10-Q 1 0001.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission file number - 333-56097 ------------- HUDSON RESPIRATORY CARE INC. (Exact name of registrant as specified in its charter) ------------- California 95-1867330 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 27711 Diaz Road, P.O. Box 9020 92589 Temecula, California (Zip Code) (Address of Principal Executive Offices) (909) 676-5611 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,387,148 on November 14, 2000. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (unaudited).... 1 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 24, 1999 and September 30, 2000, and the Nine Months Ended September 24, 1999 and September 30, 2000............... 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 24, 1999 and September 30, 2000...................................... 4 Notes to Unaudited Condensed Consolidated Financial Statements.............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................... 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................... 18 Item 2. Changes in Securities................................... 18 Item 3. Defaults Upon Senior Securities......................... 18 Item 4. Submission of Matters to a Vote of Security Holders..... 18 Item 5. Other Information....................................... 18 Item 6. Exhibits and Reports on Form 8-K........................ 18 SIGNATURE................................................................ 19 i HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Amounts in thousands)
December 31, September 30, 1999 2000 ------------- -------------- (unaudited) CURRENT ASSETS: Cash..................................................... $ 2,917 $ 1,804 Accounts receivable, less allowance for doubtful accounts of $973 and $1,281 at December 31, 1999 and September 30, 2000, respectively........................ 30,425 37,221 Inventories.............................................. 24,043 35,139 Other current assets..................................... 4,612 2,083 ---------- --------- Total current assets.................................. 61,997 76,247 PROPERTY, PLANT AND EQUIPMENT, net........................... 42,476 46,242 OTHER ASSETS: Intangible assets, net................................... 66,970 60,918 Deferred financing costs, net............................ 11,134 9,729 Deferred tax asset, net.................................. 68,943 68,560 Other assets............................................. 299 154 ---------- --------- Total other assets.................................... 147,346 139,361 ---------- --------- Total assets....................................... $ 251,819 $ 261,849 ========== =========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 1 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Amounts in thousands, except per share data)
December 31, September 30, 1999 2000 ------------ ------------- (unaudited) CURRENT LIABILITIES: Notes payable to banks.................................... $ 6,673 $ 8,030 Accounts payable.......................................... 6,168 12,279 Accrued liabilities....................................... 11,700 16,665 Other current liabilities................................. 1,485 1,385 --------- --------- Total current liabilities............................... 26,026 38,359 NOTE PAYABLE TO AFFILIATE.................................. 7,508 8,009 NOTES PAYABLE TO BANKS, net of current portion............. 82,513 78,825 SENIOR SUBORDINATED NOTES PAYABLE.......................... 115,000 115,000 --------- --------- Total liabilities....................................... 231,047 240,193 --------- --------- MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value: authorized 1,800 shares; issued and outstanding 356 shares and 376 shares at December 31, 1999 and September 30, 2000, respectively; liquidation preference: $35,558 and $37,603, respectively................................. 34,558 36,603 Accrued preferred stock dividend, payable in kind......... 863 2,041 --------- --------- 35,421 38,644 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $0.01 par value: authorized 15,000 shares; issued and outstanding--10,044........................... 92,158 92,158 Cumulative translation adjustment......................... (862) (2,854) Accumulated deficit....................................... (105,945) (106,292) --------- --------- Total stockholders' equity (deficit).................... (14,649) (16,988) --------- --------- Total liabilities, mandatorily-redeemable preferred stock and stockholders' equity (deficit)............... $ 251,819 $ 261,849 ========= =========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands)
Three Months Nine Months Ended Ended ---------------------------- ----------------------------- September 24, September 30, September 24, September 30, 1999 2000 1999 2000 ------------ ------------- -------------- ------------- NET SALES................................................. $30,827 $41,111 $ 85,270 $113,729 COST OF SALES............................................. 18,642 19,587 50,283 56,915 ------- ------- -------- -------- Gross profit........................................... 12,185 21,524 34,987 56,814 ------- ------- -------- -------- OPERATING EXPENSES: Selling, distribution, general and administrative........ 8,207 11,745 21,490 31,270 Amortization of goodwill................................. 601 767 724 2,387 Research and development................................. 651 533 1,295 1,782 ------- ------- -------- -------- 9,459 13,045 23,509 35,439 ------- ------- -------- -------- Income from operations................................. 2,726 8,479 11,478 21,375 INTEREST AND OTHER EXPENSE................................ (4,342) (5,812) (12,140) (16,279) ------- ------- -------- -------- Net loss before (benefit) provision for income taxes... (1,616) 2,667 (662) 5,096 PROVISION (BENEFIT) FOR INCOME TAXES...................... (62) 1,005 284 2,220 ------- ------- -------- -------- Net income (loss)...................................... (1,554) 1,662 (946) 2,876 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation loss........................ (220) (2,299) (364) (1,992) ------- ------- -------- -------- Comprehensive income (loss)............................ $(1,774) $ (637) $ (1,310) $ 884 ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited condensed consolidated statements. 3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amount in thousands)
