SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1996 Commission File Number: 1-8147
MEDIQ INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 51-0219413
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 665-9300
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
-- --
As of August 9, 1996, there were 18,417,965 shares of Common Stock, par value
$1.00 per share and 6,311,501 shares of Preferred Stock, par value $.50 per
share, outstanding.
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1996
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations-
Three and Nine Months ended June 30, 1996 and 1995
(Unaudited) 4
Condensed Consolidated Balance Sheets-
June 30, 1996 (Unaudited) and September 30, 1995 5
Condensed Consolidated Statements of Cash Flows-
Nine Months ended June 30, 1996 and 1995
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11-15
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K. 16
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1996
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
3
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 34,386 $ 33,098 $ 103,478 $ 101,976
Costs and expenses:
Operating 14,821 13,445 42,988 40,870
Selling and administrative 5,183 5,458 15,999 17,689
Restructuring -- -- 2,200 --
Depreciation and amortization 7,483 7,648 22,319 21,818
--------- --------- --------- ---------
27,487 26,551 83,506 80,377
--------- --------- --------- ---------
Operating income 6,899 6,547 19,972 21,599
Other (charges) credits:
Interest expense (6,806) (7,358) (20,398) (22,365)
Equity in earnings of unconsolidated affiliate 606 397 1,882 1,519
Interest income 340 349 1,157 1,032
Other - net 639 54 204 (749)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and extraordinary item 1,678 (11) 2,817 1,036
Income tax expense 985 225 2,379 1,006
--------- --------- --------- ---------
Income (loss) from continuing operations before
discontinued operations and extraordinary item 693 (236) 438 30
Discontinued operations (net of taxes) (1,914) (956) (212) 354
Extraordinary item - early retirement of debt
(net of taxes) 153 -- 1,154 --
--------- --------- --------- ---------
Net income (loss) $ (1,068) $ (1,192) $ 1,380 $ 384
========= ========= ========= =========
Earnings per share:
Income (loss) from continuing operations $ .03 $ (.01) $ .02 $ --
Discontinued operations (.08) (.04) (.01) .01
Extraordinary item -- -- .04 --
--------- --------- --------- ---------
Net income (loss) $ (.05) $ (.05) $ .05 $ .01
========= ========= ========= =========
Weighted average shares outstanding 25,244 24,699 24,890 24,573
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, Sept. 30,
1996 1995
-------- ---------
(Unaudited) (See Note)
Assets
Current assets:
Cash $ 2,331 $ 2,966
Accounts receivable - net 32,353 27,884
Investment in discontinued operations 43,798 19,024
Inventories 6,163 4,181
Deferred income taxes 4,203 4,310
Other current assets 3,647 5,095
-------- --------
Total current assets 92,495 63,460
Investment in unconsolidated affiliate 20,479 18,598
Investment in discontinued operations 8,061 32,533
Property, plant and equipment - net 125,799 132,823
Goodwill - net 59,157 61,744
Note receivable from MHM 10,158 10,733
Other assets 16,373 14,272
-------- --------
Total assets $332,522 $334,163
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to financial institutions $ 21,995 $ --
Accounts payable 10,573 6,694
Accrued expenses 23,359 20,691
Current portion of long-term debt 33,600 37,300
-------- --------
Total current liabilities 89,527 64,685
Senior debt 128,948 136,949
Subordinated debt 59,993 81,907
Deferred income taxes and other liabilities 19,529 19,105
Stockholders' equity 34,525 31,517
-------- --------
Total liabilities and stockholders' equity $332,522 $334,163
======== ========
- -----------------
Note: The balance sheet at September 30, 1995 has been condensed from the
audited financial statements at that date and restated for discontinued
operations.
