below, the Company Preferred Stock shall not be redeemable at the option of the Company prior to April 15, 2003. On or after April 15, 2003, each share of the Company Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company, at the redemption prices (expressed as a percentage of the Liquidation Preference of such share) set forth below, plus, without duplication, an amount in cash equal to all accrued and unpaid dividends to the date fixed for redemption (an “Optional Redemption Date”) (including, without duplication, an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Optional Redemption Date) (the “Optional Redemption Price”), if redeemed during the 12-month period beginning April 15 of each of the years set forth below:

YEAR IN WHICH REDEMPTION OCCURS	PERCENTAGE
2003	105.750	%
2004	104.600
2005	103.450
2006	102.300
2007	101.150
2008 and thereafter	100.000

(B) At any time prior to April 15, 2001, the Company may redeem at its option (i) up to 50% or (ii) all but not less than all of the outstanding shares of Company Preferred Stock with the net proceeds of any Public Equity Offering by the Company at a redemption price (expressed as a percentage of the Liquidation Preference per share thereof) of 111.5% plus accumulated and unpaid dividends (including, without duplication, an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such Public Equity Offering upon not less than 30 nor more than 60 days’ notice.

(C) In the event of a redemption of only a portion of the then outstanding shares of Company Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold less than 100 shares as a result of such redemption), as may be determined by the Company.

(ii) Mandatory Redemption. Each share of the Company Preferred Stock (if not earlier redeemed) shall be subject to mandatory redemption in whole (to the extent of lawfully available funds therefor) on April 15, 2010 (the “Mandatory Redemption Date”) at a price equal to 100% of the Liquidation Preference of such share, plus an amount equal to all accrued and unpaid dividends thereon (including, without duplication, an amount equal to a prorated dividend thereon from the immediately preceding Dividend Payment Date to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the “Mandatory Redemption Price”).

(iii) Procedure for Redemption. (A) On and after an Optional Redemption Date or the Mandatory Redemption Date, as the case may be (the “Redemption Date”), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Company Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest; provided, however, that if a notice of redemption shall have been given as provided in subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be shareholders of the Company and shall be entitled only to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, for such shares without interest from the Redemption Date.

(B) With respect to a redemption pursuant to paragraph (e)(i) or (e)(ii), the Company will send a written notice of redemption by first class mail to each holder of record of shares of Company Preferred Stock at its registered address, not fewer than 30 days nor more than 60 days prior to the Redemption Date (the “Redemption Notice”) and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company

Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state:

(1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof;

(2) the Optional Redemption Price or the Mandatory Redemption Price, as the case may be;

(3) whether all or less than all the outstanding shares of Company Preferred Stock are to be redeemed and the total number of shares of Company Preferred Stock being redeemed;

(4) the Redemption Date;

(5) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed; and

(6) that dividends on the shares of the Company Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be to the Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (C) below on or before the Redemption Date.

(C) Each Holder of Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares.

(f) Voting Rights. (i) The Holders of Company Preferred Stock, except as otherwise required under California law or as set forth in paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter required or permitted to be voted upon by the shareholders of the Company.

(ii) (A) If (1) dividends on the Company Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2003, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a “Dividend Default”); (2) the Company fails for any reason to redeem the Company Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Company Preferred Stock; (3) the Company fails to make an offer to redeem all of the outstanding shares of the Company Preferred Stock following a Change of Control (whether or not the Company is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of the Company); (4) a breach or violation of any of the provisions set forth under paragraph (l) (Certain Additional Provisions) occurs and, the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the Holders of at least 25% of the shares of the Company Preferred Stock then outstanding; or (5) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Debt of the Company or any Subsidiary of the Company or the stated maturity of any such Debt of the Company or any Subsidiary of the Company is accelerated because of a default and the total amount of such Debt unpaid or accelerated exceeds $7.5 million, then, subject to paragraph (f)(ii)(E), the Holders of the then outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable), voting together as a class, shall have the right and power to elect two directors to the Board of Directors of the Company and the common stock of the Company (“Common Stock”) shall have the right to elect the remaining directors. Each such event described in clauses (1), (2), (3), (4) or (5) above is a “Voting Rights Triggering Event”.

(B) The voting rights set forth in paragraph (f)(ii)(A) above will continue until such time as (x) in the case of a Dividend Default, all dividends in arrears on the Company Preferred Stock are paid in full in cash and (y) in all other cases, any failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the Holders of at least a majority of the shares of Company Preferred Stock then outstanding, at which time the exclusive right to elect directors shall revert to the Common Stock, subject to renewal of the voting right of the Company Preferred Stock under paragraph (f)(ii)(A) from time to time. At any time after the right to elect two directors is vested in the Company Preferred Stock, and at any time after the exclusive right to elect directors shall revert to the Common Stock, the holders of 25% or

more of the outstanding shares of Company Preferred Stock (or the holders of 25% of the shares of any other series of Preferred Stock then outstanding upon which like rights have been conferred and are exercisable) or 25% or more of the outstanding Common Stock, as the case may be, have a right to call a special meeting of shareholders for the purpose of electing all of the members of the Board of Directors, such right to be exercisable by delivering a request in writing for the calling of the special meeting to the president or secretary, or to the chairman of the board or a vice-president if there be such; provided, however, that no such special meeting shall be called if the next annual meeting of shareholders of the Company is to be held within 60 days after the voting power to elect directors shall have become vested, in which case such meeting shall be deemed to have been called for such next annual meeting. The officer receiving the request shall forthwith cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the shareholders calling the meeting shall have the rights accorded to them pursuant to subdivision (c) of Section 601 of the California Corporations Code. In lieu of electing directors at a meeting of the shareholders in accordance with the foregoing, the holders of Common Stock and Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting as separate classes, may, pursuant to Section 603 of the Corporations Code of the State of California elect such directors by unanimous written consent. Upon the election of directors by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) at a meeting of shareholders (or by written consent), the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) together with those elected at such meeting (or by written consent) by the Common Stock shall constitute the directors of the Company until the next annual meeting, unless the terms of such directors shall terminate earlier in accordance with the immediately following sentence. Upon the election of directors by the Common Stock at a meeting of shareholders (or by written consent) after the exclusive right to elect directors has reverted to the Common Stock, the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Common Stock at such meeting (or by written consent) shall constitute the directors of the Company until the next annual meeting, unless earlier removed in accordance with this paragraph (f)(ii)(B).

(C) At any meeting held for the purposes of electing directors at which the Holders of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable) shall have the right, voting together as a single class, to elect directors as aforesaid, the presence in person or by proxy of the holders of at least a majority in voting power of the outstanding shares of Company Preferred Stock (and such Preferred Stock) shall be required to constitute a quorum thereof.

(D) Any vacancy occurring in the office of a director elected by the Holders of Company Preferred Stock (and such Preferred Stock) may be filled by the remaining director elected by the Holders of Company Preferred Stock (and such Preferred Stock) unless and until such vacancy shall be filled by the Holders of Company Preferred Stock (and such Preferred Stock) at a meeting of shareholders held in accordance with paragraph (f)(ii)(B). In lieu of electing a director at a meeting of the shareholders in accordance with the foregoing, a majority of the outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting together as a single class, may, pursuant to Sections 305(b) and 603 of the Corporations Code of the State of California, elect such director by written consent.

(E) In the event that an event occurs at any time which results in the holders of any Parity Stock having voting rights to elect directors to the Board of Directors, Holders of Company Preferred Stock shall, whether or not such event otherwise constitutes a Voting Rights Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed (for purposes of this paragraph (f) only) to constitute a Voting Rights Triggering Event. In addition, in the event that during a time in which directors elected by the Holders of Company Preferred Stock pursuant to this paragraph (f)(ii) are serving on the Board of Directors (“Previously-Elected Directors”) an event occurs which results in holders of Preferred Stock having voting rights to elect (voting together with the Holders of Company Preferred Stock) at least two directors to the Board of Directors, the Holders of Company Preferred Stock shall vote together, as a single class, with the holders of such Preferred Stock to elect such new directors, and upon the election of the new directors the term of office of the Previously-Elected Directors shall (unless such Previously-Elected Directors are elected as new directors) automatically terminate.

(iii) (A) So long as any shares of Company Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will

rank senior to the Company Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as “Senior Stock”) or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares of Company Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting.

