UNITED STATES
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 quarter ended: June 30, 1997 Commission File Number: 1-8147
MEDIQ Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 51-0219413
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 662-3200
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 8, 1997, there were 19,376,620 shares of Common Stock, par value
$1.00 per share and 6,279,698 shares of Preferred Stock, par value $.50 per
share, outstanding.
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1997
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations-
Three and Nine Months Ended June 30, 1997 and 1996
(Unaudited) 4
Condensed Consolidated Balance Sheets-
June 30, 1997 (Unaudited) and
September 30, 1996 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended June 30, 1997 and 1996
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13-18
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K. 19
2
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1997
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,
-------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 31,148 $ 27,960 $ 94,341 $ 87,026
Sales 5,327 3,756 14,785 8,308
Other 3,150 2,670 8,548 8,144
-------- -------- -------- --------
39,625 34,386 117,674 103,478
Costs and Expenses:
Cost of sales 4,266 3,005 12,020 6,566
Operating 13,816 11,816 41,131 36,422
Selling and administrative 6,397 5,183 17,919 15,999
Restructuring -- -- -- 2,200
Depreciation and amortization 7,365 7,483 22,096 22,319
-------- -------- -------- --------
31,844 27,487 93,166 83,506
-------- -------- -------- --------
Operating Income 7,781 6,899 24,508 19,972
Other (Charges) Credits:
Interest expense (3,283) (6,806) (15,205) (20,398)
Equity participation - repurchase of MEDIQ/PRN warrants -- -- (11,047) (625)
Gain on sale and market appreciation of Cardinal Health stock -- -- 9,213 --
Gain on NutraMax note receivable 565 -- 1,760 --
Other - net (302) 979 842 1,986
-------- -------- -------- --------
Income from Continuing Operations before
Income Taxes and Extraordinary Item 4,761 1,072 10,071 935
Income Tax Expense 2,200 779 8,644 1,739
-------- -------- -------- --------
Income (Loss) before Discontinued Operations and
Extraordinary Item 2,561 293 1,427 (804)
Discontinued Operations (net of taxes) (1,092) (1,514) 36,083 1,030
Extraordinary Item - Early Retirement of Debt (net of taxes) (76) 153 (7,002) 1,154
-------- -------- -------- --------
Net Income (Loss) $ 1,393 $ (1,068) $ 30,508 $ 1,380
======== ======== ======== ========
Earnings Per Share:
Continuing Operations $ .10 $ .01 $ .05 $ (.03)
Discontinued Operations (.04) (.06) 1.40 .04
Extraordinary Item -- .01 (.27) .05
-------- -------- -------- --------
Net Income (Loss) $ .06 $ (.04) $ 1.18 $ .06
======== ======== ======== ========
Weighted Average Shares Outstanding 26,370 25,244 25,796 24,890
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, Sept. 30,
1997 1996
----------- ----------
(Unaudited) (See Note)
Assets
<S> <C> <C>
Current Assets:
Cash $ 2,152 $ 3,219
Accounts receivable - net 41,161 30,233
Inventories 12,375 6,614
Deferred income taxes 4,866 2,447
Other current assets 2,306 2,280
--------- ---------
Total Current Assets 62,860 44,793
Property, plant and equipment - net 114,494 122,706
Goodwill - net 55,156 58,321
Investment in discontinued operations - restricted 4,878 64,967
Notes receivable 11,713 7,328
Deferred financing fees 8,187 4,225
Marketable equity securities - restricted 5,200 --
Other Assets 6,831 5,773
--------- ---------
Total assets $ 269,319 $ 308,113
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 7,671 $ 8,907
Accrued expenses 27,285 27,877
Current portion of long-term debt 7,840 8,520
--------- ---------
Total Current Liabilities 42,796 45,304
Senior debt 129,000 192,461
Subordinated debt 10,055 41,229
Deferred income taxes 30,326 7,254
Other liabilities 2,667 4,420
Stockholders' Equity 54,475 17,445
--------- ---------
Total Liabilities and Stockholders' Equity $ 269,319 $ 308,113
========= =========
</TABLE>
Note: The balance sheet at September 30, 1996 has been condensed from the
audited financial statements at that date.