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,380 $ 384
Adjustments to reconcile net income to
net cash provided by operating activities 14,528 13,481
-------- --------
Net cash provided by operating activities 15,908 13,865
Cash Flows From Investing Activities:
Purchase of equipment (12,956) (7,060)
Advance to joint venture (3,250) --
Repayment of advance to joint venture 3,250 --
Purchase of warrant (1,625) --
Proceeds from disposal of equipment and other assets 4,533 6,762
Proceeds from the sale of discontinued operations 1,602 6,368
Collections of MHM note receivable 575 --
Other (164) (1,265)
-------- --------
Net cash provided by (used in) investing activities (8,035) 4,805
Cash Flows From Financing Activities:
Borrowings 21,712 5,088
Debt repayments (31,848) (22,674)
Proceeds from exercise of stock options 1,628 47
-------- --------
Net cash used in financing activities (8,508) (17,539)
-------- --------
Increase (decrease) in cash (635) 1,131
Cash:
Beginning balance 2,966 1,495
-------- --------
Ending balance $ 2,331 $ 2,626
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 16,357 $ 17,725
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Equipment financed with debt, capital leases and
accounts payable $ 1,482 $ 1,328
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1996, the condensed
consolidated statements of operations for the three and nine months ended June
30, 1996 and 1995, and the condensed consolidated statements of cash flows for
the nine months then ended have been prepared by the Company without audit. In
the opinion of management, all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1996 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1995 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1996 are not necessarily
indicative of the operating results for the full year.
Reclassification of accounts - Certain reclassifications have been made to
conform prior years' balances to the current year presentation
Note B - Discontinued Operations
On July 24, 1996, PCI Services, Inc., an entity in which the Company has a 46%
equity interest, announced it agreed to be acquired by Cardinal Health, Inc.
Under the terms of the agreement, shareholders of PCI will receive 0.336 shares
of Cardinal Health common stock for each share of PCI owned at the time the
transaction closes, subject to adjustment under certain circumstances. The
transaction is anticipated to close in the first quarter of fiscal 1997. If the
merger was consummated at the closing price for Cardinal Health stock on August
9, 1996, the Company would have received shares of Cardinal Health having a
market value of approximately $67.1 million and would have reported an after-tax
gain of approximately $24.3 million or approximately $1.00 per share. In
connection with the transaction, the Company granted Cardinal Health an option
to purchase all of the shares of PCI owned by the Company, exercisable upon the
occurrence of certain events and has agreed to vote in favor of the transaction.
Accordingly, the Company's investment in PCI, as well as its equity in the
earnings of PCI, have been reported as discontinued operations.
In the second quarter of fiscal 1995, the Company adopted a plan to sell four
non-core businesses, Medifac, Inc., Health Examinetics, Inc., MEDIQ Mobile X-Ray
Services, Inc. and MEDIQ Imaging Services, Inc. During fiscal 1995, the Company
sold Medifac and MEDIQ Imaging Services. In the fourth quarter, the Company
revised the plan to include the operations of HealthQuest, Inc. Discontinued
operations also include the Company's equity investment in InnoServ
Technologies, Inc. ("InnoServ"), which is anticipated to be distributed to the
Company's shareholders during the first quarter of fiscal 1997. The Company's
prior year consolidated financial statements have been restated to report the
net assets and operating results of these businesses, as well as PCI, as
discontinued operations.
7
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note B - Discontinued Operations (Continued)
In February 1996, the Company agreed to sell substantially all of the assets of
Mobile X-Ray to a subsidiary of Long-Term Care Services, Inc. In July 1996, this
agreement was terminated as a result of uncertainties relating to certain
Medicare reimbursement rate adjustments. The Company is currently reviewing
several new offers and believes it will sign a letter of intent in the fourth
quarter of fiscal 1996 to sell substantially all of the assets of Mobile X-Ray.
The Company anticipates that the disposal of Health Examinetics and HealthQuest
will be completed in fiscal 1996. The estimated loss on the sale of these
operations was recorded in fiscal 1995. As a result of the termination of the
agreement to sell the assets of Mobile X-Ray and the current offers for these
assets, as well as offers for the assets of Health Examinetics, the Company has
revised its estimate of the reserve for disposal of discontinued operations and
recorded an additional reserve of $7.2 million ($2.6 million, net of tax) in the
third quarter of fiscal 1996.