Nine Months Ended ---------------------------- September 24, September 30, 1999 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................................... $ (946) $ 2,876 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization................................................... 5,817 8,780 Amortization of deferred financing costs........................................ 1,024 620 Deferred taxes.................................................................. 720 383 Change in operating assets and liabilities: Decrease (increase) in accounts receivable...................................... 1,964 (6,796) Decrease (increase) in inventories.............................................. (3,936) (11,096) Decrease (increase) in other current assets..................................... (213) 2,529 (Increase) decrease in other assets............................................. (508) 145 Decrease (increase) in accounts payable......................................... 3,918 6,111 Increase in accrued liabilities................................................. 5,695 4,965 Decrease in other current liabilities........................................... (1,189) (99) Increase in other non-current liabilities....................................... 250 0 -------- -------- Net cash provided by operating activities..................................... 4,760 8,418 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment......................................... (6,876) (8,356) Acquisition of Louis Gibeck AB Stock, net of cash acquired of $8,208............... (38,750) 2,648 -------- -------- Net cash used in investing activities.............................................. (45,626) (5,708) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable to banks............................................... (9,000) (7,400) Proceeds from bank borrowings...................................................... 14,171 5,569 Proceeds from note payable to affiliate............................................ 22,000 -- Sale of common and preferred stock, net of transaction costs....................... 22,000 -- -------- -------- Net cash provided by (used in) financing activities............................. 49,171 (1,831) -------- -------- Effect of exchange rate changes on cash............................................. (364) (1,992) -------- -------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.......................... 7,941 (1,113) CASH AND SHORT-TERM INVESTMENTS, beginning of period................................ 507 2,917 -------- -------- CASH AND SHORT-TERM INVESTMENTS, end of period...................................... $ 8,448 $ 1,804 ======== ========
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Nine Months Ended ---------------------------- September 24, September 30, 1999 2000 ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest..................................................... $ 7,971 $8,275 ======= ====== DETAILS OF ACQUISITIONS: Acquisition price............................................... $53,581 $ - Less: cash acquired............................................ (8,208) - Less: common stock issued for acquisition....................... (6,623) - ------- ------ Net cash paid for acquisition................................... $38,750 $ - ======= ====== NON-CASH FINANCING ACTIVITIES: Preferred dividends accrued or paid-in-kind..................... $ 2,868 $3,223 ======= ====== Common stock issued for acquisition............................. $ 6,623 $ - ======= ======
The accompanying notes are an integral part of these unaudited condensed consolidated statements. 5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 1. Financial Statements. The condensed consolidated financial statements -------------------- included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2000, and the results of operations and cash flows for the three and nine month periods ended September 24, 1999 and September 30, 2000 pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company's 1999 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and nine month periods ended September 24, 1999 and September 30, 2000 are not necessarily indicative of the results to be achieved for a full year. 2. Acquisitions. During 1999, the Company completed certain business ------------ acquisitions, the most significant of which was the acquisition of Louis Gibeck AB ("LGAB"). Had the acquisition of LGAB occurred at the beginning of the prior fiscal year, the unaudited pro forma net sales and net loss would be as follows (amounts in thousands):
Nine Months Ended September 24, 1999 ------------------ (unaudited) Net sales............................... $94,704 ======= Net loss................................ $(1,582) =======
3. Inventories. Inventories consisted of the following (amounts in ----------- thousands):
December 31, September 30, 1999 2000 ------------- ------------- (unaudited) Raw materials............................. $ 5,901 $ 9,835 Work-in-process........................... 5,682 9,499 Finished goods............................ 12,460 15,805 ------- ------- $24,043 $35,139 ======= =======
4. Bank Notes Payable. During the third quarter 2000, certain covenant ------------------ provisions of the existing bank loan agreement were amended. 5. Subsidiaries Guaranteeing Debt and Segment Data. The Company is the 100% ----------------------------------------------- owner of certain subsidiaries which do not guarantee the Company's senior subordinated notes. The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): 6 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2000 --------------------------------------------------- Guarantor Non-Guarantor Adjustments Total --------- ------------- ----------- ----- CURRENT ASSETS: Cash......................................... $ 51 $ 1,753 $ -- $ 1,804 Accounts receivable, net..................... 33,352 5,480 (1,611) 37,221 Inventories.................................. 32,292 3,973 (1,126) 35,139 Other current assets......................... 3,990 20,461 (22,368) 2,083 -------- ------- -------- -------- Total current assets....................... 69,685 31,667 (25,105) 76,247 PROPERTY, PLANT AND EQUIPMENT, NET 45,250 991 -- 46,241 OTHER ASSETS: Intangible assets, net....................... 21,517 39,401 -- 60,918 Deferred financing costs, net................ 9,729 -- -- 9,729 Deferred tax asset, net...................... 67,925 635 -- 68,560 Investment in non-guarantor subsidiaries..... 29,245 -- (29,245) -- Other........................................ 728 151 (725) 154 -------- ------- -------- -------- Total other assets......................... 129,144 40,187 (29,970) 139,361 -------- ------- -------- -------- Total assets.............................. $244,079 $72,845 $(55,075) $261,849 ======== ======= ======== ========