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,
---------------------------
1997 1996
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 30,508 $ 1,380
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Income from discontinued operations (36,083) (1,030)
Gain on sale of Cardinal shares (9,213) --
Equity participation - repurchase of MEDIQ/PRN warrants 11,047 --
Other - net 1,046 15,860
--------- --------
Net cash provided by (used in) operating activities (2,695) 16,210
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations 124,995 1,500
Proceeds from sale of equipment and other assets 552 4,533
Purchase of equipment (11,589) (12,956)
Note receivable from SpectraCair to joint venture -- (3,250)
Payment of note receivable from SpectraCair -- 3,250
Repurchase of MEDIQ/PRN warrant (12,500) (1,625)
Other (3,000) 411
--------- --------
Net cash provided by (used in) investing activities 98,458 (8,137)
Cash Flows from Financing Activities:
Borrowings 214,000 21,712
Debt repayments (302,228) (31,848)
Deferred financing fees (8,874) --
Proceeds from exercise of stock options 272 1,428
--------- --------
Net cash used in financing activities (96,830) (8,708)
--------- --------
Decrease in cash (1,067) (635)
--------- --------
Cash:
Beginning balance 3,219 2,966
--------- --------
Ending balance $ 2,152 $ 2,331
========= ========
Supplemental disclosure of cash flow information:
Interest paid $ 16,760 $ 16,357
========= ========
Income taxes paid $ 5,056 $ 430
========= ========
Supplemental disclosure of non-cash investing and financing activities:
Conversion of 7.25% subordinated debentures into common stock $ 6,251 $ --
========= ========
Equipment financed with long-term debt and capital leases $ -- $ 1,482
========= ========
</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, 1997 and the condensed
consolidated statements of operations and cash flows for the nine months ended
June 30, 1997 and 1996 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, 1997 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, 1996 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1997 are not necessarily
indicative of the operating results for the full year.
Note B - Revenues
The Company derives revenues from the following sources: (1) rental - rental of
moveable medical equipment, (2) sales - sales of disposable products, spare
parts and equipment and (3) other - logistical services, maintenance and
reconditioning services and management consulting services.
In fiscal 1997, the Company entered into several revenue-share arrangements with
original equipment manufacturers ("OEM") whereby the Company rents moveable
medical equipment and sells disposable products owned by the OEM to the
Company's customers. Under such arrangements, the Company pays the OEM a fee.
The revenue related to the rental of moveable medical equipment is included in
rental revenue while the related fees are reflected in operating expenses. The
revenue related to the sale of disposable products is included in sales while
the related fees are reflected in cost of goods sold. In the third quarter, the
Company reclassified rental revenue-share arrangement revenue from other to
rental for all periods presented.
Note C - Discontinued Operations
On May 7, 1997, the Company sold the stock of Health Examinetics, Inc. to the
management of Health Examinetics for approximately $1.7 million, consisting of
$.1 million in cash and an interest-bearing promissory note ("promissory note")
in the amount of $1.6 million. The promissory note bears interest at 7% per
annum and matures in April 2003. Interest only is due on the note for the first
eighteen months. Quarterly principal and interest payments commence on January
1, 1999. The sale resulted in an after-tax charge of $1.1 million, or $.04 per
share in addition to the estimated net loss on the disposal recorded in fiscal
1996.
On December 31, 1996, the Company sold to NutraMax Products, Inc. ("NutraMax"),
all of the 4,037,258 shares of NutraMax common stock owned by the Company at a
price of $9.00 per share. The Company received from NutraMax $19.9 million in
cash and an interest-bearing promissory note (the "Note") in the amount of $16.4
million. The Note matures in July 2003 and
7
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note C - Discontinued Operations (Continued)
bears interest at 7.5% per annum for the first eighteen months with decreasing
interest rates over the remaining term. The Note is payable when NutraMax shares
owned by the Company, which are held in escrow in support of the Company's 7.50%
Exchangeable Subordinated Debentures due 2003 (the "7.50% debentures"), are
delivered to NutraMax upon release from escrow. The NutraMax shares are released
from escrow upon the purchase or redemption of the 7.50% debentures. The Note
does not bear a market rate of interest for its full term. Accordingly, the
Company discounted the Note to $13.6 million. The Company recognized an
after-tax gain of $4.6 million, or $.18 per share on the sale of the NutraMax
stock which is included in Discontinued Operations in the Company's Condensed
Consolidated Statement of Operations.