The investment in discontinued operations as of June 30, 1996 consisted of (in
thousands):
Current assets $39,229
Current liabilities (9,023)
-------
Net current assets 30,206
Net fixed assets 5,704
Other noncurrent assets 7,888
-------
43,798
Investment in InnoServ 8,061
-------
$51,859
=======
The investment in InnoServ, which is expected to be distributed to the Company's
shareholders in the form of a dividend, is classified as a long-term asset.
Note C - Inventories
Inventories, which consist primarily of finished goods for sale and repair parts
for rental equipment, are stated at the lower of cost (first-in, first-out
method) or market.
Note D - Investment in Unconsolidated Affiliate
As of June 30, 1996, the Company owned 47.4% of the outstanding common stock of
NutraMax Products, Inc.
Summarized income statement information for NutraMax is presented below
(in thousands).
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ -------------------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
-------- -------- -------- --------
Net sales $ 20,071 $ 15,184 $ 58,043 $ 45,362
Gross profit 5,598 3,863 16,721 12,744
Net income 1,279 857 3,971 3,206
8
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note E - Long-Term Debt
Under the terms of the Company's 7.25% subordinated convertible debentures due
2006, the Company is required to offer to repurchase a portion of the debentures
if stockholders' equity is $40 million or less at the end of two consecutive
fiscal quarters. As of June 30, 1994 and subsequent thereto, the Company's
stockholders' equity has been less than $40 million. During the first and third
quarters of fiscal 1996, the Company repurchased an aggregate of $21.4 million
of its debentures at a discount in the open market and through a private
transaction, which resulted in a pretax gain of $1.7 million, or $1.2 million
net of taxes. This gain was recorded as an extraordinary item in the Company's
Condensed Consolidated Statement of Operations. In July 1996, the Company,
through a Special Mandatory Redemption Obligation Offer made to all bond holders
of record on June 28, 1996, repurchased an additional $1.1 million of debentures
representing the remaining balance of its obligation to purchase $11.25 million
of debentures by June 30, 1996. The Company is required to offer to repurchase
$11.25 million of debentures prior to December 31, 1996 and semi-annually
thereafter until all of the debentures are repurchased unless stockholders'
equity exceeds $40 million as of September 30, 1996 or any subsequent quarter.
As of June 30, 1996, $23.6 million of the debentures have been classified as a
current liability.
In December 1995, the Company's $13.4 million revolving credit facility was
extended to December 1996 and increased to $15.0 million with interest reduced
to the prime rate plus 1/2%. In addition, as amended, the facility will be
reduced by an amount equal to 50% of the net cash proceeds from the sale of
certain discontinued operations and certain other assets. As of June 30, 1996,
$13.1 million was outstanding under this facility which was included in Notes
Payable to Financial Institutions in the Condensed Consolidated Balance Sheet.
In July 1996, the Company executed a commitment letter with two financial
institutions to refinance substantially all of the Company's senior debt and
working capital facilities and a portion of the Company's subordinated debt. The
commitment provides for two term loans aggregating $135 million, a $25 million
line of credit, and, under certain circumstances, a $100 million revolving
credit facility. The interest rate on these facilities will be based upon prime
or LIBOR, at the Company's discretion, with a spread based upon the Company's
leverage ratio. The interest rate should initially approximate LIBOR plus 3%.
The Company expects to finalize the negotiations on the credit agreement shortly
and consummate the refinancing by September 30, 1996.
Note F - Stock Options
In the first quarter of fiscal 1996, the Company granted stock options to
acquire 100,000 and 980,000 shares of common stock at $4.00 per share and $4.53
per share, respectively, to 35 officers and managers of the Company and certain
subsidiaries, including 250,000 options to Mr. Thomas E. Carroll, the Company's
President and Chief Executive Officer.
Note G - Restructuring Charge
In the first quarter of fiscal 1996, the Company recorded a restructuring charge
of $2.2 million for employee severance costs incurred in connection with a plan
approved by the Board of Directors to downsize corporate functions and
consolidate certain activities with the operations of MEDIQ/PRN. The plan
resulted in the termination of employment for 27 employees. The Company
anticipates reductions in corporate expenses of approximately $2.0 million in
1996 and $2.5 million annually thereafter as a result of the downsizing and
consolidation of corporate activities.
