-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtJuC+pTGfqqNy0X1RkFojZQCVZeIuhLxRMegBbw+vBbQIuMDSigzLUA7mYM6tHt l6c/59rTp6VyweG6/DTmBA== 0000898430-99-004126.txt : 19991109 0000898430-99-004126.hdr.sgml : 19991109 ACCESSION NUMBER: 0000898430-99-004126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990924 FILED AS OF DATE: 19991108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON RESPIRATORY CARE INC CENTRAL INDEX KEY: 0001061893 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 951867330 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-56097 FILM NUMBER: 99743628 BUSINESS ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 BUSINESS PHONE: 9096765611 MAIL ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 10-Q 1 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 24, 1999 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 [_] No [X] The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,044,291 on October 31, 1999. ================================================================================ HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES Quarter Ended September 24, 1999 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of December 25, 1998 and September 24, 1999.............................................................. 1 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 25, 1998 and September 24, 1999................. 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 25, 1998 and September 24, 1999................................. 4 Notes to Condensed Consolidated Financial Statements............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 16 Item 3. Qualitative and Quantitative Disclosures About Market Risk....................... 23 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds....................................... 23 Item 6. Exhibits and Reports on Form 8-K................................................ 23 SIGNATURE........................................................................................... 24
i HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS ------ (Amounts in Thousands)
December 25, September 24, 1998 1999 ------------- ------------- (unaudited) CURRENT ASSETS: Cash............................................................. $ 507 $ 8,448 Accounts receivable, less allowance for doubtful accounts of $635 and $412 at December 25, 1998 and September 24, 1999, respectively................................................... 25,829 25,689 Inventories...................................................... 18,024 24,268 Other current assets............................................. 716 1,630 -------- -------- Total current assets........................................... 45,076 60,035 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net.................................. 32,732 36,993 -------- -------- OTHER ASSETS: Deferred tax asset............................................... 70,329 69,609 Deferred financing costs, net.................................... 11,917 11,651 Intangible assets, net........................................... 4,955 50,514 Other assets..................................................... 312 821 -------- -------- Total other assets............................................. 87,513 132,595 -------- -------- $165,321 $229,623 ======== ========
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 AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- (Amounts in Thousands)
December 25, September 24, 1998 1999 ------------ ------------- (unaudited) CURRENT LIABILITIES: Notes payable to banks............................................ $ 3,000 $ 8,256 Accounts payable.................................................. 6,324 2,991 Note payable to affiliate......................................... -- 22,000 Accrued liabilities............................................... 6,219 14,997 --------- --------- Total current liabilities....................................... 15,543 48,244 SENIOR SUBORDINATED NOTES PAYABLE.................................... 115,000 115,000 NOTES PAYABLE TO BANKS, net of current portion....................... 41,000 44,079 Other non-current liabilities........................................ -- 1,210 --------- --------- Total liabilities............................................... 171,543 208,533 --------- --------- MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value: Authorized--1,800 shares; issued and outstanding--318 and 336 shares at December 25, 1998 and September 24, 1999; liquidation preference: $33,625............................................... 30,802 32,625 Accrued preferred stock dividend, payable in kind.................. 711 1,755 --------- --------- 31,513 34,380 STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $0.01 par value: Authorized--15,000 shares, issued and outstanding--7,812 and 10,044 at December 25, 1998 and September 24, 1999, respectively............................. 63,535 92,158 Cumulative translation adjustment.................................. (464) (828) Accumulated deficit................................................ (100,806) (104,620) --------- --------- (37,735) (13,290) --------- --------- $ 165,321 $ 229,623 ========= =========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Amounts in Thousands)
Three Months Ended Nine Months Ended ---------------------- ----------------------------- Sept. 25, 1998 Sept. 25, Sept. 24, (as restated, Sept. 24, 1998 1999 see Note 6) 1999 --------- --------- -------------- ---------- (unaudited) (unaudited) NET SALES........................................................ $22,130 $30,827 $ 68,828 $ 85,270 COST OF SALES.................................................... 11,548 17,953 36,691 48,006 ------- ------- -------- -------- Gross Profit.................................................. 10,582 12,874 32,137 37,264 ------- ------- -------- -------- OPERATING EXPENSES: Selling, distribution, general and administrative............. 6,512 9,266 19,657 23,793 Research and development...................................... 475 882 1,415 1,993 ------- ------- -------- -------- 6,987 10,148 21,072 25,786 ------- ------- -------- -------- PROVISION FOR EQUITY PARTICIPATION PLAN.......................... -- -- 63,939 -- PROVISION FOR RETENTION PAYMENTS................................. -- -- 4,754 -- ------- ------- -------- -------- Income (loss) from operations................................. 