(B) So long as any shares of the Company Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Company Preferred Stock or to authorize the issuance of any additional shares of the Company Preferred Stock (except to authorize the issuance of additional shares of Company Preferred Stock to be paid as dividends on the Company Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Company Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the Company and a Wholly Owned Subsidiary of Holding or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to Holding shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Company Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Company Preferred Stock.

(C) Except as required under California law or as set forth in paragraph (f)(iii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Company Preferred Stock, or (y) the increase or decrease in the amount of authorized Capital Stock of any class, including any Company Preferred Stock, shall not require the consent of Holders of Company Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of the Company Preferred Stock.

(iv) In any case in which the Holders of Company Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or pursuant to law, each Holder of the Company Preferred Stock entitled to vote with respect to such matters shall be entitled to one vote for each share of Company Preferred Stock held.

(g) Redemption. (A) The Company may, at its option, redeem the Company Preferred Stock, in whole but not in part (including in conjunction with, and after giving effect to, a redemption of up to 50% of the outstanding shares of the Company Preferred Stock with the proceeds of a Public Equity Offering by the Company pursuant to clause (B) of paragraph (e)(i) above), at any time, for Company Exchange Debentures; provided, however, that (i) on the date of such redemption there are no accumulated and unpaid dividends on the Company Preferred Stock (including the dividend payable on such date) that are not paid contemporaneously with such redemption or other contractual impediments to such redemption; (ii) such redemption is permitted under applicable law; (iii) immediately after giving effect to such redemption, no Default (as defined in the Company Exchange Indenture) or Voting Rights Triggering Event, as applicable, shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Company Exchange Indenture an opinion of counsel with respect to the due authorization and issuance of the Company Exchange Debentures.

(B) Upon any redemption of Company Preferred Stock for Company Exchange Debentures pursuant to this paragraph (g), each Holder of Company Preferred Stock will be entitled to receive, subject to the second succeeding sentence, $1.00 principal amount of Company Exchange Debentures for each $1.00 Liquidation Preference of Company Preferred Stock so redeemed, and an amount in cash equal to a prorated dividend for any partial dividend period. The Company Exchange Debentures will be issued in registered form without coupons. Company Exchange Debentures issued upon redemption of the Company Preferred Stock will be issued in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issued in principal amounts less than $1,000 so that each Holder of Company Preferred Stock will receive certificates representing the entire amount of Company Exchange Debentures to which such Holder’s shares of Company Preferred Stock entitle such Holder; provided, however, that the Company may pay cash in lieu of issuing a Company Exchange (ii) Procedures. (A) The Company will send a written notice of redemption (the “Redemption Notice”) by first-class mail to each Holder of record of shares of Company Preferred Stock not fewer than 30 days nor more than 60 days before the date fixed for any redemption (the “Redemption Date”) at its registered address and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or

except as to the Holder or Holders whose notice was defective; provided further that, in the event of any redemption which is intended to occur in conjunction with a Public Equity Offering by the Company, (i) the Company may provide for a Redemption Date which relates to the consummation of such Public Equity Offering and (ii) the Company shall have the right to revoke such written notice in the event that such related Public Equity Offering is terminated by sending by first-class mail a subsequent written notice to such Holders within two Business Days following such termination.

The Redemption Notice shall state:

(1) the Redemption Date;

(2) that the Holder is to surrender to the Company, in the manner and at the place or places designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed;

(3) that dividends on the shares of Company Preferred Stock to be redeemed shall cease to accrue on such Redemption Date whether or not certificates representing shares of Company Preferred Stock are surrendered for redemption on such Redemption Date unless the Company shall default in the delivery of the Company Exchange Debentures to Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (g)(ii)(C) on or before the Redemption Date; and

(4) that interest on the Company Exchange Debentures shall accrue from the Redemption Date whether or not certificates for shares of Company Preferred Stock are surrendered for redemption on such Redemption Date.

(B) On and after the Redemption Date, dividends will cease to accrue on the outstanding shares of Company Preferred Stock, and all rights of the Holders of Company Preferred Stock (except the right to receive the Company Exchange Debentures, an amount in cash, to the extent applicable, equal to the accumulated and unpaid dividends to the Redemption Date and, if the Company so elects, cash in lieu of any Company Exchange Debenture that is in a principal amount that is not an integral multiple of $1,000 or in lieu of any fractional share of Company Preferred Stock) will terminate. Subject to clause (g)(ii)(D) below, from and after the Redemption Date, the person entitled to receive the Company Exchange Debentures issuable upon such redemption will be treated for all purposes as the registered holder of such Company Exchange Debentures.

(C) On or before the Redemption Date, each Holder of the Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock, in the manner and at the place designated in the Redemption Notice. Upon surrender in accordance with the Redemption Notice of the certificates representing any shares of Company Preferred Stock so redeemed, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), such shares shall be redeemed by the Company for Company Exchange Debentures received by the Company in accordance with clause g(i)(B). Subject to clause (g)(ii)(D) below, the Company shall pay interest, as applicable, on the Company Exchange Debentures at the rate and on the dates specified therein from the Redemption Date.

(D) Anything contained herein to the contrary notwithstanding, no Holder of Company Preferred Stock will be entitled to receive any payment of interest on Company Exchange Debentures or exercise any other right or privilege in respect thereof, until such Holder has surrendered the certificate or certificates evidencing such Holder’s Company Preferred Stock in accordance with clause (g)(ii)(C). The Company shall pay all interest which would have accrued on a Holder’s Company Exchange Debentures without additional interest, had such Holder surrendered the certificate or certificates evidencing such Holder’s Company Preferred Stock on the Redemption Date at the time such certificate or certificates are duly surrendered.

(iii) No Redemption in Certain Cases. Notwithstanding the foregoing provisions of this paragraph (g), the Company shall not be entitled to redeem the Company Preferred Stock for Company Exchange Debentures if such redemption, or any term or provision of the Company Exchange Indenture or the Company Exchange Debentures, or the performance of the Company’s obligations under the Company Exchange Indenture or the Company Exchange Debentures, shall violate or conflict with any applicable law or agreement or instrument then binding on the Company or if, at the time of such redemption, the Company is insolvent or would be rendered insolvent by such redemption.

(iv) Redemption of Initial Company Preferred Stock for Series B Stock. The Series B Stock will be issued by the Company only in connection with a redemption offer, on a share for share basis, for the Initial Company Preferred Stock as required pursuant to the Registration Agreement. Each share of Series B Stock issued upon redemption of a share of Initial Company Preferred Stock will be deemed to have the same Liquidation Preference and accrued and unpaid dividends as the share of Initial Company Preferred Stock so redeemed.

(h) Redemption at the Option of Holders Upon a Change of Control.

(i) Upon the occurrence of a Change of Control (the date of such occurrence being the “Change of Control Date”), each Holder of Company Preferred Stock shall have the right to require the Company to redeem all or any part of such Holder’s Company Preferred Stock pursuant to the offer described in paragraph (h)(ii) below (the “Change of Control Offer”) at a cash redemption price (the “Change of Control Redemption Price”) equal to 101% of the Liquidation Preference thereof, plus payment in cash of accrued and unpaid dividends thereon, if any, to the redemption date (including an amount in cash equal to a prorated dividend for any partial dividend period).

(ii) Within 30 days following the date on which the Company knows or reasonably should have known a Change of Control has occurred, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the transfer agent, to each Holder of Company Preferred Stock, at such Holder’s address appearing in the security register, a notice stating: (A) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this paragraph (h) and that all Company Preferred Stock timely tendered will be accepted for payment; (B) the Change of Control Redemption Price and the redemption date (the “Change of Control Redemption Date”), which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (C) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (D) that any shares of Company Preferred Stock not tendered will continue to accrue dividends; (E) that, unless the Company defaults in making payment therefor, any share of Company Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Redemption Date; (F) that Holders electing to have any shares of Company Preferred Stock redeemed pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Company Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Company Preferred Stock at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Redemption Date; (G) that Holders will be entitled to withdraw their election if the Company receives, not later than five Business Days prior to the Change of Control Redemption Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Company Preferred Stock the Holder delivered for redemption and a statement that such Holder is withdrawing his election to have such shares of Company Preferred Stock redemption; and (H) that Holders whose shares of Company Preferred Stock are redeemed only in part will be issued a new certificate representing the unredeemed shares of Company Preferred Stock.

(iii) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the redemption of Company Preferred Stock pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Determination, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Certificate of Determination by virtue of such compliance.