9
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note H - Acquisition
On January 31, 1996, SpectraCair, a 50% owned joint venture of MEDIQ/PRN,
acquired certain rental assets from Bio Clinic Corporation, a subsidiary of
Sunrise Medical, Inc. The Company advanced $3.3 million to the joint venture to
fund this acquisition. SpectraCair repaid the advance with interest at the prime
rate plus 2% in April 1996. This acquisition expanded the joint venture's
business of renting air therapy mattress systems throughout the United States.
Note I - Purchase of Warrant
In February 1996, the Company purchased a warrant issued by MEDIQ/PRN Life
Support Services, Inc. in 1992 to a lender in connection with a financing for an
acquisition. The warrant provided for the purchase of up to 2.5% of the common
stock of MEDIQ/PRN Life Support Services, Inc. for a period of seven years for
nominal consideration. The purchase price of the warrant was $1.6 million. The
excess of the purchase price over the carrying value of the warrant resulted in
a net charge to income in the second quarter of 1996 of $.6 million, or $.03 per
share. This charge is reflected in other charges in the Company's Condensed
Consolidated Statement of Operations for the nine months ended June 30, 1996.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion addresses the financial condition of the Company as of
June 30, 1996 and results of operations for the three and nine month periods
ended June 30, 1996 and 1995. This discussion should be read in conjunction with
the financial statements included elsewhere herein and the Management's
Discussion and Analysis and Financial Statement sections of the Company's
September 30, 1995 Annual Report on Form 10-K to which the reader is directed
for additional information.
Some of the information presented herein constitutes forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurances that actual results will not differ materially from
its expectations. For cautionary statements, see the Company's Form 8-K filed on
June 12, 1996.
Discontinued Operations
On July 24, 1996, PCI Services, Inc., an entity in which the Company has a 46%
equity interest, announced it agreed to be acquired by Cardinal Health, Inc.
Under the terms of the agreement, shareholders of PCI will receive 0.336 shares
of Cardinal Health common stock for each share of PCI owned at the time the
transaction closes, subject to adjustment under certain circumstances. The
transaction is anticipated to close in the first quarter of fiscal 1997. If the
merger was consummated at the closing price for Cardinal Health stock on August
9, 1996, the Company would have received shares of Cardinal Health having a
market value of approximately $67.1 million and would have reported an after-tax
gain of approximately $24.3 million or approximately $1.00 per share. In
connection with the transaction, the Company granted Cardinal Health an option
to purchase all of the shares of PCI owned by the Company, exercisable upon the
occurrence of certain events and has agreed to vote in favor of the transaction.
Accordingly, the Company's investment in PCI as well as its equity in the
earnings of PCI have been reported as discontinued operations.
In the second quarter of fiscal 1995, the Company adopted a plan to sell its
non-core businesses: MEDIQ Mobile X-Ray Services, Inc., MEDIQ Imaging Services,
Inc., Medifac, Inc., and Health Examinetics, Inc. In the fourth quarter of
fiscal 1995, the Company expanded its plan to include the operations of
HealthQuest, Inc. These operations, in addition to the Company's equity
investment in InnoServ Technologies, Inc., which is anticipated to be
distributed to the Company's shareholders in the first quarter of fiscal 1997,
are reported as discontinued operations.
In June 1995, the Company sold Medifac and related assets to the management of
Medifac for approximately $11 million, consisting of $6 million in cash and $5
million in notes, and the assumption of $26.9 million of non-recourse debt.
In August 1995, the Company sold the assets of MEDIQ Imaging to NMC Diagnostic
Services, Inc., a division of W.R. Grace & Co., for approximately $17 million in
cash and the assumption of $9.7 million of debt.
11
<PAGE>
In February 1996, the Company agreed to sell substantially all of the assets of
Mobile X-Ray to a subsidiary of Long-Term Care Services, Inc. In July 1996, this
agreement was terminated as a result of uncertainties relating to certain
Medicare reimbursement rate adjustments. The Company is currently reviewing
several new offers and believes it will sign a letter of intent in the fourth
quarter of fiscal 1996.