3,595 2,726 (57,628) 11,478 ------- ------- -------- -------- INTEREST EXPENSE................................................. (4,001) (4,342) (7,791) (12,140) ------- ------- -------- -------- Loss before (benefit) provision for income taxes.............. (406) (1,616) (65,419) (662) (BENEFIT) PROVISION FOR INCOME TAXES (Note 5).................... (163) (62) (76) 284 ------- ------- -------- -------- Loss before extraordinary item................................ (243) (1,554) (65,343) (946) EXTRAORDINARY ITEM--loss on extinguishment of debt............... -- -- 104 -- ------- ------- -------- -------- Net loss...................................................... (243) (1,554) (65,447) (946) Preferred stock dividends........................................ 872 978 1,648 2,868 ------- ------- -------- -------- Net loss available to common shareholders........................ $(1,115) $(2,532) $(67,095) $ (3,814) ======= ======= ======== ======== Pro forma net loss available to common shareholders assuming C corporation status for income tax purposes (Note 5)........... $(1,115) $(2,532) $(41,000) $ (3,814) ======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated statements. 3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Amounts in Thousands)
Nine Months Ended ------------------------------ Sept. 25, Sept. 24, 1998 1999 ---------- --------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................................................... $ (65,447) $ (946) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation and amortization............................................... 4,869 5,817 Write-off of deferred financing fees........................................ 104 -- Amortization of deferred financing costs.................................... -- 1,024 Gain on disposal of equipment............................................... (28) -- Deferred taxes.............................................................. (3,345) 720 Increase in equity participation plan (EPP)................................. 63,939 -- Decrease in accounts receivable............................................. 2,319 1,964 Decrease (increase) in inventories.......................................... 72 (3,936) Decrease (increase) in other current assets................................. 250 (213) (Increase) decrease in other assets......................................... 215 (508) Increase (decrease) in accounts payable..................................... 1,522 (3,918) Increase in accrued liabilities............................................. 7,057 5,695 Decrease in other current liabilities....................................... -- (1,189) Increase in other non-current liabilities................................... -- 250 Payments of EPP liabilities................................................. (89,642) -- --------- -------- Net cash provided by (used in) operating activities....................... (78,115) 4,760 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment..................................... (2,730) (6,876) Acquisition of certain assets of Gibeck, Inc................................... (3,352) -- Acquisition of Louis Gibeck AB stock, net of cash acquired of $8,208........... -- (38,750) --------- -------- Net cash used in investing activities..................................... (6,082) (45,626) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank............................................. (43,250) (9,000) Proceeds from bank borrowings.................................................. 61,000 14,171 Additions to deferred financing costs.......................................... (12,563) -- Redemption of stockholder interest............................................. (127,624) -- Proceeds from senior subordinated debt......................................... 115,000 -- Proceeds from note payable to affiliate........................................ -- 22,000 Sale of common and preferred stock, net of transaction costs................... 92,125 22,000 --------- -------- Net cash provided by financing activities................................. 84,688 49,171 --------- -------- Effect of exchange rate changes on cash.......................................... 345 (364) --------- -------- NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS.................................. 836 7,941 CASH AND SHORT-TERM INVESTMENTS, beginning of period............................. 470 507 --------- -------- CASH AND SHORT-TERM INVESTMENTS, end of period................................... $ 1,306 $ 8,448 ========= ========
4
Nine Months Ended ----------------------------- Sept. 25, Sept. 24, 1998 1999 ---------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest............................................................... $ 2,377 $ 7,971 ========= ======== Income taxes........................................................... $ 1,659 $ 107 ========= ======== DETAILS OF ACQUISITIONS: Acquisition price........................................................ $ 3,352 $ 53,581 Less: cash acquired...................................................... -- (8,208) Less: common stock issued for acquisition................................ -- (6,623) --------- -------- Net cash paid for acquisitions.............................................. $ 3,352 $ 38,750 ========= ======== NON-CASH FINANCING ACTIVITIES: Preferred dividends accrued or paid in kind.............................. $ 1,648 $ 2,868 ========= ======== Common stock issued for acquisition...................................... $ -- $ 6,623 ========= ========