(iv) On the Change of Control Redemption Date the Company shall (A) accept for payment the shares of Company Preferred Stock validly duly tendered pursuant to the Change of Control Offer, (B) pay to the Holders of shares so accepted the redemption price therefor in cash and (C) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Company Preferred Stock duly tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Company Preferred Stock tendered and all rights of Holders of such tendered shares will terminate, except for the right to receive payment therefor, on the Change of Control Redemption Date.

(v) To accept the Change of Control Offer, the Holder of a share of Company Preferred Stock shall deliver, on or before the 10th day prior to the Change of Control Redemption Date, written notice to the Company (or an agent designated by the Company for such purpose) of such Holder’s acceptance, together with certificates evidencing the shares of Company Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer.

(i) Conversion or Exchange. The Holders of shares of Company Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company.

(j) Reissuance of the Company Preferred Stock. Shares of Company Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall not be reissued as shares of Company Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so long as any shares of Company Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof.

(k) Business Day. If any payment or redemption shall be required by the terms hereof to be made on a day that is not a Business Day, such payment or redemption shall be made on the immediately succeeding Business Day.

(l) Certain Additional Provisions. The sole remedy to Holders of Company Preferred Stock in the event that any of the following conditions shall occur, and the sole consequence of any such occurrence, shall be the voting rights described in paragraph (f)(ii).

(i) SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, however, that the Company shall not be so obligated to file such information, documents and reports with the SEC if the SEC does not permit such filings. The Company shall file with the SEC and provide Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with the information, documents and reports described herein whether or not the Exchange Offer Registration Statement has been filed or declared effective.

(ii) Limitation on Debt. The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Voting Rights Triggering Event would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt.

(iii) Limitation on Restricted Payments. The Company shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment,

(a) a Voting Rights Triggering Event shall have occurred and be continuing,

(b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above or

(c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of:

(i) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit),

(ii) Capital Stock Sale Proceeds,

(iii) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company’s balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt for Parity Stock or Junior Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and

(iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (B) the portion (proportionate to the Company’s equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and

(v) $7.5 million.

Notwithstanding the foregoing limitation, the Company may:

(a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this covenant; provided, however, that at the time of such payment of such dividend, no other Voting Rights Triggering Event shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments;

(b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Parity Stock or Junior Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above;

(c) purchase, repurchase, redeem, legally defease, acquire or retire for value shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock (or pay dividends or make loans to Holding for such purpose); provided, however, that (i) the aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Company Preferred Stock, except that (x) such amounts shall be increased by the aggregate net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of Holding, the Company or any of their Subsidiaries and (y) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (c)(i) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (c)(i) and (ii) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; and

(d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Company Preferred Stock (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be excluded in the calculation of the amount of Restricted Payments.

(iv) Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors’ qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) the disposition of 100% of the Capital Stock of a Restricted Subsidiary; provided that (x) the Company receives consideration at the time of such disposition at least equal to the Fair Market Value of such Restricted Subsidiary, (y) at least 75% of the consideration paid to the Company in connection with such disposition is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Company Preferred Stock) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities, and (z) the Net Available Cash received by the Company from such disposition is applied within

twelve months from the date of the receipt of such Net Available Cash to prepay, repay, legally defease or purchase Debt of the Company or any Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company) or to reinvest in Additional Assets (including by means of an Investment in Additional Assets by the Company or a Restricted Subsidiary with Net Available Cash received by the Company).

(v) Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of the Company Preferred Stock than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (B) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (C) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale.

(vi) Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an “Affiliate Transaction”), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Transfer Agent and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be.

Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following:

(i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary);

(ii) any Restricted Payment permitted to be made pursuant to paragraph (l)(iii) above;.

(iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor;

(iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and advances do not exceed $1.0 million in the aggregate at any one time outstanding;

(v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date;

(vi) the sale of common stock of the Company for cash; provided, that the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding;

(vii) the payment of dividends in kind in respect of (i) the Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this covenant; and

(viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company.

(vii) Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any Subsidiary of the Company (other than any Subsidiary of the Company designated as a Restricted Subsidiary under the Indenture governing the Notes) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.

The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above and (y) no Voting Rights Triffering Event shall have occurred and be continuing or would result therefrom.

Any such designation or redesignation by the Board of Directors will be evidenced to the Transfer Agent by filing with the Transfer Agent a Board Resolution giving effect to such designation or redesignation and an Officers’ Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Transfer Agent to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company’s fiscal year, within 90 days after the end of such fiscal year).

(viii) Merger, Consolidation and Sale of Property. The Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the “Surviving Person”) or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) the Surviving Person (if other than the Company) expressly assumes all obligations of the Company under the Company Preferred Stock and this Certificate of Determination; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Voting Rights Triggering Event shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of covenant (l)(iv) above, determining compliance thereunder for this purpose based upon the Consolidated Interest Expense, Consolidated Net Income and EBITDA of the Company or the Surviving Person, as the case may be, and its Restricted Subsidiaries; provided, however, that this clause (e) shall not apply to a

merger between the Company and a Wholly Owned Subsidiary of the Company solely for the purpose of reincorporating the Company in another state of the United States so long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof; and (f) the Company shall deliver, or cause to be delivered, to the Transfer Agent, in form and substance reasonably satisfactory to the Transfer Agent, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction complies with this covenant and that all conditions precedent herein provided for relating to such transaction have been satisfied.

(m) Certificates. (i) Form and Dating. The Company Preferred Stock and the Transfer Agent’s Countersignature shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Determination. The Company Stock certificate may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Company Preferred Stock certificate shall be dated the date of its countersignature. The terms of the Company Preferred Stock certificate set forth in Exhibit A are part of the terms of this Certificate of Determination. Notwithstanding any of the provisions of this paragraph (m) to the contrary, the rights, preferences, privileges and restrictions of each share of Company Preferred Stock shall be equal in all respects to each other share of Company Preferred Stock, except with respect to restrictions and other matters that may be imposed by applicable federal securities laws.

(A) Global Company Preferred Stock. Rule 144A Company Preferred Stock shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the “Rule 144A Global Company Preferred Stock”) and Regulation S Company Preferred Stock shall, to the extent required pursuant to paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act, be issued initially in the form of one or more temporary global securities (collectively, the “Temporary Regulation S Global Company Preferred Stock”), and, to the extent permitted pursuant to paragraph (C)(3)(ii)(B) of such Rule 903, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the “Permanent Regulation S Global Company Preferred Stock”), in each case without coupons with the global securities legend and restricted securities legend set forth in Exhibit A hereto, which shall be deposited on behalf of the purchasers of the Initial Company Preferred Stock represented thereby with the Transfer Agent, at its New York office, as custodian for DTC (or with such other custodian as DTC may direct), and registered in the name of DTC or a nominee of DTC, duly executed by the Company and countersigned by the Transfer Agent as hereinafter provided. Beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock will not be exchangeable for interests in the Rule 144A Global Company Preferred Stock, the Permanent Regulation S Global Company Preferred Stock, or any other security without a legend containing restrictions on transfer until the expiration of the Restricted Period and then only upon certification in form reasonably satisfactory to the Transfer Agent that beneficial ownership interests in such Temporary Regulation S Global Company Preferred Stock are owned either by non- U.S. persons or U.S. persons who purchased such interests in a transaction that did not require registration under the Securities Act. The Rule 144A Global Company Preferred Stock, Temporary Regulation S Global Company Preferred Stock and Permanent Regulation S Global Company Preferred Stock are collectively referred to herein as “Global Company Preferred Stock.” Subject to the terms hereof and to the requirements of applicable law, the number of shares of Company Preferred Stock represented by Global Company Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Determination or under applicable law with respect to any transfer of any interest in the Company Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Company Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by the terms of this Certificate of Determination, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

(B) Book-Entry Provisions. In the event Global Company Preferred Stock is deposited with or on behalf of DTC, the Company shall execute and the Transfer Agent shall countersign and deliver initially one or more Global Company Preferred Stock certificates that (a) shall be registered in the name of DTC for such Global Company Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC’s instructions or held by the Transfer Agent as custodian for DTC.

Members of, or participants in, DTC (“Agent Members”) shall have no rights under this Certificate of Determination with respect to any Global Company Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Company Preferred Stock, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Company Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written

certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Company Preferred Stock.

(C) Definitive Securities. Except as provided by applicable law or as provided in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial interests in Global Company Preferred Stock will not be entitled to receive physical delivery of certificated Company Preferred Stock.