The Company anticipates that the disposal of Health Examinetics and HealthQuest
will be completed in fiscal 1996.
Results of Operations
Third Quarter 1996 Compared with Third Quarter 1995
Revenues were $34.4 million for the third quarter of 1996, as compared to $33.1
million in the prior year quarter. Revenue growth attributable to disposable
products, outsource services and sales of equipment was partially offset by
lower equipment rentals as a result of softness in the rental market.
Operating income was $6.9 million, or 20% of revenues for the third quarter of
1996 as compared to $6.5 million, or 20% of revenues in the prior year quarter.
Operating income was favorably affected by reductions in corporate overhead in
the amount of $363,000 primarily as a result of the reduction in corporate
personnel in connection with the corporate restructuring in the first quarter of
1996. The Company expects this trend of decreased corporate overhead to continue
throughout fiscal 1996.
Interest expense decreased 8% to $6.8 million for the third quarter of 1996 from
$7.4 million, primarily as a result of a net reduction in indebtedness. This
decrease was partially offset by an increase in the interest rate of MEDIQ/PRN's
$100 million senior secured notes from 11 1/8% to 12 1/8% effective October 1,
1995.
The Company's equity in earnings of its unconsolidated affiliate was $.3
million, which was consistent with the prior year period.
The Company revised its estimate of the net loss on the disposal of discontinued
operations in connection with the termination of the agreement to sell the
assets of Mobile X-Ray Services to a subsidiary of Long-Term Care Services, Inc.
and the current offer for the assets of Health Examinetics. The additional
reserve of $7.2 million, or $2.6 million, net of tax, represents a reduction in
the carrying value of discontinued operations to estimated net realizable value.
Discontinued operations also reflects equity in the earnings of PCI Services,
Inc. of $1.1 million pretax, or $.7 million, net of tax. PCI announced on July
24, 1996 that it agreed to be acquired by Cardinal Health, Inc. in a pooling of
interests transaction anticipated to close in the first quarter of fiscal 1997.
Nine Months Ended June 30, 1996 Compared with Nine Months Ended June 30, 1995
Revenues were $103.5 million for the nine months ended June 30, 1996, as
compared to $102.0 million in the prior year period. Revenue growth attributable
to disposable products, outsource services and sales of equipment was partially
offset by lower equipment rentals as a result of the lack of a sustained flu
season and a general softness in the rental market.
12
<PAGE>
Operating income decreased to $20.0 million, or 19% of revenues, for the current
period, as compared to $21.6 million, or 21% of revenues, in the prior year
period. The decrease in operating income was primarily attributable to a
restructuring charge of $2.2 million, recorded in the first quarter of fiscal
1996, for employee severance costs incurred in connection with a plan approved
by the Board of Directors to downsize corporate functions and consolidate
certain activities with the operations of MEDIQ/PRN. Operating income was also
adversely affected by lower margins associated with the increase in sales of
disposable products and equipment and increased depreciation expense related to
an increase in rental equipment. This decrease was offset by reductions in
corporate overhead of $1.6 million primarily as a result of the reduction in
corporate personnel in connection with the corporate restructuring plan
discussed above. The Company expects this trend of decreased corporate overhead
to continue throughout fiscal 1996.
Interest expense decreased 9% to $20.4 million for the current period from $22.4
million, primarily as a result of a net reduction in indebtedness. This decrease
was partially offset by an increase in the interest rate of MEDIQ/PRN's $100
million senior secured notes from 11 1/8% to 12 1/8% effective October 1, 1995.
The Company's equity in earnings of its unconsolidated affiliate was $1.9
million as compared with $1.5 million in the prior year period. The increase was
primarily attributable to the improved operating results of NutraMax.
In February 1996, the Company purchased a warrant issued by MEDIQ/PRN Life
Support Services, Inc. in 1992 to a lender in connection with a financing for an
acquisition. The warrant provided for the purchase of up to 2.5% of the common
stock of MEDIQ/PRN Life Support Services, Inc. for a period of seven years for
nominal consideration. The purchase price of the warrant was $1.6 million. The
excess of the purchase price over the carrying value of the warrant resulted in
a net charge to income in the second quarter of 1996 of $.6 million, or $.03 per
share. This charge is reflected in other charges in the Company's Condensed
Consolidated Statement of Operations for the nine months ended June 30, 1996.