7 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2000 ---------------------------------------------------- Guarantor Non-Guarantor Adjustments Total ---------- ------------- ----------- ----- CURRENT LIABILITIES: Notes payable to banks......................... $ 7,000 $ 1,030 $ - $ 8,030 Accounts payable............................... 14,727 3,926 (6,374) 12,279 Accrued liabilities............................ 12,034 4,631 - 16,665 Other current liabilities...................... 1,440 17,827 (17,882) 1,385 -------- -------- --------- -------- Total current liabilities.................... 35,201 27,414 (24,256) 38,359 OTHER LIABILITIES: Note payable to affiliate...................... - 8,009 - 8,009 Notes payable to banks, net of current portion. 66,000 12,825 - 78,825 Senior subordinated notes...................... 115,000 - - 115,000 -------- -------- --------- -------- Total liabilities............................ 216,201 48,248 (24,256) 240,193 -------- -------- --------- -------- Mandatorily-redeemable preferred stock.......... 38,644 - - 38,644 -------- -------- --------- -------- STOCKHOLDERS' EQUITY (DEFICIT).................. (10,765) 24,597 (30,820) (16,988) -------- -------- --------- -------- 244,080 72,845 (55,076) 261,849 ======== ======== ========= ========
8 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2000 ---------------------------------------------- Non- Guarantor Guarantor Adjustments Total -------- -------- ----------- ----- NET SALES................................................... $37,533 $ 7,584 $ (4,006) $ 41,111 COST OF SALES............................................... 21,203 2,390 (4,006) 19,587 ------- ------- -------- -------- Gross profit............................................... 16,330 5,194 - 21,524 OPERATING EXPENSES: Selling, distribution, general and administrative.......... 9,867 1,878 - 11,745 Goodwill amortization...................................... 279 488 - 767 Research and development................................... 217 316 - 533 ------- ------- ------- -------- Income from operations..................................... 6,967 2,512 - 8,479 ------- ------- ------- -------- INTEREST AND OTHER EXPENSE.................................. (4,804) (1,008) - (5,812) Income before provision for income taxes................... 1,163 1,504 - 2,667 PROVISION (BENEFIT) FOR INCOME TAXES....................... 453 552 - 1,005 ------- ------- ------- -------- Net income ................................................ $ 710 $ 952 $ - $ 1,662 ======= ======= ======= ======== Depreciation and amortization............................... $ 2,752 $ 718 $ - $ 3,470 ======= ======= ======= ======== Adjusted EBITDA(a).......................................... $ 7998 $ 3,718 $ - $ 12,716 ======= ======= ======= ========
----------------------- (a) Adjusted EBITDA represents income before depreciation and amortization, interest expense and income tax expense. Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States, or as a measure of profitability or liquidity. 9 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2000 -------------------------------------------------- Non- Guarantor Guarantor Adjustments Total ---------- --------- ----------- -------- NET SALES................................................. $101,551 $21,256 $(9,078) $113,729 COST OF SALES............................................. 57,166 8,627 (8,878) 56,915 -------- ------- ------- -------- Gross profit............................................. 44,385 12,629 (200) 56,814 OPERATING EXPENSES: Selling, distribution, general and administrative........ 25,949 5,321 -- 31,270 Goodwill amortization.................................... 877 1,510 -- 2,387 Research and development................................. 729 993 -- 1,782 -------- ------- ------- -------- Income from operations................................... 16,770 4,805 (200) 21,375 -------- ------- ------- -------- INTEREST AND OTHER EXPENSE................................ (13,954) (2,325) -- (16,279) -------- ------- ------- -------- Income before provision for income taxes................. 2,816 2,480 (200) 5,096 PROVISION FOR INCOME TAXES............................... 1,152 1,068 -- 2,220 -------- ------- ------- -------- Net income............................................... $ 1,664 $ 1,412 $ (200) $ 2,876 ======== ======= ======= ======== Depreciation and amortization............................. $ 6,852 $ 1,928 $ -- $ 8,780 ======== ======= ======= ======== Adjusted EBITDA(a)........................................ $ 24,429 $ 8,243 $ (200) $ 32,542 ======== ======= ======= ========
_____________________ (a) Adjusted EBITDA represents income before depreciation and amortization, interest expense and income tax expense. Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States, or as a measure of profitability or liquidity. 10 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2000 ------------------------------------------- Non- Guarantor Guarantor Total ------------ ------------ ----------- Net cash provided by operating activities..................... $ 1,413 $ 7,005 $ 8,418 Net cash used in investing activities......................... (2,343) (2,865) (5,708) Net cash provided by (used in) financing activities........... 1,400 (3,231) (1,831) Effect of exchange rate changes on cash....................... (117) (1,875) (1,992) ------------ ------------- ----------- NET DECREASE IN CASH.......................................... (147) (966) (1,113) CASH, beginning of period..................................... 184 2,733 2,917 ------------ ------------- ----------- CASH, end of period........................................... $ 37 $ 1,767 $ 1,804 ============ ============= ===========
The Company operates in two segments: North American operations (guarantor) and international operations (non-guarantor). The financial data of these two segments closely approximates the guarantor/non-guarantor information set forth above and, accordingly, segment data is not provided separately. 11 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