(ii) Execution and Countersignature. Two Officers shall sign the certificates representing the Company Preferred Stock for the Company by manual or facsimile signature. The Company’s seal shall be impressed, affixed, imprinted or reproduced on the Company Preferred Stock and may be in facsimile form.

If an Officer whose signature is on certificates representing the Company Preferred Stock no longer holds that office at the time the Transfer Agent countersigns the Company Preferred Stock evidenced thereby, the shares of Company Preferred Stock evidenced thereby shall be valid nevertheless.

A certificate representing the Company Preferred Stock shall not be valid until an authorized signatory of the Transfer Agent manually countersigns the Company Preferred Stock. The signature shall be conclusive evidence that the Company Preferred Stock has been countersigned under this Certificate of Determination.

The Transfer Agent shall countersign and deliver a number of shares of Initial Company Preferred Stock and Series B Stock equal to the aggregate number of shares of Holding Preferred Stock for which such Company Preferred Stock is exchanged for issue only in a Registered Exchange Offer pursuant to the Registration Agreement, in each case upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. In addition, the Transfer Agent shall countersign and deliver, from time to time, Additional Shares for original issue upon order of the Company signed by two Officers or by an Officer or either an Assistant Treasurer or Assistant Secretary of the Company. Such orders shall specify the number of shares of the Company Preferred Stock to be countersigned and the date on which the original issue of Company Preferred Stock is to be countersigned and whether the Company Preferred Stock is to be Initial Company Preferred Stock or Series B Stock.

The Transfer Agent may appoint an countersigning agent reasonably acceptable to the Company to countersign the Company Preferred Stock. Unless limited by the terms of such appointment, a countersigning agent may countersign the Company Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Determination to countersign by the Transfer Agent includes countersign by such agent. An countersigning agent has the same rights as the Transfer Agent or agent for service of notices and demands.

(iii) Transfer and Exchange. (A) Transfer and Exchange of Definitive Company Preferred Stock. When Definitive Company Preferred Stock is presented to the Transfer Agent with a request to register the transfer of such Definitive Company Preferred Stock or to exchange such Definitive Company Preferred Stock for an equal number of shares of Definitive Company Preferred Stock of other authorized denominations, the Transfer Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Company Preferred Stock surrendered for transfer or exchange:

(1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Transfer Agent, duly executed by the Holder thereof or its attorney duly authorized in writing; and

(2) is being transferred or exchanged pursuant to an effective registration statement under the Securities Act or pursuant to clause (I) or (II) below, and are accompanied by the following additional information and documents, as applicable:

(I) if such Definitive Company Preferred Stock is being delivered to the Transfer Agent by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect in substantially the form of Exhibit B hereto; or

(II) if such Definitive Company Preferred Stock is being transferred to the Company or to a “qualified institutional buyer” (“QIB”) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto).

(B) Restrictions on Transfer of Definitive Company Preferred Stock for a Beneficial Interest in Global Company Preferred Stock. Definitive Company Preferred Stock may not be exchanged for a beneficial interest in Global Company Preferred Stock except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of Definitive Company Preferred Stock, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Transfer Agent, together with:

(1) certification that such Definitive Company Preferred Stock is being transferred (A) to a QIB in accordance with Rule 144A, (B) to an institution that is an “accredited investor” as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act that has furnished to the Transfer Agent a signed letter in the form of Exhibit B hereto or (C) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and

(2) written instructions directing the Transfer Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Company Preferred Stock to reflect an increase in the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, then the Transfer Agent shall cancel such Definitive Company Preferred Stock and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Transfer Agent, the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock to be increased accordingly. If no Global Company Preferred Stock is then outstanding, the Company shall issue and the Transfer Agent shall countersign, upon written order of the Company in the form of an Officers’ Certificate, a new Global Company Preferred Stock representing the appropriate number of shares.

(C) Transfer and Exchange of Interests in Global Company Preferred Stock. The transfer and exchange of beneficial interests in Global Company Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Determination (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor.

(D) Transfer of a Beneficial Interest in Temporary Regulation S Global Company Preferred Stock for interests in other Company Preferred Stock. During the Restricted Period, beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock (if any) may not be exchanged for interests in any other Global Company Preferred Stock or Definitive Company Preferred Stock. Thereafter, such beneficial ownership interests may be so exchanged only upon delivery to the Company and the Transfer Agent of a certificate in form and substance satisfactory to them certifying that the beneficial owner of the Temporary Regulation S Global Company Preferred Stock is either a non-U.S. person or a U.S. person who purchased such beneficial ownership interests in a transaction that did not require registration under the Securities Act, as provided in paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act.

(E) (i) Restrictions on Transfer and Exchange of Global Company Preferred Stock. Notwithstanding any other provisions of this Certificate of Determination, Global Company Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository.

(ii) Restrictions on Transfer of Temporary Regulation S Global Company Preferred Stock Interests. During the Restricted Period, beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock may only be sold, pledged or transferred through Euroclear or Cedel in accordance with the Applicable Procedures and only (i) to the Company, (ii) so long as such security is eligible for resale pursuant to Rule 144A under the Securities Act (“Rule 144A”), to a person whom the selling Holder reasonably believes is a “qualified institutional buyer” (“QIB”) as defined in Rule 144A that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (iii) in an offshore transaction in accordance with Regulation S, (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (v) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. During the Restricted Period, interests in the Temporary Regulation S Global Company Preferred Stock may not be transferred to institutions that are “Accredited Investors” (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.

(F) Countersignature of Definitive Company Preferred Stock. If at any time:

(1) DTC notifies the Company that DTC is unwilling or unable to continue as depository for the Global Company Preferred Stock and a successor depository for the Global Company Preferred Stock is not appointed by the Company within 90 days after delivery of such notice;

(2) DTC ceases to be a clearing agency registered under the Exchange Act;

(3) The Company, in its sole discretion, notifies the Transfer Agent in writing that it elects to cause the issuance of Definitive Company Preferred Stock under this Certificate of Determination, then the Company will execute, and the Transfer Agent, upon receipt of a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company requesting the countersign and delivery of Definitive Company Preferred Stock to the persons designated by the Company, will countersign and deliver Definitive Company Preferred Stock equal to the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, in exchange for such Global Company Preferred Stock. Definitive Company Preferred Stock issued in exchange for a beneficial interest in a Global Company Preferred Stock shall be registered in such names and in such authorized denominations as DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. The Transfer Agent shall mail or deliver such Definitive Company Preferred Stock to the persons in whose names such Company Preferred Stock are so registered in accordance with the instructions of DTC.

(G) Legend. (1) Except as permitted by the following paragraph (2), each certificate evidencing the Global Company Preferred Stock and the Definitive Company Preferred Stock (and all Company Preferred Stock issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form:

“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR OF A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES TO THE ISSUER, (4) TO AN INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a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“40 DAY RESTRICTED PERIOD” (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE ISSUER AND THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) PURCHASING FROM A PERSON NOT PARTICIPATING IN THE INITIAL DISTRIBUTION OF THIS SECURITY (OR ANY PREDECESSOR SECURITY), IT IS AN INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(A)(1), (2), (3), OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT.”

(2) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by Global Company Preferred Stock) pursuant to Rule 144 under the Securities Act or an effective registration statement under the Securities Act:

(I) in the case of any Transfer Restricted Security that is a Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Company Preferred Stock that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security; and

(II) in the case of any Transfer Restricted Security that is represented by a Global Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such

Transfer Restricted Security for interests in an Unrestricted Global Preferred Stock Security that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security, if the Holder’s request for such exchange was made in reliance on Rule 144 and the Holder certifies to that effect in writing to the Transfer Agent (such certification to be in the form and substance satisfactory to the Transfer Agent).

(3) In the case of any Restricted or Unrestricted Global Security that represents the Initial Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Restricted or Unrestricted Global Security for a new global security representing Series B Stock that does not bear the legend set forth above.

(H) Cancelation or Adjustment of Global Company Preferred Stock. At such time as all beneficial interests in Global Company Preferred Stock have either been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall be returned to DTC for cancelation or retained and canceled by the Transfer Agent. At any time prior to such cancelation, if any beneficial interest in Global Company Preferred Stock is exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, the number of shares of Company Preferred Stock represented by such Global Company Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Company Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.

(I) Obligations with Respect to Transfers and Exchanges of Company Preferred Stock. (1) To permit registrations of transfers and exchanges, the Company shall execute and the Transfer Agent shall countersign Definitive Company Preferred Stock and Global Company Preferred Stock as required pursuant to the provisions of this paragraph (iii).