The net loss from discontinued operations was $.2 million, as compared to net
income of $.4 million in the prior year period. The current period reflects the
equity in earnings of PCI Services, Inc. of $3.6 million pretax, or $2.4
million, net of tax and the additional reserve for the disposal of discontinued
operations discussed above.
During the first and third quarters of fiscal 1996, the Company repurchased an
aggregate of $21.4 million of its debentures at a discount in the open market
and through a private transaction, which resulted in a pretax gain of $1.7
million, or $1.2 million net of tax. This gain was recorded as an extraordinary
item in the Company's Condensed Consolidated Statement of Operations.
Income Taxes
The Company's effective tax rate was disproportionate compared to the statutory
rate as a result of goodwill amortization, earnings of the Company's equity
investment and the non-recognition of certain operating losses for state income
tax purposes.
13
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities was $15.9 million for the nine months
ended June 30, 1996, as compared to $13.9 million in the prior year period. The
increase in cash flows from operating activities was primarily attributable to a
higher level of collections of accounts receivable in the current period,
partially offset by other working capital fluctuations. Cash flows from
operations in the prior year were adversely affected by the increase in accounts
receivable attributable to the growth in MEDIQ/PRN's business as a result of the
KCI acquisition. As of June 30, 1996, the Company had cash of $2.3 million and
working capital of $3.0 million. Current liabilities as of June 30, 1996 include
$23.6 million representing the portion of the 7.25% subordinated convertible
debentures expected to be repurchased by June 30, 1997.
Net cash used in investing activities consisted principally of capital
expenditures for equipment of $13.0 million and the purchase of the MEDIQ/PRN
warrant for $1.6 million. Cash provided by investing activities included
proceeds from the disposal of equipment of $4.5 million, collections on a note
receivable from the sale of discontinued operations of $1.6 million and
collections on the MHM note receivable of $.6 million.
Net cash used in financing activities resulted from debt repayments of $31.8
million partially offset by borrowings of $21.7 million and proceeds from the
exercise of stock options of $1.6 million.
Under the terms of the Company's 7.25% convertible debentures due 2006, the
Company is required to offer to repurchase a portion of the debentures if
stockholders' equity is $40 million or less at the end of two consecutive fiscal
quarters. As of June 30, 1994 and subsequent thereto, the Company's
stockholders' equity has been less than $40 million. During the first and third
quarters of fiscal 1996, the Company repurchased an aggregate of $21.4 million
of its debentures at a discount in the open market and through a private
transaction. In July 1996, the Company, through a Special Mandatory Redemption
Obligation Offer made to all bond holders of record on June 28, 1996,
repurchased an additional $1.1 million of debentures representing the remaining
balance of its obligation to purchase $11.25 million of debentures by June 30,
1996. The Company is required to offer to repurchase $11.25 million of
debentures prior to December 31, 1996 and semi-annually thereafter until all
debentures are repurchased unless stockholders' equity exceeds $40 million as of
September 30, 1996 or any subsequent quarter. As of June 30, 1996, $23.6 million
of the debentures have been classified as a current liability.
In December 1995, the Company's $13.4 million revolving credit facility was
extended to December 1996 and increased to $15.0 million with interest reduced
to the prime rate plus 1/2%. In addition, as amended, the facility will be
reduced by an amount equal to 50% of the net cash proceeds from the sale of
certain discontinued operations and certain other assets. As of June 30, 1996,
$13.1 million was outstanding under this facility. In addition, the Company has
$8.9 million outstanding under an additional revolving credit facility and a
line of credit aggregating $16.0 million. The amount of available credit on the
additional revolving credit facility fluctuates based upon the amount of
eligible accounts receivable.
14
<PAGE>
In July 1996, the Company executed a commitment letter with two financial
institutions to refinance substantially all of the Company's senior debt and
working capital facilities and a portion of the Company's subordinated debt. The
commitment provides for two term loans aggregating $135 million, a $25 million
line of credit, and, under certain circumstances, a $100 million revolving
credit facility. The interest rate on these facilities will be based upon prime
or LIBOR, at the Company's discretion, with a spread based upon the Company's
leverage ratio. The interest rate should initially approximate LIBOR plus 3%.