As of September 24, 1999 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Adjustments Total ----------- ------------- ----------- ----------- CURRENT ASSETS: Cash and short term investments............... $ -- $ 10,067 $ (1,619) $ 8,448 Accounts receivable........................... 23,124 2,565 -- 25,689 Inventories................................... 20,496 3,772 -- 24,268 Other current assets.......................... 642 4,655 (3,667) 1,630 -------- -------- ---------- -------- Total current assets....................... 44,262 21,059 (5,286) 60,035 -------- -------- ---------- -------- PROPERTY, PLANT AND EQUIPMENT, NET............... 35,886 1,107 -- 36,993 -------- -------- ---------- -------- OTHER ASSETS: Deferred tax asset............................ 69,525 84 -- 69,609 Deferred financing costs, net................. 11,101 550 -- 11,651 Intangible assets, net........................ 4,122 42,708 3,684 50,514 Ivestment in non-guarantor subsidiaries....... 28,978 -- (28,978) -- Other assets.................................. 554 642 (375) 821 -------- -------- ---------- -------- Total other assets......................... 114,280 43,984 (25,669) 132,595 -------- -------- ---------- -------- $194,428 $ 66,150 $ 30,955 $229,623 ======== ======== ========== ========
12 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
As of September 24, 1999 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Adjustments Total ----------- ------------- ----------- ----------- CURRENT LIABILITIES: Notes payable to bank......................... 4,000 4,256 -- 8,256 Accounts payable.............................. 3,980 630 (1,619) 2,991 Note payable to affiliate..................... -- 22,000 -- 22,000 Accrued liabilities..................... 10,255 4,940 (198) 14,997 -------- -------- ---------- -------- Total current liabilities................... 18,235 31,826 (1,817) 48,244 -------- -------- ---------- -------- OTHER LIABILITIES: Notes payable to bank, net of current portion. 38,000 6,185 (106) 44,079 Senior subordinated notes..................... 115,000 -- -- 115,000 Other......................................... -- 1,209 1 1,210 -------- -------- ---------- -------- Total liabilities........................... 171,235 39,220 (105) 208,533 -------- -------- ---------- -------- Manditorily redeemable preferred stock........... 34,380 -- -- 34,380 -------- -------- ---------- -------- STOCKHOLDERS' EQUITY (DEFICIT)................... (11,187) 26,930 (29,033) (13,290) -------- -------- ---------- -------- $194,428 $ 66,150 $ (30,955) $229,623 ======== ======== ========== ========
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As of December 31, 1999 -------------------------------------------------- Non- Guarantor Guarantor Adjustments Total ASSETS CURRENT ASSETS: Cash............................................. $ 184 $ 2,733 - $ 2,917 Accounts receivable.............................. 28,329 2,096 - 30,425 Inventories...................................... 21,124 4,065 (1,146) 24,043 Other current assets............................. 4,578 16,673 (16,639) 4,612 -------- -------- -------- --------- Total current assets........................... 54,215 25,567 (17,785) 61,997 PROPERTY, PLANT AND EQUIPMENT, net................ 41,335 1,141 - 42,476 OTHER ASSETS: Intangible assets, net........................... 22,770 44,200 - 66,970 Deferred financing costs, net.................... 10,749 385 - 11,134 Deferred tax asset............................... 68,600 223 120 68,943 Investment in non-guarantor subsidiaries......... 29,245 - (27,345) - Other assets..................................... 833 162 (696) 291 -------- -------- -------- --------- Total other assets............................. 132,197 44,970 (29,821) 147,346 -------- -------- -------- --------- $227,747 $ 71,678 $(47,606) (251,819) -------- -------- -------- --------- LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY DEFICIT CURRENT LIABILITIES: Notes payable to bank............................ $ 5,500 $ 1,173 $ - $ 6,673 Accounts payable................................. 6,625 1,550 (2,016) 6,160 Accrued liabilities.............................. 8,344 3,356 - 11,700 Other current liabilities........................ 450 10,876 (9,849) 1,485 -------- -------- -------- --------- Total current liabilities...................... 20,927 16,964 (11,065) 26,026 NOTE PAYABLE TO AFFILIATE.......................... - 13,906 (6,398) 7,508 NOTES PAYABLE TO BANK, net of current portion...... 66,100 16,413 - 82,513 SENIOR SUBORDINATED NOTES.......................... 115,000 - - 115,000 -------- -------- -------- --------- Total liabilities.............................. 202,027 47,283 (19,263) 231,047 -------- -------- -------- --------- Mandatorily-redeemable preferred stock............. 35,421 - - 35,421 STOCKHOLDERS' EQUITY (DEFICIT)..................... (9,701) 24,395 (29,343) (14,640) -------- -------- -------- --------- $227,747 $ 71,678 $(47,606) $ 251,019 -------- -------- -------- ---------
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Three Months Ended September 24, 1999 -------------------------------------------------------- Non- Guarantor Guarantor Adjustments(a) Total --------- --------- -------------- ------- NET SALES............................................................ $28,145 $ 3,469 $(787) $30,827 COST OF SALES........................................................ 16,448 2,355 (161) 18,642 ------- -------- ----- ------- Gross Profit...................................................... 11,697 1,114 (626) 12,185 OPERATING EXPENSES: Selling, distribution, general and administrative................. 6,758 2,050 -- 8,808 Research and development.......................................... 326 325 -- 651 ------- -------- ----- ------- 7,084 2,375 -- 9,459 ------- -------- ----- ------- Income (loss) from operations.................................. 4,613 (1,261) (626) 2,726 ------- -------- ----- ------- OTHER INCOME AND (EXPENSES): Interest expense.................................................. (3,884) (466) -- (4,350) Other, net........................................................ 8 -- -- 8 ------- -------- ----- ------- (3,876) (466) -- (4,342) ------- -------- ----- ------- Income (loss) before provision (benefit) for income taxes......... 737 (1,727) (626) (1,616) PROVISION (BENEFIT) FOR INCOME TAXES................................. 188 (250) -- (82) ------- -------- ----- ------- NET INCOME (LOSS).................................................... $ 549 $(1,577) $(626) $(1,534) ======= ======= ===== ======= Depreciation and amortization........................................ $ 1,534 ======= EBITDA before EPP and bonuses........................................ $ 6,147 ======= Nine Months Ended September 24, 1999 --------------------------------------------------------- Non- Guarantor Guarantor Adjustments(a) Total --------- --------- -------------- ------- .................................................................. NET SALES............................................................ $ 82,588 $ 3,469 $(787) $85,270 COST OF SALES........................................................ 