(2) All Definitive Company Preferred Stock and Global Company Preferred Stock issued upon any registration of transfer or exchange of Definitive Company Preferred Stock or Global Company Preferred Stock shall be the valid obligations of the Company, entitled to the same benefits under this Certificate of Determination as the Definitive Company Preferred Stock or Global Company Preferred Stock surrendered upon such registration of transfer or exchange.

(3) Prior to due presentment for registration of transfer of any shares of Company Preferred Stock, the Transfer Agent and the Company may deem and treat the person in whose name such shares of Company Preferred Stock are registered as the absolute owner of such Company Preferred Stock and neither the Transfer Agent nor the Company shall be affected by notice to the contrary.

(4) No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Company Preferred Stock Certificate at the office of the Transfer Agent maintained for that purpose. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Company Preferred Stock Certificates.

(5) Upon any sale or transfer of shares of Company Preferred Stock (including any Company Preferred Stock represented by a Global Company Preferred Stock Certificate) pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to the Company that no legend is required:

(A) in the case of any Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Company Preferred Stock for Definitive Company Preferred Stock that does not bear the legend set forth in paragraph (iii)(G) above and rescind any restriction on the transfer of such Company Preferred Stock; and

(B) in the case of any Global Company Preferred Stock, such Company Preferred Stock shall not be required to bear the legend set forth in paragraph (m)(iii)(G) above but shall continue to be subject to the provisions of paragraph (m)(iii)(D) hereof.

(iv) Replacement Certificates. If a mutilated Company Preferred Stock certificate is surrendered to the Transfer Agent or if the Holder of a Company Preferred Stock certificate claims that the Company Preferred Stock certificate has been lost, destroyed or wrongfully taken, the Company shall issue and the Transfer Agent shall countersign a replacement Company Preferred Stock certificate if the reasonable requirements of the Transfer Agent, the Company and of Section 8-405 of the Uniform Commercial Code as in effect in the State of New York are met. If required by the Transfer Agent or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Transfer Agent to protect the Company and the Transfer Agent from any loss which either of them may suffer if a Company Preferred Stock certificate is replaced. The Company and the Transfer Agent may charge the Holder for their expenses in replacing a Company Preferred Stock certificate.

(v) Temporary Certificates. Until definitive Company Preferred Stock certificates are ready for delivery, the Company may prepare and the Transfer Agent shall countersign temporary the Company Preferred Stock certificates. Temporary the Company Preferred Stock certificates shall be substantially in the form of definitive Company Preferred Stock certificates but may have variations that the Company considers appropriate for temporary Company Preferred Stock certificates. Without unreasonable delay, the Company shall prepare and the Transfer Agent shall countersign definitive Company Preferred Stock certificates and deliver them in exchange for temporary Company Preferred Stock certificates.

(vi) Cancelation. (A) In the event the Company shall purchase or otherwise acquire Definitive Company Preferred Stock, the same shall thereupon be delivered to the Transfer Agent for cancelation.

(B) At such time as all beneficial interests in Global Company Preferred Stock have been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall thereupon be delivered to the Transfer Agent for cancelation.

(C) The Transfer Agent and no one else shall cancel and, subject to the record retention requirements under the Exchange Act, destroy all Company Preferred Stock certificates surrendered for transfer, exchange, replacement or cancelation and deliver a certificate of such destruction to the Company unless the Company directs the Transfer Agent to deliver canceled Company Preferred Stock certificates to the Company. The Company may not issue new Company Preferred Stock certificates to replace Company Preferred Stock certificates to the extent they evidence Company Preferred Stock which the Company has purchased or otherwise acquired.

(n) Additional Rights of Holders. In addition to the rights provided to Holders under this Certificate of Determination, Holders shall have the rights set forth in the Registration Agreement.

(o) Certain Definitions. As used in this Certificate of Determination, the following terms shall have the following meanings (and (1) terms defined in the singular have comparable meanings when used in the plural and vice versa, (2) “including” means including without limitation, (3) “or” is not exclusive and (4) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles as in effect on the Issue Date and all accounting calculations will be determined in accordance with such principles), unless the content otherwise requires:

“Additional Assets” means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), such Restricted Subsidiary is primarily engaged in a Related Business.

“Affiliate” of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. For purposes of the covenant described under paragraph (l)(vi) only, “Affiliate” shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof.

“Asset Sale” means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a “disposition”), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors’ qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) any disposition effected in compliance with the first paragraph of the covenant described under paragraph (l)(viii), (iii) any Sale and Leaseback

Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (iv) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000).

“Attributable Debt” in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended).

“Average Life” means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments.

“Board of Directors” means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board.

“Business Day” means each day which is not a Legal Holiday.

“Capital Lease Obligations” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty.

“Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest.

“Capital Stock Sale Proceeds” means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Parity Stock and Junior Stock (other than Disqualified Stock) after the Issue Date, net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

“Change of Control” means the occurrence of any of the following events:

(a) prior to the first Public Equity Offering, the Permitted Holders cease to be the “beneficial owners” (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have “beneficial ownership” of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the “specified corporation”) held by any other corporation (the “parent corporation”) so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or

(b) after the first Public Equity Offering, any “Person” or “group” (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have “beneficial ownership” of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the “beneficial owners” (as defined in Rule 13d-3 under the Exchange Act, except that a

Person will be deemed to have “beneficial ownership” of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or

(c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or

(d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; or

(e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Exchange Debentures” means the 11 ¹/2% Subordinated Exchange Debentures due 2010 of the Company, issuable upon redemption of the Company Preferred Stock.

“Company Exchange Indenture” means the Exchange Indenture dated as of April 7, 1998 between the Company and the United States Trust Company of New York, as Trustee, governing the Company Exchange Debentures.

“Consolidated Interest Coverage Ratio” means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period

directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term “pro forma”. If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months).

“Consolidated Interest Expense” means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Parity Stock or Junior Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust.

“Consolidated Net Income” means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company’s equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company’s equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of paragraph (l)(iii) only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company’s equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of paragraphs (l)(ii) and (l)(viii) only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants

of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to Issue Date in respect of payments under the Company’s 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of paragraph (l)(iii) only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof.

“Credit Facility” means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders).

“Currency Exchange Protection Agreement” means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates.

“Debt” means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (t) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Debt issued with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP.

“Disqualified Dividends” means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock.

“Disqualified Stock” means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Company Preferred Stock; provided, however, that Redeemable Stock of such Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to

require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a “change of control” occurring prior to the first anniversary of the Stated Maturity of the Company Preferred Stock, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Company Preferred Stock and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Company Preferred Stock.

“EBITDA” means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non- cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders.

“Employee Notes” means promissory notes of employees of Holding, the Company or any of their Subsidiaries payable to the Company or Holding and received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees.

“Exchange Act” means the Securities Exchange Act of 1934.

“Exchange Offer Registration Statement” means a registration statement of the Company on an appropriate form under the Securities Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

“Fair Market Value” means, with respect to any Property, the price which could be negotiated in an arm’s-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Transfer Agent.

“GAAP” means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC.

“Guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning. The term “Guarantor” shall mean any Person Guaranteeing any obligation.

“Hedging Obligation” of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement.

“Holder” means the person in whose name a share of Company Preferred Stock is registered on the Transfer Agent’s books.

“Holding” means River Holding Corp., the corporate parent of the Company, and any successor thereto.

“IAI” means an institution that is an “accredited investor” as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.

“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that solely for purposes of determining compliance with paragraph (l)(ii), amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.

“Indenture” means the Indenture dated as of the Issue Date among Holding, the Company and the United States Trust Company of New York, as Trustee, governing the Notes.

“Independent Appraiser” means an investment banking firm of national standing or any third party appraiser of national standing, provided that such firm or appraiser is not an Affiliate of the Company.

“Industrias Hudson” means Industrias Hudson S.A. de C.V.

“Interest Rate Agreement” means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates.

“Investment” by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of paragraphs (l)(iii) and (l)(vii) and the definition of “Restricted Payment”, “Investment” shall include the portion (proportionate to the Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company’s “Investment” in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment.

“Issue Date” means April 7, 1998.

“Legal Holiday” means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York and Los Angeles.

“Lien” means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction).

“Merger Agreement” means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date.

“Mirror Preferred Stock” means the 11 ¹/2% Senior PIK Preferred Stock due 2010 of the Company.