The accompanying notes are an integral part of these condensed consolidated statements. 5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) 1. Financial Statements. The condensed consolidated financial statements -------------------- included herein have been prepared by Hudson Respiratory Care Inc. (the "Company" or Hudson RCI"), without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 24, 1999, and the results of operations and cash flows for the three and nine month periods ended September 25, 1998 and September 24, 1999 pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company's 1998 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 25, 1998 and September 24, 1999 are not necessarily indicative of the results to be achieved for a full year. Recapitalization. In April 1998, the Company consummated a plan pursuant ---------------- to which a majority interest in the Company was sold in accordance with an agreement and plan of merger (the "Recapitalization"). Key components of the Recapitalization included: (1) Common and preferred equity investments in consideration for an 80.8% ownership in the Company's common stock and preferred stock with an initial liquidation preference of $30.0 million; (2) Issuance of 9-1/8% senior subordinated notes with a par value of $115.0 million, maturing in 2008; (3) Execution of a new term loan facility and revolving loan facility; (4) Repayment of existing indebtedness; (5) Payment of amounts due under the Equity Participation Plan; (6) Payment for common shares acquired from the existing shareholder; this shareholder retained a 19.2% interest in the common shares outstanding; (7) Potential contingent payments based on 1998 performance, payable to the continuing shareholder and former participants in the Equity Participation Plan; however, as a result of the Company's 1998 performance, no additional amounts are due. The Company has terminated the Equity Participation Plan. Additionally, the Company's sole shareholder, who owned the remaining 21% of Industrias Hudson, transferred this interest to the Company in consideration of one dollar. Because of the commonality of ownership, the 21% minority interest has been included in the financial statements for all periods presented. The Company effected a 245:1 stock split concurrent with the Recapitalization. The stock split has been reflected in the stock amounts shown herein. 6 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) The Recapitalization resulted in no change to the carrying amounts of the Company's existing assets and liabilities. The Company has recorded a deferred tax asset due to the conversion from S to C corporation status and a tax election to revalue the basis of assets and liabilities for tax purposes. 2. Inventories. Inventories consisted of the following (amounts in ----------- thousands):
December 25, September 24, 1998 1999 ------------- ------------- Raw materials..................... $ 5,127 $ 4,662 Work-in-process................... 5,926 5,442 Finished goods.................... 6,971 14,164 ------- ------- $18,024 $24,268 ======= =======
3. Comprehensive Income. In June 1997, FASB issued Statement of Financial -------------------- Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This Statement requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. This Statement was adopted by the Company in the quarter ended March 27, 1998. The Company had comprehensive loss for the three and nine month periods ended September 25, 1998 and September 24, 1999 as follows (amounts in thousands):
Three Months Ended Nine Months Ended ---------------------- ------------------------- Sept. 25, Sept. 24, Sept. 25, Sept. 24, 1998 1999 1998 1999 --------- --------- ---------- --------- Net loss.............................. $(243) $(1,554) $(65,447) $ (946) Other comprehensive income (loss): Foreign currency translation loss... -- (220) (21) (364) ----- ------- -------- ------- Comprehensive loss.................... $(243) $(1,774) $(65,468) $(1,310) ===== ======= ======== =======
4. Foreign Currency Translation. Effective in the first quarter of 1999, the ---------------------------- Company commenced using the Mexican Peso as the functional currency of its Mexican operations since Mexico is no longer considered a highly inflationary economy. 5. Income Taxes. The Company became a C corporation upon consummation of the ------------ transaction discussed in Note 1. Accordingly, the Company has presented pro forma net income (loss) amounts to reflect a provision for income taxes at a combined effective rate of approximately 40%, after consideration of permanent differences between financial reporting and income tax amounts. 6. Restatement. The effect of the conversion of the Company to a C ----------- corporation in connection with the Recapitalization of approximately $77.1 million was previously reflected in operations during the quarter ended June 26, 1998. This amount should have been reflected as a direct credit to retained earnings during the period. This restatement had no impact on ending retained earnings for the periods presented. The impact of this restatement on the accompanying financial statements is as follows: 7 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited)
Nine Months Ended September 25, 1998 ------------------------------------ As Originally As Reported Adjustments Restated ---------- ----------- -------- Net loss before (benefit) provision for income taxes........................ $(65,419) $ -- $(65,419) ======== ======== ======== Net income (loss) before extraordinary item................................ $ 11,721 $(77,064) $(65,343) ======== ======== ======== Net income (loss)....................... $ 11,617 $(77,064) $(65,447) ======== ======== ========
7. Acquisition of Louis Gibeck AB. On July 22, 1999, the Company acquired ------------------------------ substantially all of the outstanding capital stock of Louis Gibeck AB ("LGAB") and subsidiaries, a Swedish company engaged in the same business as the Company. The purchase price was approximately $53.6 million, which included cash consideration of approximately $45.5 million (including approximately $8.2 million of cash acquired), a non-cash contribution of shares of Common Stock of River Holding Corp., a Delaware corporation and the Company's parent, of $6.6 million and transaction expenses of approximately $1.5 million. The acquisition was funded with (i) a $22.0 million common stock sale to the Company's existing majority shareholder, (ii) a $22.0 million, 12% per annum unsecured note payable to an affiliate of the Company's existing majority shareholder due August 1, 2000 and (iii) a $5.9 million unsecured bank loan bearing interest at the bank's reference rate plus 1/4% per annum due July 30, 2006. The acquisition of LGAB was accounted for as a purchase and the purchase price was preliminarily allocated based upon management's estimate of the assets acquired and liabilities assumed as follows (unaudited, amounts in thousands): Cash................................................ $ 8,208 Accounts receivable................................. 1,823 Inventories......................................... 5,161 Fixed assets........................................ 1,206 Current liabilities................................. (4,856) Non-current liabilities............................. (4,123) Other assets/liabilities............................ 1,378 Goodwill............................................ 44,784 ------- Total purchase price............................... $53,581 =======