48,089 2,355 (161) 50,283 -------- -------- ----- ------- Gross Profit...................................................... 34,499 1,114 (626) 34,987 OPERATING EXPENSES: Selling, distribution, general and administrative................. 20,164 2,050 -- 22,214 Research and development.......................................... 970 325 -- 1,295 -------- -------- ----- ------- 21,134 2,375 -- 23,509 -------- -------- ----- ------- Income (loss) from operations.................................. 13,365 1,261 (626) 11,478 -------- -------- ----- ------- OTHER INCOME AND (EXPENSES): Interest expense.................................................. (11,727) (303) -- (12,110) Other, net........................................................ 53 (83) -- (30) -------- -------- ----- ------- (11,674) (466) -- (12,140) -------- -------- ----- ------- Income (loss) before provision (benefit) for income taxes......... 1,691 (1,727) (626) (662) PROVISION (BENEFIT) FOR INCOME TAXES................................. 534 (250) -- 284 -------- -------- ----- ------- NET INCOME (LOSS).................................................... $ 1,157 $(1,477) $(626) $ (946) ======== ======= ===== ======= Depreciation and amortization........................................ $ 4,670 ======== EBITDA before EPP and bonuses........................................ $ 10,035 ========
15 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended September 24, 1999 ------------------------------------------------- Non- Guarantor Guarantor Total --------- --------- -------- Net cash provided by (used in) operating activities......................... $ 8,733 $ (3,973) $ 4,760 Net cash used in investing activities....................................... (28,876) (16,750) (45,626) Net cash provided by from financing activities.............................. 20,000 29,171 49,171 Effect of exchange rate changes on cash..................................... (364) -- (364) -------- -------- --------- NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS................................................................ (507) 8,448 7,941 CASH AND SHORT-TERM INVESTMENTS, beginning of period........................................................ 507 -- 507 -------- -------- -------- CASH AND SHORT-TERM INVESTMENTS, end of period.............................................................. $ -- $ 8,448 $ 8,448 -------- -------- --------
As discussed above, the non-guarantor subsidiaries consist principally of subsidiaries of LGAB and subsidiaries (whose operations are principally international) the Company operates in two segments: North American operations and international operations. The financial data of these two segments closely approximates the guarantor/non-guarantor information set forth above and, accordingly, separate segment data is not provided. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Hudson Respiratory Care Inc.'s (the "Company" or "Hudson RCI") consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-Q. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements involving risks and uncertainties that are detailed from time to time in the Company's Securities and Exchange Commission filings. General The Company has increased its net sales and improved its position within the disposable health care products market in recent years by increasing its respiratory care product offering, introducing disposable products for the anesthesia health care market, expanding its presence in international markets and establishing a position in the growing alternate site market. The Company's results of operations may fluctuate significantly from quarter to quarter as a result of a number of factors, including, among others, the buying patterns of the Company's distributors, group purchasing organizations ("GPOs") and other purchasers of the Company's products, forecasts regarding the severity of the annual cold and flu season, announcements of new product introductions by the Company or its competitors, changes in the Company's pricing of its products and the prices offered by the Company's competitors, rate of overhead absorption due to variability in production levels and variability in the number of shipping days in a given quarter. Recent Developments On October 28, 2000, the Company acquired certain assets of Tyco Healthcare LP ("Tyco"), including Tyco's Sheridan line of endotreacheal tubes for a cash purchase price of approximately $18.0 million. The Tyco acquisition was funded with proceeds from the Company's $60.0 million revolving line of credit and additional equity provided by existing shareholders. On November 8, 1999, the Company acquired certain assets of Tyco Healthcare Group LP ("Tyco"), including Tyco's incentive breathing exerciser and pulmonary function monitor product lines, for a cash purchase price of approximately $23.8 million. The Tyco acquisition was funded principally with proceeds from the Company's $60.0 million revolving line of credit. On October 8, 1999, the Company acquired certain assets of Medimex, a German distribution company that had previously distributed products for both the Company and Louis Gibeck AB ("LGAB"), for a cash purchase price of $2.2 million. The assets were acquired through the Company's wholly-owned, non- guarantor subsidiary, HRCDAC Inc., and was funded with cash on hand. On July 22, 1999, the Company, through its indirect, wholly-owned subsidiary Steamer Holding AB, a company organized under the laws of Sweden ("Steamer"), acquired a majority of the outstanding capital stock of HUDSON RCI AB, formerly Louis Gibeck, AB (LGAB), LGAB, a company organized under the laws of Sweden. Pursuant to a series of private purchases and a tender offer consummated pursuant to Swedish law, Steamer acquired 604,000 shares of Class A stock and 2,452,838 shares of Class B stock representing approximately 82.0% of the capital and 62.8% of the voting power of LGAB at a price of 115 Swedish krona (approximately $13.60 at the July 22 exchange rate) per share of Class A stock and Class B stock for an aggregate cash purchase price of approximately $45.5 million. In addition, on August 4, 1999, Steamer acquired an additional 483,750 shares of Class A stock of LGAB from River Holding Corp., a Delaware corporation and the parent of Steamer and the Company ("Holding"), which shares Holding acquired in a private transaction in exchange for 525,042 shares of common stock of Holding ("Holding Common Stock"). The exchange ratio for the Class A stock was the same as the effective price per share of the shares acquired in the tender offer. After giving effect to this exchange and the conversion 17 of the Series A stock acquired by Steamer in the tender offer