“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

“Net Available Cash” from any Asset Sale or other transaction subject to paragraph (l)(iv) means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such transaction or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such transaction, (b) all payments made on any Debt which is secured by any Property subject to such transaction, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such transaction, or by applicable law, be repaid out of the proceeds from such transaction, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such transaction and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such transaction and retained by the Company or any Restricted Subsidiary after such transaction.

“New Credit Facility” means the credit facilities made available pursuant to the Senior Secured Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent.

“Notes” means the 9 ¹/8% Senior Subordinated Notes due 2008 of the Company.

“Officer” means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company.

“Officers’ Certificate” means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Transfer Agent.

“Opinion of Counsel” means a written opinion from legal counsel who is acceptable to the Transfer Agent. The counsel may be an employee of or counsel to the Company.

“Permitted Debt” means:

(a) Debt of the Company evidenced by the Notes and of Subsidiary Guarantors evidenced by Subsidiary Guaranties;

(b) (i) Debt under the Credit Facility; provided that the aggregate principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans and obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) Guarantees of Debt under the Credit Facility;

(c) Debt in respect of Capital Lease Obligations and Purchase Money Debt, provided that (i) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million;

(d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any subsequent issue or transfer of Capital Stock or other event that

results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof;

(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii);

(f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of paragraph (l)(ii);

(g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes;

(h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances;

(i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above;

(j) Debt not otherwise described in clauses (a) through (i) above and clause (1) below in an aggregate principal amount outstanding at any one time not to exceed $15.0 million;

(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of paragraph (l)(ii) and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto; and

(l) Debt of the Company under the Company Exchange Debentures.

“Permitted Holders” means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated.

“Permitted Investment” means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person’s primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding,

the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees; provided that the aggregate principal amount of such loans, advances and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with a disposition of assets; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided that such amounts do not increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of paragraph (l)(iii)).

“Permitted Refinancing Debt” means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced and (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary.

“Person” means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

“Preferred Stock” means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person.

“pro forma” means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be.

“Property” means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person.

“Public Equity Offering” means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act.

“Purchase Money Debt” means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodeling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be.

“Redeemable Stock” means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock.

“Refinance” means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. “Refinanced” and “Refinancing” shall have correlative meanings.

“Registered Exchange Offer” means the proposed offer to the Holders to issue and deliver to such Holders, upon redemption of the Initial Company Preferred Stock a like liquidation preference of Series B Stock.

“Registration Agreement” means the Registration Agreement, dated April 7, 1998, among the Company, Holding and Salomon Brothers Inc and BT Alex. Brown Incorporated.

“Regulation S Company Preferred Stock” means all Initial Company Preferred Stock offered and sold outside the United States in reliance on Regulation S under the Securities Act.

“Related Business” means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date.

“Restricted Payment” means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Parity Stock or Junior Stock of the Company or any Capital Stock of any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Junior Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Parity Stock or Junior Stock of the Company or any Affiliate of the Company (other than from the Company or any Capital Stock of any Restricted Subsidiary) or any securities exchangeable for or convertible into any such Parity Stock, Junior Stock or Capital Stock, including the exercise of any option to exchange any Parity Stock, Junior Stock or Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); or (c) any Investment (other than Permitted Investments) in any Person.

“Restricted Subsidiary” means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to paragraph (l)(vii).

“Rule 144A Company Preferred Stock” means the Initial Company Preferred Stock issued in reliance on Rule 144A under the Securities Act.

“S&P” means Standard & Poor’s Ratings Service or any successor to the rating agency business thereof.

“Sale and Leaseback Transaction” means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person.

“Securities Act” means the Securities Act of 1933.

“Shelf Registration Statement” means a “shelf” registration statement of the Company pursuant to the provisions of the Registration Agreement which covers the Initial Company Preferred Stock and the Series B Stock on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, all amendments and supplements to such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.

“Stated Maturity” means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred).

“Subsidiary” means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person.

“Subsidiary Guarantor” means each Subsidiary of the Company that becomes a Subsidiary Guarantor pursuant to the terms of the Notes.

“Subsidiary Guaranty” means a Guarantee of the Notes on the terms set forth in the Indenture by a Subsidiary Guarantor of the Company’s obligations with respect to the Notes.

“Temporary Cash Investments” means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rate “A-3” or “A-” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any investment therein is made of “P-1” (or higher) according to Moody’s or “A-” (or higher) according to S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer’s option, provided that (i) the long-term debt of such state is rated “A- 3” or “A-1” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above.

“Unrestricted Subsidiary” means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto.

“U.S. Government Obligations” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer’s option.

“Voting Stock” of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

“Wholly Owned Subsidiary” means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors’ qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries.

5. The foregoing Certificate of Determination has been duly approved by the required vote of holders of the Company’s Senior PIK Preferred Stock (pursuant to the voting rights of such stock set forth in the Amended and Restated Certificate of Determination for that series). The Company has outstanding 300,000 shares of Senior PIK Preferred Stock. The vote required to approve this Certificate of Determination was more than two-thirds of the outstanding Senior PIK Preferred Stock, and the number of shares voting in favor of this Certificate of Determination equaled or exceeded the vote required.

The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on April 8, 1998 in Temecula, California.

/s/ Richard W. Johansen

Richard W. Johansen, President

/s/ Jay R. Ogram

Jay R. Ogram, Chief Financial Officer

CERTIFICATE OF AMENDMENT

OF THE AMENDED AND RESTATED

CERTIFICATE OF DETERMINATION OF

HUDSON RESPIRATORY CARE INC.

Charles A. French and Patrick Yount certify that:

1. They are the duly elected and acting President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the “Corporation”).

2. The first sentence of section (a) of the Amended and Restated Certificate of Determination of the Corporation (the “Certificate of Determination”) is hereby deleted and replaced in its entirety with the following:

“The designation of such series of Preferred Stock is the 11½% Senior PIK Preferred Stock due 2010, $.01 par value, (the “Senior PIK Preferred Stock”), and the number of shares of such Senior PIK Preferred Stock is 800,000.”

3. The last two sentences of section (d)(i) of the Certificate of Determination of the Corporation are hereby deleted and replaced in their entirety with the following:

“Any dividend on the Senior PIK Preferred Stock payable pursuant to this paragraph (d)(i) on or prior to April 15, 2004 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Senior PIK Preferred Stock (the “Additional Shares”) equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2004, all dividends shall be payable solely in cash.”

4. Section (g)(ii)(A)(1) of the Certificate of Determination of the Corporation is hereby deleted and replaced in its entirety with the following:

“dividends on the Senior PIK Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2004, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a “Dividend Default”);”

5. The above amendment of the Certificate of Determination has been approved by the Board of Directors of the Corporation.

6. The foregoing amendment of the Certificate of Determination has been duly approved by the required vote of the shareholders of each class of stock of the Corporation in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of each class entitled to vote with respect to the amendment was 10,654,293 Common shares, 526,028 Senior PIK Preferred shares and 3,000 Junior Preferred shares. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the common shares, more than 50% of the Senior PIK Preferred Shares and more than two-thirds of the Junior Preferred Shares.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Executed at Los Angeles, California on May 20, 2003.

/s/ Charles A. French

Charles A. French, President

/s/ Patrick Yount

Patrick Yount, Secretary

Certificate of Amendment of the

Amended and Restated Certificate of Determination

of Hudson Respiratory Care Inc.

for its 11½% Senior PIK Preferred Stock due 2010

Charles A. French and Patrick Yount certify that:

1. They are the duly elected and acting President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the “Corporation”).

2. The Corporation filed an Amended and Restated Certificate of Determination for its 11½% Senior PIK Preferred Stock due 2010 (the “Certificate of Determination”) with the California Secretary of State on April 8, 1998 (as amended on May 27, 2003).

3. The last two sentences of section (d)(i) of the Certificate of Determination of the Corporation are hereby deleted and replaced in their entirety with the following:

“Any dividend on the Senior PIK Preferred Stock payable pursuant to this paragraph (d)(i) on or prior to April 15, 2005 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Senior PIK Preferred Stock (the “Additional Shares”) equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2005, all dividends shall be payable solely in cash.”

4 Section (g)(ii)(A)(1) of the Certificate of Determination of the Corporation is hereby deleted and replaced in its entirety with the following:

“dividends on the Senior PIK Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2005, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a “Dividend Default”);”

5 The above amendment of the Certificate of Determination has been approved by the Board of Directors of the Corporation.