The Company is evaluating the status of certain research and development projects that were acquired with the purchase of LGAB. Accordingly, a portion of the purchase price may be allocated to research and development when the Company has completed this analysis. The Company is also evaluating other estimates made in conjunction with the purchase price allocation, which may change in the near term. Had this acquisition and the acquisition of certain assets of Gibeck, Inc. occurred at the beginning of the current and prior fiscal years, the unaudited pro forma net sales, net loss before extraordinary item and net loss would be as follows (in thousands): 8 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited)
Nine Months Ended -------------------------------- Sept. 25, Sept. 24, 1998 1999 --------- --------- Net sales.............................................. $ 92,067 $93,873 ======== ======= Net loss before extraordinary item..................... $(71,115) $(2,073) ======== ======= Net loss............................................... $(71,219) $(2,073) ======== =======
8. 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 and certain bank debt. The non-guarantor subsidiaries consist principally of the assets, liabilities and operations of LGAB and subsidiaries. The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): 9 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 ======== ======== ========== ========
10 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 ======== ======== ========== ========
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 STATEMENT OF OPERATIONS
Three Months Ended September 24, 1999 ------------------------------------------------------- Non- Guarantor Guarantor Adjustments(a) Total --------- --------- ----------- ------- NET SALES..................................................... $28,145 $ 3,469 $(787) $30,827 COST OF SALES................................................. 15,759 2,355 (161) 17,953 ------- ------- ----- ------- Gross Profit............................................... 12,386 1,114 (626) 12,874 OPERATING EXPENSES: Selling, distribution, general and administrative.......... 7,216 2,050 -- 9,266 Research and development................................... 557 325 -- 882 ------- ------- ----- ------- 7,773 2,375 -- 10,148 ------- ------- ----- ------- 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) -- (62) ------- ------- ----- ------- NET INCOME (LOSS)............................................. $ 549 $(1,477) $(626) $(1,554) ======= ======= ===== ======= Depreciation and amortization................................. $ 1,534 ======= EBITDA before EPP and bonuses................................. $ 6,147 =======
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 STATEMENT OF OPERATIONS
Nine Months Ended September 24, 1999 ------------------------------------------------------- Non- Guarantor Guarantor Adjustments(a) Total ------------ ----------- ------------ ------------ NET SALES..................................................... $ 82,588 $ 3,469 $ (787) $ 85,270 COST OF SALES................................................. 45,812 2,355 (161) 48,006 -------- -------- -------- -------- Gross Profit............................................. 36,776 1,114 (626) 37,264 OPERATING EXPENSES: Selling, distribution, general and administrative.......... 21,743 2,050 -- 23,793 Research and development................................... 1,668 325 -- 1,993 -------- -------- -------- -------- 23,411 2,375 -- 25,786 -------- -------- -------- -------- Income (loss) from operations................................. 13,365 1,261 (626) 11,478 -------- -------- -------- -------- OTHER INCOME AND (EXPENSES): Interest expense........................................... (11,727) (383) -- (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................................. $ 18,035 ========
(a) Represents elimination of sales of products from LGAB to the Company which have not been resold by the Company, i.e., inter-company profit. 13 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. 14 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- September 24, 1999 ------------------ (unaudited) 9. Subsequent Event--Acquisition of Product Line. On September 30, 1999, the ---------------------------------------------- Company entered into a definitive agreement to acquire 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 will be funded principally with proceeds from the Company's $60.0 million revolving line of credit. Management expects that the acquisition will be accounted for as purchase and that the majority of the purchase price will be allocated to goodwill. 10. Subsequent Event--Principal Payment on Note Payable. In October 1999, the --------------------------------------------------- Company paid $4.2 million in principal on a note payable to an affiliate. 15 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. The following discussion and analysis covers periods before completion of the Recapitalization, as described below. 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 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's principal products include oxygen masks, humidification systems, 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 and home health care agencies. Internationally, the Company sells its products to distributors who market to hospitals and other health care providers. 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 September 30, 1999, the Company entered into a definitive agreement to acquire 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 will be funded principally with proceeds from the Company's $60.0 million revolving line of credit. 