into Series B stock, Steamer holds approximately 99.0% of the capital and 100.0% of the voting power of LGAB. The Company intends that Steamer, through continuing purchases and a statutory freezeout and appraisal procedure under Swedish law, will acquire the remaining outstanding shares of LGAB as soon as practicable. The cash for the purchase price and certain related transaction costs was funded with (i) $22.0 million in gross proceeds from the sale of Holding Common Stock to the majority stockholder of Holding, (ii) a $22.0 million loan from the majority stockholder of Holding to Steamer's parent, HRC Holding Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, and (iii) the funding of 50 million Swedish krona (approximately $5.9 million) pursuant to the terms of a loan facility agreement between Steamer and Svenska Handelsbanken AB. Founded in 1954, LGAB develops, manufactures and markets medical device products which humidify, heat and filter a patient's breathing gases during anesthesia and intensive care. LGAB is a market leader in the area of "heat moisture exchange" ("HME") products, with approximately 25% share of the world market. Following completion of the acquisition, the Company intends to continue LGAB's operations in substantially the same manner as conducted prior to the acquisition. In September 1998, the Company acquired certain assets of Gibeck, Inc., a subsidiary of LGAB, for approximately $3.35 million. Prior to the transaction, Gibeck, Inc. was engaged primarily in the business of manufacturing, marketing and selling disposable anesthesia supplies. In conjunction with that transaction, the Company became the exclusive North American distributor of LGAB's HME product line. In fiscal year 1997, Gibeck, Inc. reported net sales of approximately $12.3 million. The Company established a sales office located in Germany in the second quarter of 1999. It is anticipated that this operation will better equip the Company to more aggressively pursue sales in the German market. The German operation had a negative impact on the Company's results of approximately $1.0 million in the first nine months of 2000. It is anticipated that the Company's earnings will be positively impacted by the German operation for the remainder of fiscal 2000 and beyond. Results of Operations The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company's net sales.
Three Month Period Ended Nine Month Period Ended (unaudited) (unaudited) ---------------------------------------------------------------------------- September 24, September 30, September 24, September 30, 1999 2000 1999 2000 ---------------------------------------------------------------------------- (in thousands) (in thousands) Net sales.............................................. $30,827 $41,111 $85,270 $113,729 Cost of sales.......................................... 18,642 19,587 50,283 56,915 ------- ------- ------- -------- Gross profit.......................................... 12,185 21,524 34,987 56,814 Selling expenses....................................... 3,296 4,098 8,408 11,813 Distribution expenses.................................. 1,488 3,102 3,448 6,565 General and administrative expenses.................... 3,423 4,545 9,634 12,892 Amortization of goodwill............................... 601 767 724 2,387 Research and development expenses...................... 651 533 1,295 1,782 ------- ------- ------- -------- Total operating expenses.............................. 9,459 13,045 23,509 35,439 ------- ------- ------- -------- Operating income...................................... $ 2,726 $ 8,479 $11,478 $ 21,375 ======= ======= ======= ========
18
Three Month Period Ended Nine Month Period Ended (unaudited) (Unaudited) ------------------------------- ------------------------------- September 24, September 30, September 24, September 30, 1999 2000 1999 2000 ------------------------------ -------------------------------- Net sales........................................... 100.0% 100.0% 100.0% 100.0% Cost of sales....................................... 60.5 47.6 59.0 50.0 ------ ------ ------ ------ Gross profit....................................... 39.5 52.4 41.0 50.0 Selling expenses.................................... 10.7 10.0 9.9 10.4 Distribution expenses............................... 4.8 7.5 4.0 5.8 General and administrative expenses................. 11.1 11.1 11.3 11.3 Amortization of goodwill............................ 1.9 1.9 0.8 2.1 Research and development expenses................... 2.2 1.3 1.5 1.6 ------ ------ ------ ------ Total operating expenses........................... 30.7 31.8 27.5 31.2 ------ ------ ------ ------ Operating income................................... 8.8% 20.6% 13.5% 18.8% ====== ====== ====== ======
Three Months Ended September 30, 2000 Compared to Three Months Ended September 24, 1999 Net sales, reported net of accrued rebates, were $41.1 million in the third quarter of 2000 as compared to $30.8 million in the third quarter of 1999, an increase of $10.3 million or 33.4%. Sales by the acquired Hudson RCI AB increased approximately $0.6 million, $3.5 million related to the acquired Tyco IBE product line and $0.4 million related to the acquired Medimex product line. For the base Hudson product line, Domestic Hospital sales increased by $2.0 million, primarily due to increased demand by GPO customers. Alternate Site sales increased by $0.7 million, as market share continues to grow in this market. Canadian sales increased by $0.3 million. International sales increased by $1.8 million, due to growth in the Germany and the Far East. OEM sales increased by $1.0 million, due to sales of the Tyco IBE product. The Company's gross profit for the third quarter of 2000 was $21.5 million, an increase of $9.3 million or 76.7% over the third quarter of 1999. As a percentage of sales, the gross profit was 52.3% and 39.5% for the third quarter of 2000 and 1999, respectively. The higher margin in 2000 was primarily due to sales of higher-margin Hudson RCI AB product lines as well as the Tyco products. In addition, the Hudson RCI AB negatively impacted gross margins during the 1999 period. Selling expenses were $4.1 million for the third quarter of 2000, a $0.8 million increase over the third quarter of 1999. This increase was due primarily to the start-up of a U.K.