During the second and third quarters of 1997, the Company repurchased $17.8
million of the 7.50% debentures in the open market and a private transaction
(See Note D) which resulted in the release of 1,161,961 shares of NutraMax
common stock from escrow. The shares were delivered to NutraMax resulting in
cash payments on the Note aggregating $10.5 million and the realization of a
$1.8 million pretax gain as a result of the recognition of a portion of the
discount on the Note. The gain is reflected in Other Income on the Company's
Condensed Consolidated Statement of Operations.
On November 6, 1996, the Company sold substantially all of the assets of MEDIQ
Mobile X-Ray Services, Inc. ("Mobile X-Ray") to Symphony Diagnostics, Inc., a
subsidiary of Integrated Health Services, Inc. ("IHS", NYSE:IHS) for $5.3
million in cash and shares of IHS common stock with a value of $5.2 million.
Through July 31, 1997, the Company received additional proceeds of $.9 million,
with the possibility of the Company receiving additional cash consideration
based upon the occurrence of certain future events. The loss on the disposal of
these assets was recorded in fiscal 1996. In July 1997, the Company sold the IHS
shares at an amount which approximated carrying value. The proceeds from these
transactions reduced borrowings under the Credit Agreement.
On October 11, 1996, PCI Services, Inc., was acquired by Cardinal Health, Inc.
("Cardinal"). As a result, the Company received 966,000 shares of Cardinal stock
which, based on the closing price on October 11, 1996, had a market value of
$79.2 million. The Company recognized an after-tax gain of $32.6 million on this
transaction. In December 1996, Cardinal's common stock split 3 for 2 and, as of
December 31, 1996, the Company owned 1,449,000 shares which had an aggregate
market value of $84.4 million based upon the closing price of $58.25 per share
on that date. Accordingly, the Company recognized market appreciation of $5.2
million on the Cardinal shares in the first quarter of fiscal 1997. The Company
sold its Cardinal shares in January 1997 and recognized an additional pretax
gain of $4 million.
As of June 30, 1997, the Company's investment in discontinued operations
consisted of its equity investment in InnoServ Technologies, Inc. ("InnoServ").
The Company anticipates that the disposal of its investment in InnoServ will be
completed in fiscal 1997.
Revenues from discontinued operations were $4.1 million and $28.8 million for
the nine months ended June 30, 1997 and 1996, respectively.
8
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note D - Long-Term Debt
On October 1, 1996, the Company, together with MEDIQ/PRN, entered into a $260
million Credit Agreement with a group of lenders (the "Credit Agreement"). The
Credit Agreement provided for four separate loans, a Term A loan ($35 million),
a Term B loan ($100 million), an Acquisition Revolver ($100 million) and a
Working Capital Revolver ($25 million). Borrowings under the Credit Agreement
provided the funds for the Company to refinance substantially all of its
existing senior debt, its outstanding lines of credit and all of MEDIQ/PRN's
subordinated debt and $100 million 11 1/8% Senior Secured Notes (the
"Refinancing"). On January 24, 1997, the Company amended the Credit Agreement to
increase the amounts which may be borrowed under the Term B loan by $45 million
and the Working Capital Revolver by $5 million. The additional funds will only
be available at the time of consummation of the acquisition of Universal
Hospital Services, Inc. ("Universal") (See Note H). Substantially all of the
cash proceeds from the sale of NutraMax stock, Mobile X-Ray assets and Cardinal
stock were used to reduce borrowings under the Credit Agreement. As of June 30,
1997, the Company had $100 million available under the Acquisition Revolver and
$ 18.7 million available under the Working Capital Revolver, both of which were
available to the Company upon continued compliance with certain financial
covenants and/or ratios.
Borrowings under the Credit Agreement bear interest at either the prime rate
plus a factor or at a Eurodollar rate plus a factor. The factor may change
quarterly based upon the Company's leverage ratio, as defined in the Credit
Agreement. The Company's interest rate on the Term A loan, the Acquisition
Revolver and the Working Capital Revolver is prime (8.50% at June 30, 1997) plus
0.5% or Eurodollar (6.06% at June 30, 1997) plus 2.0% and the interest rate on
the Term B loan is either prime plus 1.25% or Eurodollar plus 2.75%. The loans
are collateralized by substantially all of the assets of the Company.