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 Louis Gibeck AB, a company organized under the laws of Sweden ("LGAB"). Pursuant to a series of private purchases and a tender offer consummated pursuant to Swedish law, Steamer acquired 604,000 shares of Class A stock and 2,452,838 shares of Class B stock representing approximately 82.0% of the capital and 62.8% of the voting power of LGAB at a price of 115 Swedish krona (approximately $13.60 at the July 22 exchange rate) per share of Class A stock and Class B stock for an aggregate cash purchase price of approximately $45.5 million. In addition, on August 4, 1999, Steamer acquired an additional 483,750 shares of Class A stock of LGAB from River Holding Corp., a Delaware corporation and the parent of Steamer and the Company ("Holding"), which shares Holding acquired in a private transaction in exchange for 525,042 shares of common stock of Holding ("Holding Common Stock"). The exchange ratio for the Class A stock was the same as the effective price per share of the shares acquired in the tender offer. After giving effect to this exchange and the conversion of the Series A stock acquired by Steamer in the tender offer into Series B stock, Steamer holds approximately 99.0% of the capital and 100.0% of the voting power of LGAB. The Company intends that 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. 16 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 "heat moisture exchange" ("HME") products, with approximately 25% share of the world market. Following completion of the acquisition, the Company intends to continue LGAB's operations in substantially the same manner as conducted prior to the acquisition. In September 1998, the Company acquired certain assets of Gibeck, Inc., a subsidiary of LGAB, for approximately $3.35 million. Prior to the transaction, Gibeck, Inc. was engaged primarily in the business of manufacturing, marketing and selling disposable anesthesia supplies. In conjunction with that transaction, the Company became the exclusive North American distributor of LGAB's HME product line. In fiscal year 1997, Gibeck, Inc. reported net sales of approximately $12.3 million. The Company established a sales office located in Germany in the second quarter of 1999. It is anticipated that this operation will better equip the Company to more aggressively pursue the German market. The German operation had a negative impact on the Company's results of approximately $400,000 in the second and third quarters of 1999. It is anticipated that the Company's earnings will be negatively impacted for the first twelve months of operation. The Recapitalization On April 7, 1998, Hudson RCI consummated its recapitalization pursuant to an Agreement and Plan of Merger pursuant to which River Acquisition Corp., a wholly-owned subsidiary of Holding merged with and into Hudson RCI, with Hudson RCI surviving as a majority-owned subsidiary of Holding (the "Merger"). Pursuant to the Recapitalization, Holding contributed approximately $93.0 million in equity capital into Hudson RCI (the "Holding Equity Investment") and a shareholder of Hudson RCI (the "Continuing Shareholder") retained common stock of Hudson RCI ("HCRI Common Stock") with a value of approximately $15.0 million (the "Rollover Equity"), based on the valuation of Hudson RCI used in the Recapitalization. In the Merger, a portion of the HRCI Common Stock was converted into the right to receive approximately $131.1 million in cash, and management received $88.3 million pursuant to the Company's Equity Participation Plan (the "Equity Participation Plan" or "EPP"). Following the Holding Equity Investment, Holding owned 80.8% of the outstanding HRCI Common Stock and the Continuing Shareholder owned the remaining 19.2%. The Holding Equity Investment was comprised of $63.0 million of common equity (the "Common Stock Investment") and $30.0 million of preferred equity (the "Preferred Stock Investment"). The Common Stock Investment was funded with a $55.0 million investment by affiliates of Freeman Spogli & Co. Incorporated ("FS&Co."), and an $8.0 million investment by management of Hudson RCI. The Preferred Stock Investment was funded with proceeds from the sale of 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 (the "Holding Preferred Stock") with an aggregate liquidation preference of $30.0 million offered by Holding (the "Preferred Stock Offering"). Immediately following consummation of the Recapitalization, FS&Co. beneficially owned approximately 87.3% of the outstanding Holding Common Stock and management owned the remaining 12.7%. In connection with the Recapitalization and concurrently with the Preferred Stock Offering, Hudson RCI offered $115.0 million aggregate principal amount of 9-1/8% Senior Subordinated Notes due 2008 (the "Subordinated Notes") (the "Subordinated Notes Offering," and together with the Preferred Stock Offering, the "Offerings"). On April 7, 1998, Hudson RCI entered into an agreement (the "Credit Facility") providing for a $40.0 million secured term loan facility (the "Term Loan Facility"), which was funded in connection with the consummation of the 17 Recapitalization, and a $60.0 million revolving loan facility (the "Revolving Loan Facility") which will be available for Hudson RCI's future capital requirements and to finance acquisitions. The Offerings and the application of the net proceeds therefrom, repayment of existing Hudson RCI debt payments to the Continuing Shareholder under the Recapitalization Agreement and to management, the Holding Equity Investment and the related borrowings under the Credit Facility are collectively referred to herein as the "Recapitalization." The Company and the shareholders that received distributions in the Recapitalization made an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, to treat the Recapitalization as an asset purchase for tax purposes, which had the effect of significantly increasing the basis of the Company's assets, thus increasing depreciation and amortization expenses and other deductions for tax purposes and reducing the Company's taxable income in 1998 and subsequent years. The Recapitalization resulted in no change in the basis of the Company's assets and liabilities for financial reporting purposes. Results of Operations The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company's net sales.