-based sales office. Distribution expenses were $3.1 million for the third quarter of 2000, a $1.6 million increase over the third quarter of 1999. This increase was primarily driven by the establishment of an Atlanta distribution facility late in the third quarter of 1999, the addition of a third shift and overtime at all warehouses required to meet customer demand. General and administrative expenses were $4.5 million in the third quarter of 2000, an increase of $1.1 million or 32.8% over the third quarter of 1999. This increase was primarily the result of additional expenses associated with the acquired Hudson RCI AB business, costs associated with a new computer system implementation and increased staffing levels. Amortization of goodwill was $0.8 million for the third quarter of 2000, as compared to $0.6 million in the third quarter of 1999. This increase was primarily due to the Tyco IBE acquisition, completed in the fourth quarter of 1999. Research & development costs were $0.5 million in the third quarter of 2000, as compared to $0.7 million in the third quarter of 1999. This increase was primarily due to expenses of the acquired Hudson RCI AB. Interest expense and other was $5.8 million in the third quarter of 2000, as compared to $4.0 million in the third quarter of 1999. This increase reflects increased borrowings as a result of the Hudson RCI AB and Tyco acquisitions as well as increased borrowings on the working capital revolving facility at higher interest rates. 19 The Company provides for state and federal income taxes as a C corporation, although actual tax payments are expected to be substantially less than provided amounts due to the increase in tax basis of assets provided by the Section 338(h)(10) election made in conjunction with the April 1998 recapitalization. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 24, 1999 Net sales, reported net of accrued rebates, were $113.7 million in the first nine months of 2000 as compared to $85.3 million in the first nine months of 1999, an increase of $28.4 million or 33.4%. Additional sales by the acquired Hudson RCI AB were approximately $8.0 million, $9.7 million related to the acquired Tyco product line and $1.0 million related to the acquired Medimex product line. For the base Hudson product line, Domestic Hospital sales increased by $1.8 million, primarily due to increased demand from GPO customers. Alternate Site sales increased by $2.3 million as focus in this key market resulted in market share growth. International sales increased by $4.3 million, primarily due to increased sales in the German market and increased demand in Asia. OEM sales increased by $1.3 million, primarily due to sales of IBE products. Although demand was strong in all sectors of the business, sales were negatively impacted by shipping difficulties associated with the implementation of a new computer system during the second quarter. The Company's gross profit for the first nine months of 2000 was $56.8 million, an increase of $21.8 million or 62.3% over the first nine months of 1999. As a percentage of sales, the gross profit was 50.0% and 41.0% for the fist nine months of 2000 and 1999, respectively. The improved margin was primarily due to higher-margin sales of the Hudson RCI AB product as well as the acquired Tyco products. In addition, due to the shipping difficulties associated with the computer system implementation, production levels significantly exceeded sales levels, causing a fixed overhead to be absorbed into inventory at a higher than normal rate. In addition, sales of the acquired Hudson RCI AB products negatively impacted margins in 1999. Selling expenses were $11.8 million for the first nine months of 2000, a $3.4 million increase over the first nine months of 1999. This increase was due primarily to costs related to the acquired Hudson RCI AB and to the start-up German and U.K. operations. Additionally, sales representatives were added in the Alternate Site market to service the growing demand. Distribution expenses were $6.6 million for the first nine months of 2000, a $3.1 million increase over the first nine months of 1999. This increase was primarily driven by the establishment of an Atlanta distribution facility late in the third quarter of 1999, the addition of a third shift and overtime at all warehouses required to meet customer demand. General and administrative expenses were $12.9 million in the first nine months of 2000, an increase of $3.3 million or 33.8% over the first nine months of 1999. This increase was primarily the result of additional expenses associated with the acquired Hudson RCI AB business, the German start-up operation, training costs associated with the computer system implementation and increased staffing levels. Amortization of goodwill was $2.4 million for the first nine months of 2000, as compared to $0.7 million in the first nine months of 1999. This increase was primarily due to the Tyco and Hudson RCI AB acquisitions in late 1999. Research & development costs were $1.8 million in the first nine months of 2000, as compared to $1.3 million in the first nine months of 1999. This increase was primarily due to expenses of the acquired Hudson RCI AB. Interest expense and other was $16.2 million in the first nine months of 2000, as compared to $12.1 million in the first nine months of 1999. This increase reflects increased borrowings as a result of the Hudson RCI AB and Tyco acquisitions as well as increased borrowings under on the working capital revolving facility at higher interest rates. The Company provides for state and federal income taxes as a C corporation, although actual tax payments are expected to be substantially less than provided amounts due to the increase in tax basis of assets provided by the Section 338(h)(10) election made in conjunction with the April 1998 recapitalization. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operations and borrowings under its working capital bank facility. Cash provided by operations totaled $4.8 million and $8.4 million in the first nine months of 20 1999 and 2000, respectively. The increase from the first nine months of 1999 to the first nine months of 2000 is primarily attributable to increased income partially offset by higher working capital levels. The Company had operating working capital, excluding cash and short-term debt, of $39.7 million and $43.9 million as of December 31, 1999 and September 30, 2000, respectively. Inventories were $24.0 million and $35.1 million as of December 31, 1999 and September 30, 2000, respectively. In order to meet the needs of its customers, the Company must maintain inventories sufficient to permit same-day or next-day filling of most orders. Such inventories are higher than those that would be required for delayed filling of orders, thus adversely impacting liquidity. Over time, the Company expects its level of inventories to increase as the Company's sales in the international market increase. Accounts receivable, net of