The Company expects to finalize the negotiations on the credit agreement shortly
and consummate the refinancing by September 30, 1996.
The Company believes that its primary source of liquidity for operating
activities will continue to be generated through cash flows from MEDIQ/PRN, the
refinancing discussed above and the sale of discontinued operations and
miscellaneous assets. The Company believes that sufficient funds will be
available from operating cash flows and the sale of assets to meet the Company's
anticipated operating and capital requirements, including obligations to
repurchase a portion of the 7.25% subordinated convertible debentures.
15
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1996
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Income Per Share appears on page 18.
Exhibit 27 - Financial Data Schedule appears on page 19.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the quarter ended
June 30, 1996:
Date of Earliest Event Requiring Report: June 12, 1996
Date of Filing: June 12, 1996
Items Reported: Item 5
Subject: Cautionary statements for
purposes of the "safe harbor"
provisions of the Private
Securities Litigation Reform
Act of 1995.
16
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1996
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIQ Incorporated
------------------------------------
(Registrant)
August 14, 1996
- ---------------
(Date) /s/ Michael F. Sandler
------------------------------------
Michael F. Sandler
Senior Vice President - Finance
and Chief Financial Office
17
EXHIBIT 11
MEDIQ INCORPORATED AND SUBSIDIARIES
Computation of Net Income Per Share
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computation of Primary Earnings Per Share:
Net Income (loss) $ (1,068) $ (1,192) $ 1,380 $ 384
======== ======== ======== ========
Weighted average of primary shares:
Common stock 18,391 17,786 18,173 17,758
Preferred stock 6,337 6,385 6,354 6,411
Assumed conversion of options 516 528 363 404
-------- -------- -------- ---------
Total 25,244 24,699 24,890 24,573
======== ======== ======== ========
Primary Earnings (Loss) Per Share $ (.05) $ (.05) $ .05 $ .01
======== ======== ======== ========
Computation of Fully Diluted Earnings Per Share (1):
Net Income (loss) $ (1,068) $ (1,192) $ 1,380 $ 384
Interest and amortization of deferred costs on
convertible debentures - net of tax 456 579 1,367 1,738
-------- -------- -------- --------
Total $ (612) $ (613) $ 2,747 $ 2,122
======== ======== ======== ========
Weighted average of fully diluted shares:
Common stock 18,391 17,786 18,173 17,758
Preferred stock 6,337 6,385 6,354 6,411
Assumed conversion of options 519 531 408 423
Assumed conversion of convertible debentures 5,397 6,897 5,397 6,897
-------- -------- -------- --------
Total 30,644 31,599 30,322 31,489
======== ======== ======== ========
Fully Diluted Earnings Per Share $ (.02) $ (.02) $ .09 $ .07
======== ======== ======== ========
</TABLE>
- --------------
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
opinion No. 15, because it is anti-dilutive or results in dilution of less
than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,331
<SECURITIES> 0
<RECEIVABLES> 33,934
<ALLOWANCES> 1,581
<INVENTORY> 6,163
<CURRENT-ASSETS> 92,495
<PP&E> 228,673
<DEPRECIATION> 102,874
<TOTAL-ASSETS> 332,522
<CURRENT-LIABILITIES> 89,527
<BONDS> 188,941
0
3,367
<COMMON> 19,145
<OTHER-SE> 12,013
<TOTAL-LIABILITY-AND-EQUITY> 332,522
<SALES> 0
<TOTAL-REVENUES> 103,478
<CGS> 0
<TOTAL-COSTS> 83,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,398
<INCOME-PRETAX> 2,817
<INCOME-TAX> 2,379
<INCOME-CONTINUING> 438
<DISCONTINUED> (212)
<EXTRAORDINARY> 1,154
<CHANGES> 0
<NET-INCOME> 1,380
<EPS-PRIMARY> .05
<EPS-DILUTED> .09
</TABLE>