Three Months Ended Nine Months Ended (unaudited) (unaudited) ---------------------------- ----------------------- Sept. 25, Sept. 24 Sept. 25, Sept. 24, 1998 1999 1998 1999 ---------- -------- --------- -------- (in thousands) (in thousands) Net sales $22,130 $30,827 $ 68,828 $85,270 Cost of sales 11,548 17,953 36,691 48,006 ------- ------- -------- ------- Gross profit 10,582 12,874 32,137 37,264 ------- ------- -------- ------- Selling expenses 2,489 3,296 7,180 8,408 Distribution expenses 1,251 1,946 3,949 5,027 General and administrative expenses 2,772 4,024 8,528 10,358 Research and development expenses 475 882 1,415 1,993 Provision for equity participation plan -- -- 63,939 -- Provision for retention payments -- -- 4,754 -- ------- ------- -------- ------- Total operating expenses 6,987 10,148 89,765 25,786 ------- ------- -------- ------- Operating income (loss) 3,595 2,726 (57,628) 11,478 ------- ------- -------- ------- Add back: Provision for equity participation -- -- 63,939 -- plan Add back: Provision for retention payments -- -- 4,754 -- ------- ------- -------- ------- Operating income before provision for equity participation plan and provision for retention payments $ 3,595 $ 2,726 $ 11,065 $11,478 ======= ======= ======== =======
18
Three Months Ended Nine Months Ended (unaudited) (unaudited) ----------------------------- ------------------------------ Sept. 25, Sept. 24, Sept. 25, Sept. 24 1998 1999 1998 1999 ------------- -------- --------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 52.2 58.2 53.3 56.3 ------ ------- ------ ------ Gross profit 47.8 41.8 46.7 43.7 Selling expenses 11.2 10.7 10.4 9.9 Distribution expenses 5.7 6.3 5.7 5.9 General and administrative expenses 12.5 13.1 12.4 12.1 Research and development expenses 2.1 2.9 2.1 2.3 Provision for equity participation -- -- 92.9 -- plan Provision for retention payments -- -- 6.9 -- ----- ----- ----- ----- Total operating expenses 31.6 32.9 130.4 30.2 ----- ----- ----- ----- Operating income (loss) 16.2 8.8 (83.7) 13.5 ----- ----- ----- ----- Add back: Provision for equity participation plan -- -- 92.9 -- Add back: Provision for retention payments -- -- 6.9 -- ----- ----- ----- ----- Operating income before provisions for equity participation plan and provision for retention payments 16.2% 8.8% 16.1% 13.5% ===== ====== ===== =====
Three Months Ended September 24, 1999 Compared to Three Months Ended September 25, 1998 Net sales, reported net of accrued rebates, were $30.8 million in the third quarter of 1999 as compared to $22.1 million in the third quarter of 1998. This represents an increase of $8.7 million or 39.3%. Of this increase, approximately $2.7 million was the result of the LGAB acquisition. Excluding LGAB, domestic hospital sales increased $3.4 million, primarily due to sales of products relating to the September 1998 acquisition of Gibeck, Inc., as well as increased sales to GPO-affiliated hospitals. Alternate site sales increased by $1.5 million or 40.6% as the Company continued to focus sales efforts in this growing market. Canadian sales were $0.4 million, essentially flat with the third quarter of 1998. House account sales decreased by $0.1 million or 10.0% from the third quarter of 1998, primarily the result of purchase timing of several OEM customers. International sales increased by $1.3 million or 32.5%, primarily the result of strong sales in Japan and Europe. Sales to the Far East, which had been hampered in 1998 by the economic crisis in that area, increased $0.1 million over the third quarter of 1998. The Company's gross profit for the third quarter of 1999 was $12.9 million, an increase of $2.3 million or 21.7% over the third quarter of 1998. Of this increase, approximately $1.6 million is a direct result of the LGAB acquisition. As a percentage of sales, gross profit was 41.8% and 47.8% for the third quarter of 1999 and 1998, respectively. This decline is related primarily to an unfavorable mix variance as sales of higher margin pre-filled solutions continues to decline and a $1.0 million charge to cost of sales relating to the fair value of acquired inventories in the third quarter of 1999. It is anticipated that substantially all inventories acquired in the LGAB acquisition will be exhausted by year-end which will result in a remaining charge of $1.6 million in the fourth quarter. No such charges will occur after fiscal 1999. Selling expenses were $3.3 million for the third quarter of 1999, a $0.8 million increase over the third quarter of 1998. This increase was primarily due to the LGAB acquisition, as well as the start up of the German operation. As a percentage of net sales, selling expenses were 10.7% in the third quarter of 1999 as compared to 11.2% in the third quarter of 1998. Distribution expenses were $1.9 million for the third quarter of 1999, an increase of $0.7 million or 55.6% over the third quarter of 1998. The majority of this increase was a result of higher sales volumes both as a result of internal 19 sales growth and the LGAB acquisition. As a percentage of net sales, distribution expenses were 6.3% and 5.7% in the third quarter of 1999 and 1998, respectively. General and administrative expenses were $4.0 million in the third quarter of 1999, an increase of $1.3 million or 45.2% over the third quarter of 1998. This increase was primarily due to the LGAB acquisition during the third quarter of 1999. Research and development expenses were $0.9 million for the third quarter of 1999, an increase of $0.4 million over the third quarter of 1998. This increase was entirely due to the LGAB acquisition during the third quarter of 1999. Interest expense was $4.4 million for the third quarter of 1999, as compared to $3.5 million in the third quarter of 1998. This increase was due to higher debt levels in the current quarter as a result of borrowings made to finance the LGAB acquisition. Prior to April 7, 1998, the Company provided for state income taxes as an S corporation and was not subject to federal income tax. The Company now provides for state and federal income taxes as a C corporation, although actual tax payments are expected to be substantially less than provided amounts due to the tax basis in assets provided by the Section 338(h)(10) election made in connection with the Recapitalization. Nine Months Ended September 24, 1999 Compared to Nine Months Ended September 25, 1998 Net sales, reported net of accrued rebates, were $85.3 million in the first nine months of 1999 as compared to $68.8 million for the first nine months of 1998. This represents an increase of $16.4 million or 23.9%. Of this increase, approximately $2.8 million is a result of the LGAB acquisition. Exclusive of the LGAB acquisition, domestic hospital sales increased $7.8 million, primarily due to sales of products relating to the September 1998 acquisition of Gibeck, Inc., as well