6 The foregoing amendment of the Certificate of Determination has been duly approved by the required vote of the shareholders of each class of stock of the Corporation in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of each class entitled to vote with respect to the amendment was 10,654,293 shares of common stock, 526,028 shares of 11½% Senior PIK Preferred Stock due 2010 and 3,000 shares of 12% Junior Convertible Preferred Stock. No shares of the Corporation’s 11½% Senior Redeemable PIK Preferred Stock have been issued. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the common shares, more than 50% of the Senior PIK Preferred Shares and more than two-thirds of the Junior Preferred Shares.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Executed at Los Angeles, California on October 2, 2003.

/s/ Charles A. French

Charles A. French, President

/s/ Patrick Yount

Patrick Yount, Secretary

CERTIFICATE OF DETERMINATION OF PREFERENCES

OF 12% JUNIOR CONVERTIBLE CUMULATIVE PREFERRED STOCK OF

HUDSON RESPIRATORY CARE INC.

a California corporation

The undersigned certify that:

A. They are the President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the “Company”).

B. The authorized number of shares of Preferred Stock is 2,000,000 of which 397,694 shares have been issued. The authorized number of shares of 12% Junior Convertible Cumulative Preferred Stock is 10,000 shares, none of which has been issued.

C. Pursuant to the authority given by the Company’s Amended and Restated Articles of Incorporation, the Board of Directors of the Corporation (the “Board”) duly has approved and adopted the following recitals and resolutions:

WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish a series of Preferred Stock as follows:

(a) The designation of such series of Preferred Stock is the 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”), and the number of shares of such Junior Preferred Stock is 10,000;

(b) The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidations preference granted to and imposed upon Junior Preferred Stock and the holders thereof (the “Holders”) shall be as set forth below:

(c) Ranking. The Junior Preferred Stock will, with respect to dividend rights and rights on liquidations, winding-up and dissolutions, rank (i) senior to common stock of the Company (the “Common Stock”) and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on parity with, the Junior Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company, (ii) junior to the 11½% Senior PIK Preferred Stock due 2010 (the “Senior PIK Preferred Stock”) as to dividend rights and rights on

liquidation, winding-up and dissolution of the Company, and (iii) on a parity with each other series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Junior Preferred as to dividend rights and right on liquidation, winding-up and dissolutions (collectively referred to as “Parity Stock”).

(d) Dividends.

(i) The holders of shares of Junior Preferred Stock then outstanding shall be entitled to receive, prior to any payment or declaration of dividends in respect of the outstanding Common Stock or any other capital stock of the Company (other than the Senior Preferred Stock or Parity Stock), when and if declared by the Board, out of funds legally available for the payment of dividends, cumulative dividends at the rate of (a) $120 per share plus (b) an amount determined by applying a 12% annual rate compounded semi-annually to any accrued but unpaid dividend amount from the last day of the period when such dividend accrues to the actual date of payment of such dividend. Such dividends on the outstanding shares of Junior Preferred Stock shall be payable on each April 15 and October 15 (each such date being a “Dividend Payment Date”). The Board may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. Each of such semi-annual dividends (whether payable in cash or in stock) shall be fully cumulative and shall accrue from day to day (whether or not declared) from the first day of each period in which such dividend may be payable as herein provided, except that with respect to the first semi-annual dividend, such dividend shall accrue from the date of issuance of the Junior Preferred Stock. Dividends, when, as permitted by the debt agreements of the Company or any of its Subsidiaries, or, at the Company’s option, by issuing shares, of Junior Preferred Stock shall constitute full payment of the Dividend.

(ii) All dividends paid with respect to shares of the Junior Preferred Stock pursuant to this paragraph (d) shall be paid pro rata to the Holders entitled thereto.

(iii) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on the Junior Preferred Stock for any period unless full cumulative dividends with respect to each Dividend Payment Date ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Senior PIK Preferred Stock. If full dividends are not so paid, the Parity Stock will share dividends pro rata with the Junior Preferred Stock.

(iv) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Junior Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Junior Preferred Stock.

(v) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative

dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Junior Preferred Stock. If full dividends are not so paid, the Junior Preferred Stock will share dividends pro rata with the Parity Stock.

(vi) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Junior Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term “dividend” does not include dividends payable solely in shares of Junior Stock on Junior Stock.

(vii) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company.

(viii) Dividends payable on the Junior Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Junior Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two.

(e) Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each Holder of Junior Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its shareholders, an amount (the “Liquidation Preference”) equal to the sum of (i) $1,000 per share of Junior Preferred Stock held by such Holder plus (ii) an amount in cash equal to all accumulated and unpaid dividends (whether or not declared, and including any accrual amounts thereon as provided in subsection (d)(i) above) thereon to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. All assets or surplus funds of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, shall be distributed in the following order of priority:

(i) First, ratably among the holders of the Senior PIK Preferred Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Senior PIK Preferred Stock, if amounts payable thereon had been paid in full);

(ii) Second, ratably among the holders of the Junior Preferred Stock and the Parity Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled.

(iii) Third, ratably among the holders of the Junior Stock.

After payment of the full amount of the Liquidation Preference of the outstanding shares of Junior Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Junior Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company.

For the purposes of this paragraph (e), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company.

(f) Optional Redemption.

(i) Each share of the Junior Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company at the redemption price of the 100% of the Liquidation Preference of such share (the “Redemption Price”).

(ii) In the event of a redemption of only a portion of the then outstanding shares of Junior Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold lower than 100 shares as a result of such redemption), as may be determined by the Company.

(iii) Procedure for Optional Redemption.

(A) On and after the Optional Redemption Date (the “Redemption Date”), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Junior Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price, without interest; provided, however, that if a notice of redemption shall have been given as provided in subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be Stockholders of the Company and shall be entitled only to receive the Optional Redemption Price, for such shares without interest from the Redemption Date.

(B) With respect to a redemption, the Company will send a written notice of redemption by first class mail to each holder of record of shares of Junior Preferred Stock, not fewer than 30 days nor more than 60 days prior to the Redemption Date at its registered address (the “Redemption Notice”) and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any deficiency therein

shall affect the validity of the procedure for the redemption of any shares of Junior Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state:

(1) the Optional Redemption Price;

(2) whether all or less than all the outstanding shares of Junior Preferred Stock are to be redeemed and the total number of shares of Junior Preferred Stock being redeemed;

(3) the Redemption Date;

(4) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Junior Preferred Stock to be redeemed; and

(5) that dividends on the shares of the Junior Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price.

(C) Each Holder of Junior Preferred Stock shall surrender the certificate or certificates representing such shares of Junior Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares.

(g) Voting Rights.

(i) The Holders of Junior Preferred Stock, in addition to any other voting rights required under California law, shall be entitled, subject to paragraph (g)(ii)(A), to cast a one-half vote per share on matters required or permitted to be voted upon by the shareholders of the Company, and the Junior Preferred Stock shall vote together with the Company’s common stock (“Common Stock”) as a single class on all such matters. Further, the Holders of the Junior Preferred Stock, voting as a separate class, shall have the voting rights set forth in paragraph (g)(ii).

(ii) (A) So long as any shares of Junior Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Junior Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as “Senior Stock”) or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares of

Junior Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting.

(B) So long as any shares of the Junior Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Junior Preferred Stock or to authorize the issuance of any additional shares of Junior Preferred Stock (except to authorize the issuance of additional shares of Junior Preferred Stock to be paid as dividends on the Junior Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the Company and a Wholly Owned Subsidiary of the Company or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to the Company shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Junior Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Junior Preferred Stock.

(C) Except as required under California law or as set forth in paragraph (g)(ii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Junior Preferred Stock, or (y) the increase or decrease in the amount of authorized capital stock of any class, including any Junior Preferred Stock, shall not require the consent of Holders of Junior Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Junior Preferred Stock.

(h) Conversion or Exchange.

(i) Optional Conversion. Each share of Junior Preferred Stock shall be convertible, without the payment of any additional consideration by the Holder thereof and at the option of the Holder thereof, at any time after the date of issuance of such share, at the office of the Company into such number of fully paid and nonassessable shares of Common Stock as determined by dividing $1,000 (the “Original Purchase Price”) by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also receive in respect of each share converted all accrued and unpaid dividends on such share payable at the election of the Holder, either (1) in a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) in cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock. The initial Conversion Price at which shares of Common Stock shall be deliverable upon conversion (the “Conversion Price”) shall be $10 per share. Such Conversion Price shall be subject to adjustment as provided in section (h)(vi) below.