allowances, were $30.4 million and $37.2 million at December 31, 1999 and September 30, 2000, respectively. The Company offers 30-day credit terms to its U.S. hospital distributors. Alternate site and international customers typically receive 60 to 90-day terms and, as a result, as the Company's alternate site and international sales have increased, the amount and aging of its accounts receivable have increased. The Company anticipates that the amount and aging of its accounts receivable will continue to increase. The Company established a sales office in Germany in the second quarter of 1999. While this will have the effect of increasing the Company's investment in inventories, management believes that it will also result in improved service to international customers as well as in lower international accounts receivable than would otherwise be the case because customers will receive products, and consequently pay for them, more quickly. During the nine months ended September 24, 1999, net cash used in investing activities was $45.6 million, reflecting purchases of computer software manufacturing equipment and the acquisition of Louis Gibeck, AB. During the nine months ended September 30, 2000, net cash used in investing activities was $5.7 million, primarily reflecting purchases of manufacturing equipment and implementation of a new enterprise resource planning software program. The Company currently estimates that capital expenditures will be approximately $8.0 million in each of 2000 and 2001, consisting primarily of additional and replacement manufacturing equipment and new heater placements. During the nine months ended September 24, 1999 and September 30, 2000, net cash (used in) provided by financing activities was $49.1 million and $(1.8) million, respectively, reflecting the acquisition of Louis Gibeck, AB in 1999 as well as repayment and borrowings of the Company's credit facility in 1999 and 2000. The Company has outstanding $209.9 million of indebtedness, consisting of $115.0 million of 9-1/8% Senior Subordinated Notes due 2008 (the "Subordinated Notes") issued in April 1998, borrowings of $75.5 million under the credit facility (the "Credit Facility") entered into in April 1998 and $8.0 million in notes payable to affiliates. In addition, LGAB has $14.4 million in outstanding borrowings under its bank facility. The Credit Facility consists of a $40.0 million term loan facility (the "Term Loan Facility") (all of which was funded in connection with the Company's April 1998 Recapitalization) and a $60.0 million revolving loan facility (the "Revolving Loan Facility"). The Subordinated Notes bear interest at the rate of 9-1/8%, payable semiannually, and will require no principal repayments until maturity. The Term Loan Facility matures on April 7, 2004 and requires principal repayments of between $3.0 million and $11.5 million each year until maturity, commencing on June 30, 1999. The Revolving Loan Facility matures on April 7, 2004 and bears interest based on a spread over either a Eurodollar or base rate. In connection with the LGAB acquisition, the Company borrowed $22.0 million pursuant to an unsecured promissory note payable to Freeman Spogli. The note bears interest at 12.0% per annum, matures in August 2006, and requires semiannual interest payments. As of September 30, 2000, $8.0 million remained outstanding on the note. In connection with the LGAB acquisition, the Company assumed debt owed by LGAB under its bank facility (the "LGAB Facility"), which was refinanced during 1999 and totaled $14.4 million as of September 30, 2000. The LGAB Facility, which is denominated in Swedish krona, bears interest at three-month STIBOR (the interest rate at or about 11:00 a.m. Stockholm time, two banking days before a draw-down date or the relevant interest period, quoted for deposits in krona) plus 0.75% to 1.75% (4.365% to 5.365% at September 30, 2000), matures in December 2003, and is secured by the common stock of LGAB. In connection with the Company's April 1998 recapitalization, the Company issued to Holding 300,000 shares of its 11-1/2% Senior PIK Preferred Stock due 2010 with an aggregate liquidation preference of $30.0 million. Dividends are payable semi-annually in arrears on April 15 and October 15 each year. Dividends are payable in cash, except on dividend payment dates occurring on or prior to April 15, 2003, for which the Company has the option to issue additional shares of preferred stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. The preferred stock ranks junior in right of payment to all obligations of the Company and 21 its subsidiaries. At the election of the Company, dividends may be paid in kind until April 15, 2003 and thereafter must be paid in cash. The Company believes that after giving effect to the 1999 acquisitions and the incurrence of indebtedness related thereto, based on current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Revolving Loan Facility, will be sufficient over the next twelve months to fund anticipated capital expenditures and acquisitions and to make required payments of principal and interest on its debt, including payments due on the Subordinated Notes and obligations under the Credit Facility. The Company intends to selectively pursue strategic acquisitions, both domestically and internationally, to expand its product line, improve its market share positions and increase cash flows. Financing for such acquisitions is available, subject to limitations, under the Credit Facility. Any significant acquisition activity by the Company in excess of such amounts would require additional capital, which could be provided through capital contributions or debt financing. The Company has no commitments for such acquisition financing and to the extent financing is unavailable, acquisitions may be delayed or not completed. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, which is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Management has not yet determined the impact that adoption of this standard will have on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company has significant operations in Sweden that is denominated in Swedish Krona. Due to the devaluation of the Krona against the U.S. dollar of approximately 20% during the third quarter of 2000, the company recognized an exchange loss of approximately $20 million. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 23 SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUDSON RESPIRATORY CARE INC., a California corporation November 14, 2000 By: /s/ Jay R. Ogram ---------------------------------------- Jay R. Ogram Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 24