as increased sales to GPO-affiliated hospitals. Alternate site sales increased by $3.4 million or 30.0% as the Company continued to focus sales efforts in this growing market. Canadian sales were $1.7 million for the first nine months of 1999, an increase of $0.3 million or 18.6% over the first nine months of 1998, primarily the result of the addition of a new distributor as well as the award of the Medbuy GPO contract in the second quarter of 1998. House account sales increased by $0.6 million or 24.7% over the first half of 1998, primarily the result of the addition of several OEM relationships. International sales increased by $1.6 million or 13.8%, primarily the result of strong sales in Japan and Europe. The Company's gross profit for the first nine months of 1999 was $37.3 million, an increase of $5.1 million or 16.0% over the first nine months of 1998. As a percentage of sales, the gross profit was 43.7% and 46.7% for the first nine months of 1999 and 1998, respectively. The decline in the margin is primarily due to unfavorable mix variance caused by increased sales of lower margin products, such as the Gibeck line of anesthesia products, as well as a $1.0 million charge to cost of sales relating to the fair value of acquired inventories in the third quarter of 1999. It is anticipated that substantially all inventories acquired in the LGAB acquisition will be exhausted by year-end which will result in a remaining charge of $1.6 million in the fourth quarter. No such charges will occur after fiscal 1999. Selling expenses were $8.4 million for the first nine months of 1999, a $1.2 million increase over the first nine months of 1998. This increase was primarily due to the LGAB acquisition, as well as the start up of the German operation. As a percentage of net sales, selling expenses were 9.9% in the first nine months of 1999 as compared to 10.4% in the first nine months of 1998. Distribution expenses were $5.0 million for the first nine months of 1999, an increase of $1.1 million or 27.3% over the first nine months of 1998. The majority of this increase was a result of higher sales volumes both as a result of internal sales growth and the LGAB acquisition. As a percentage of net sales, distribution expenses were 5.9% and 5.7% in the first nine months of 1999 and 1998, respectively. General and administrative expenses were $10.4 million in the first nine months of 1999, an increase of $1.8 million or 21.5% over the first nine months of 1998. This increase was primarily due to the LGAB acquisition 20 during the third quarter of 1999 as well as payments made to certain outside consultants during the first nine months of 1999. Research and development expenses were $2.0 million for the first nine months of 1999, an increase of $0.6 million over the first nine months of 1998. This increase was primarily due to the LGAB acquisition during the third quarter of 1999. The provision for EPP was terminated upon consummation of the Recapitalization. As a result, no expense was recorded in the third quarter of 1999. In the first quarter of 1999 certain payments totaling approximately $2.1 million were made to the EPP members and the former shareholder. These payments had been accrued in fiscal 1998 and therefore had no impact on earnings in fiscal 1999. It is not anticipated that any additional payments will be made under the plan. Interest expense was $12.1 million for the first nine months of 1999, as compared to $7.1 million in the first nine months of 1998. This increase was due to higher debt levels in the current quarter as a result of the recapitalization during the second quarter of 1998 and additional borrowings made to finance the LGAB acquisition. Prior to April 7, 1998, the Company provided for state income taxes as an S corporation and was not subject to federal income tax. The Company now provides for state and federal income taxes as a C corporation, although actual tax payments are expected to be substantially less than provided amounts due to the tax basis in assets provided by the Section 338(h)(10) election made in connection with the Recapitalization. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operations and borrowing under its working capital facility. Cash provided by operations before EPP payments totaled $11.5 million in the nine months ended September 25, 1998 and $4.8 million in the nine months ended September 24, 1999. The Company had operating working capital, excluding cash and short-term debt, of $31.7 million at September 24, 1999. Inventories were $18.0 million and $24.3 million at December 25, 1998 and September 24, 1999, 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. 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 $25.8 million and $25.7 million at December 25, 1998 and September 24, 1999, 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 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 25, 1998, net cash used in investing activities was $6.1 million, primarily reflecting the acquisition of assets of Gibeck, Inc. and purchases of manufacturing equipment. During the nine months ended September 24, 1999, net cash used in investing activities was $45.6 million, reflecting purchases of LGAB stock, manufacturing equipment and business operating software. The Company currently estimates that annual capital expenditures will be approximately $7.0 million in both 1999 and 2000, consisting primarily of additional and replacement manufacturing equipment and new heater placements. During the nine months ended September 25, 1998, net cash provided by financing activities was $84.7 million, consisting primarily of borrowings under the bank credit facilities used to fund distributions made under the EPP. During the nine months ended September 24, 1999, net cash provided by financing activities was $49.2 million, primarily reflecting increased bank loans, affiliate loans and the issuance of common stock in connection with the LGAB acquisition. 