(ii) Automatic Conversion. Each share of Junior Preferred Stock shall automatically be converted into that number of shares of Common Stock as determined by

dividing $1,000 (the “Original Purchase Price”) by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also received for accrued and unpaid dividends on each share, subject to the election of the Holder, either (1) a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company’s Common Stock

(B) Additionally, each share series of Junior Preferred Stock shall be automatically converted into shares of Common Stock at the Conversion Price in effect at the time of conversion upon the optional conversion into Common Stock of a cumulative number of shares of Junior Preferred Stock representing two thirds of the aggregate number of shares of Junior Preferred Stock theretofore issued by the Company.

(iii) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Junior Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by the Conversion Price.

(iv) Mechanics of Optional Conversion. Before any holder of Junior Preferred Stock shall be entitled to convert the same into full shares of Common Stock, such Holder shall surrender the certificate or certificates therefor, endorsed or accompanied by written instrument or instruments of transfer, in a form satisfactory to the Company, duly executed by the registered Holder or by such Holder’s his or its attorney duly authorized in writing, at the office of the Company, and shall give written notice to the Company at such office that such holder elects to convert the same and shall state therein such Holder’s name or the names of the nominees in which such Holder wishers the certificate or certificates for shares of Common Stock to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Junior Preferred Stock, or to his or its nominee or nominees, a certificate or certificates for the number of shares of Common stock to which such holder shall be entitled as aforesaid, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Junior Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. From and after such date, all rights of the Holder with respect to the Junior Preferred Stock so converted shall terminate, except only the right of such holder, upon surrender of his or its certificate or certificates therefor, to receive certificates for the number of shares of Common Stock issuable upon conversion thereof and cash for fractional shares.

(v) Mechanics of Automatic Conversion. All holders of record of shares of Junior Preferred Stock will be given written notice of the date of any automatic conversion referenced in Section (h) (ii). Such notice will be sent by mail, first class, postage prepaid, to each record holder of Junior Preferred Stock at such holder’s address appearing on the stock register. Each holder of shares of Junior Preferred Stock shall, promptly after receiving such

notice, surrender such holder’s certificate or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock or other securities to which such holder is entitled. Upon the date of any such automatic conversion, all rights with respect to the Junior Preferred Stock will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock or other securities into which such Junior Preferred Stock has been converted and cash for fractional shares, plus any dividends thereon declared and unpaid as of the time of such conversion. All certificates evidencing shares of Junior Preferred Stock which are automatically converted in accordance with the provisions hereof shall, from and after the date of such automatic conversion, be deemed to have been retired and canceled and the shares of Junior Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the date of any such automatic conversion and the surrender of the certificate or certificates for Junior Preferred Stock as aforesaid, the Company shall cause to be issued and delivered to such holder, or to such holder’s written order, a certificate or certificates for the number of full shares of Common Stock or other securities issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection (h) (iii) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion.

(vi) Certain Adjustments to Conversion Price.

(A) Adjustment for Stock Splits, Stock Dividends and Combinations of Common Stock. In the event the outstanding shares of Common Stock shall, after the filing of this Certificate of Designation, be further subdivided (split), or combined (reverse split), by reclassification or otherwise, or in the event of any dividend or other distribution payable on the Common Stock in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, dividend or other distribution shall, concurrently with the effectiveness of such subdivision, combination or dividend or other distribution, be proportionately adjusted.

(B) Adjustment for Merger or Reorganization, Etc. In case of a reclassification, reorganization or exchange transaction or any consolidation or merger of the Company with another corporation (other than a merger or other reorganization which is deemed to be a liquidation pursuant to Section (d)), each share of Junior Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon conversion of such Junior Preferred Stock would have been entitled upon such reclassification, reorganization, exchange, consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Junior Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Junior Preferred Stock.

(C) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the filing of this Certificate of Determination makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Junior Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Company which they would have received had their Junior Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section (h) with respect to the rights of the holders of the Junior Preferred Stock.

(i) Reissuance of Junior Preferred Stock. Shares of Junior Preferred Stock that have been issued and reacquired in any manner shall not be reissued as shares of Junior Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so long as any shares of Junior Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof.

(j) Certificates.

(i) Form and Dating. The Junior Preferred Stock shall be in the form approved by the Company in accordance with the applicable provision of the laws of California. The Junior Preferred Stock certificate may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company).

(ii) Execution. Two Officers shall sign the certificates representing Junior Preferred Stock for the Company by manual or facsimile signature. The Company’s seal shall be impressed, affixed, imprinted or reproduced on the Junior Preferred Stock and may be in facsimile form.

(iii) Legend. Each certificate evidencing the Junior Preferred Stock shall bear a legend in substantially the following form:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM UNDER SAID ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER.

RESOLVED FURTHER, that the President and Secretary of the Company are hereby authorized and directed to execute, acknowledge, file and record a Certificate of Determination of Preferences in accordance with the foregoing resolutions and provisions of California law.

The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on August 2, 2001 in Temecula, California.

/s/ Richard W. Johansen

Richard W. Johansen, President

/s/ Patrick Yount

Patrick Yount, Secretary

EX-14.1

EXHIBIT 14.1

Hudson Respiratory Care, Inc.

Financial Code of Ethics

Hudson RCI requires ethical conduct in the practice of financial management throughout the world. The Chief Executive Officer, Chief Financial Officer, Controller and financial managers hold an important and elevated role in corporate governance. Our Financial Code of Ethics requires that our CEO, CFO and other members of the Hudson RCI Finance Department adhere to the following practices:

• Embody and enforce this Code of Ethics.

• Promptly report to the Chief Financial Officer or the Audit Committee of the Board of Directors any conduct that the individual believes to be a violation of law or business ethics or of any provision of this Code of Ethics, including any transaction or relationship that reasonably could be expected to give rise to such a violation.

• Act at all times with honesty, integrity and independence, avoiding actual or apparent conflicts of interest in personal and professional relationships.

• Discuss with the appropriate senior management, or, in the case of the Chief Executive Officer, with the Audit Committee of the Board of Directors, in advance any transaction that reasonably could be expected to give rise to a conflict of interest in personal and professional relationships.

• Provide or produce full, fair, accurate, timely and understandable financial and other disclosures in internal reports as well as documents filed or submitted to the Securities and Exchange Commission, any other government agency or self-regulatory organization, or used in public communications.

• Comply with all applicable rules and regulations of federal, state, provincial and local governments, the Securities and Exchange Commission and other appropriate private and public regulatory agencies.

• Comply with the Company’s corporate governance and other policies and procedures.

• Act in good faith, responsibly and without knowingly misrepresenting material facts or allowing the individual’s better judgment to be subordinated.

• Protect and respect the confidentiality of non-public information acquired in the course of the individual’s work except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of the individual’s work will not be used for personal advantage.

• Proactively promote ethical conduct as a responsible partner among peers in the work environment.

• Responsibly use and control assets and other resources employed or entrusted to the individual’s supervision.

The Chief Executive Officer and Chief Financial Officer shall ensure that this Code of Ethics is communicated at least annually throughout all financial departments.

Charles French Chief Executive Officer	Patrick Yount Chief Financial Officer	Ola Magnuson President - Hudson RCI AB
Jan Bostrom Chief Financial Officer -Hudson RCI AB	Charles Boyles Corporate Controller	Lars Wallgren Controller - Hudson RCI AB

By signing this statement, I acknowledge that I have read, understand, and agree to adhere to this Code of Ethics. Violation of this Code of Ethics may result in disciplinary action and be grounds for termination of employment by Hudson RCI.

Signature: Date:

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Charles A. French, certify that:

1. I have reviewed this annual report on Form 10-K of River Holding Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2004	/s/ Charles A. French
	Charles A. French
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Patrick G. Yount, certify that:

1. I have reviewed this annual report on Form 10-K of River Holding Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2004	/s/ Patrick G. Yount
	Patrick G. Yount
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the Annual Report of River Holding Corp. (the “Company”) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Charles A. French, President and Chief Executive Officer of the Company, certify, to my knowledge, that:

1. The Periodic Report fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Charles A. French

Charles A. French

President and Chief Executive Officer

March 16, 2004

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

In connection with the Annual Report of River Holding Corp. (the “Company”) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Patrick G. Yount, Chief Financial Officer of the Company, certify, to my knowledge, that:

1. The Periodic Report fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Patrick G. Yount

Patrick G. Yount

Chief Financial Officer

March 16, 2004