21 The Company has outstanding $189.6 million of indebtedness, consisting of $115.0 million of Subordinated Notes issued in connection with the Recapitalization, borrowings of $42.0 million under the Credit Facility entered into in connection with the Recapitalization and other loans described below. The Credit Facility consists of a $40.0 million Term Loan Facility (all of which was funded in connection with the Recapitalization) and a $60.0 million 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 addition, the Company has a $22.0 million dollar loan payable to FS&Co. related to the LGAB acquisition bearing interest at the rate of 12% per annum, with no principal or interest repayments until maturity at August 2000. The Company also has loans outstanding to foreign banks in the aggregate amount of approximately $10.3 million. These loans bear interest at the bank's reference rate plus 0.25% to 0.75%. In connection with the Recapitalization, the Company issued to Holding 300,000 shares of its 11-1/2% Senior PIK Preferred Stock due 2010 with an initial aggregate liquidation preference of $30.0 million. Dividends are payable semi-annually in arrears on April 15 and October 15 each year. Dividends will be 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 will rank junior in right of payment to all obligations of the Company and its subsidiaries. The Company has elected to pay dividends on the preferred stock in kind, and expects to continue to do so until it is required to pay such dividends in cash. The Company believes that after giving effect to the Recapitalization 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. Year 2000 Compliance The following discussion about the implementation of the Company's Year 2000 program, the costs expected to be associated with the program and the results the Company expect to achieve constitute forward-looking information. As noted below, there are many uncertainties involved with the Year 2000 issue, including the extent to which the Company will be able to adequately provide for contingencies that may arise, as well as the broader scope of the Year 2000 issue as it may affect third parties and the Company's key trading partners. Accordingly, the costs and results of the Company's Year 2000 program and the extent of any impact on the Company's results of operations could vary materially from that stated herein. A significant percentage of software that runs on most computers relies on two-digit date codes to perform computations and decision-making functions. Commencing on January 1, 2000, these computer programs may fail from an inability to interpret date codes properly, misinterpreting "00" as the year 1900 rather than 2000. The Company has completed the identification of all necessary internal software changes to ensure that it does not experience any loss of critical business functionality due to the Year 2000 issue. The Company has already completed an assessment of all internal software, hardware and operating systems and has made all necessary hardware and software changes as a result of that assessment. The Company does not believe that its systems will encounter any material Year 2000 problems. The Company's products are not subject to Year 2000 problems. 22 The Company also relies, directly and indirectly, on the external systems of various independent business enterprises, such as its customers, suppliers, creditors, financial organizations, and of governments, for the accurate exchange of data and related information. The Company could be affected as a result of any disruption in the operation of the various third-party enterprises with which the Company interacts. The Company has contacted its key trading partners to assess its Year 2000 risk based upon the Year 2000 issues of its partners, and has developed contingency plans for a substantial number of its key trading partners. These contingency plans include the establishment of back-up vendors and back-up plans for communications with its customers. The Company is also developing back-up plans for the procurement of power and water at its Mexico facilities, which the Company expects to complete in the fourth quarter of 1999. The Company does not expect the cost of this program to be material. The Company believes that the worst case scenario in the event of a Year 2000 related failure would be its inability to communicate via computer transmission with its key trading partners. The Company cannot provide any assurance that any Year 2000 related systems issues of third parties will be corrected in a timely manner, that the failure of these third parties to correct these issues would not have a material adverse effect on the Company or that its contingency plans will be adequate. The total costs of the Year 2000 program are anticipated to be less than $100,000, some of which has been expended to date. The costs and time estimates of the Year 2000 project are based on the Company's best estimates. There can be no assurance that these estimates will be achieved and that planned results will be achieved. Risk factors include, but are not limited to, the retention of internal resources dedicated to the project and the successful completion of key business partners' Year 2000 projects. Recent Accounting Pronouncements Statement of Financial Accountings Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. Because the Company has no derivative instruments and does not engage in hedging activities, SFAS No. 133 will not impact the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK With the LGAB acquisition, the Company has greater foreign currency exposure with respect to its international operations. In the past, the Company's only international exposure was its manufacturing operation in Mexico. All sales were previously denominated in U.S. dollars. Currently, the Company has operations in Germany, Sweden, Japan and other countries where sales are made in local currency. The Company plans to hedge its foreign currency exposures by attempting to purchase goods and services with the proceeds from sales in local currencies where possible. The Company will 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. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On August 4, 1999, the Company sold 2,231,791 shares of HRCI Common Stock to Holding in exchange for cash consideration of approximately $22.0 million and 483,750 shares of Class A stock of LGAB, valued at approximately $6.6 million. The $22.0 million and 483,750 shares of Class A stock of LGAB were used to finance a portion of the LGAB acquisition. The sale and issuance of the securities described above was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. The Company did not engage in any general solicitation in connection with the issuance of the Common Stock described above, and Holding acquired the securities for investment only and not with a view to distribution. Appropriate legends were affixed to the stock certificates issued in these transactions. No underwriter was employed with respect to these transactions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K Form 8-K/A (date of earliest event -- July 22, 1999) relating to the LGAB transaction. 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 8, 1999 By: /s/ Jay R. Ogram ---------------- Jay R. Ogram Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUN-26-1999 JUN-26-1999 SEP-24-1999 SEP-24-1999 0 8,448 0 0 0 25,689 0 0 0 24,268 0 60,035 0 36,993 0 0 0 229,623 0 (48,244) 0 (115,000) 0 (34,380) 0 0 0 (92,158) 0 (105,448) 0 (229,623) (30,827) (85,270) (30,827) (85,270) 12,874 48,006 10,148 25,786 (8) 30 0 0 4,350 12,110 1,616 662 (62) 284 1,554 946 0 0 0 0 0 0 1,554 946 0 0 0 0
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