In accordance with the terms of the Credit Agreement, effective November 15,
1996, the Company entered into interest rate hedge transactions which terminate
in January 2000. Under one of these transactions, on $50 million of borrowings,
the Company's base Eurodollar borrowing rate is fixed at 6.26% per annum,
instead of a floating Eurodollar rate. Under the second hedge transaction, on an
additional $50 million of borrowings, the Company's base Eurodollar rate cannot
be lower than 5.25% or greater than 7.43%.
As a result of the Refinancing, the Company recognized in the first quarter of
1997, an extraordinary charge of $13 million ($6.7 million net of taxes)
resulting from premiums incurred related principally to the tender offer to
purchase the $100 million 11 1/8% Senior Secured Notes, and a non-recurring
charge of $11 million for the repurchase of warrants to purchase 10% of
MEDIQ/PRN issued in connection with financing the KCI acquisition in 1994 and
the write-off of deferred charges. The non-recurring charge is reflected in
Other Charges in the Company's Condensed Consolidated Statement of Operations.
During fiscal 1997, the Company repurchased an aggregate of $24.4 million of the
7.50% debentures at discounts in the open market, $17.8 million of which were
purchased in the second and third quarters (See Note C). The Company recognized
an extraordinary loss in connection with the repurchase of the 7.50% debentures
and write-offs of related deferred charges in the aggregate amount of $25,000,
net of taxes through June 30, 1997.
9
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note D - Long-Term Debt (Continued)
During fiscal 1997, the Company repurchased or redeemed $23 million of the 7.25%
Subordinated Convertible Debentures due 2006 ("7.25% debentures"). The Company
recognized an extraordinary loss in connection with the repurchase of the 7.25%
debentures and write-offs of related deferred charges in the aggregate amount of
$.3 million. The remaining balance of $6.2 million of the 7.25% debentures was
converted into 833,446 shares of the Company's common stock.
Note E - Inventories
Inventories, which consist primarily of finished goods held for sale and repair
parts for rental equipment, are stated at the lower of cost (first-in, first-out
method) or market.
Note F - Income Taxes
As a result of the sale of the Company's investments in PCI, NutraMax and
Cardinal, (See Note C) the Company has utilized all of its available net
operating loss and capital loss carryforwards, all of its Investment Tax Credits
and Rehabilitation Tax Credits and all of its alternative minimum tax credit
carryforwards.
Note G - Commitments and Contingencies
On February 10, 1997, the Company was sued in the Superior Court of New Jersey
by its former wholly-owned subsidiary, MHM Services, Inc. ("MHM"; formerly
Mental Health Management, Inc.). The suit challenges the validity of a note
receivable the Company and MHM entered into upon the spin-off of MHM to MEDIQ's
shareholders in August 1993. The Company believes this suit has no merit and
intends to defend the suit vigorously. In addition, beginning in February 1997,
MHM has not made the required monthly installments on the note. On February 11,
1997 the Company gave notice to MHM of its default on the note and declared all
sums outstanding under the note to be immediately due and payable. The Company
does not believe an additional reserve on the carrying value of the note
receivable is necessary at this time and is pursuing collection efforts.
Investigations and Legal Proceedings - MEDIQ Imaging Services, Inc. the assets
of which were sold by the Company in August 1995, was notified in January 1995
that it was the subject of a criminal and civil investigation by the United
States Attorney's Office for the District of New Jersey and the Department of
Health and Human Services. In March 1997, the Company was advised by the U.S.
Government that the criminal investigation had been terminated. The Company
remains the subject of a civil investigation. Reference is made to Note I in the
Company's Annual Report on Form 10-K for additional information.
10
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note H - Acquisition of Universal
On February 11, 1997, the Company entered into a definitive agreement with
Universal (NASDAQ; UHOS) to acquire the outstanding shares of Universal for
$17.50 per share. Including the assumption of debt, the total purchase price is
approximately $138 million. The transaction is structured as a cash merger and
is anticipated to be funded with proceeds from the existing Credit Agreement.
Universal provides movable medical equipment to over 3,300 hospitals and
alternate care providers. In addition, Universal sells disposable supplies
related to the equipment it rents. Universal operates in 46 states in five
primary categories - critical care, monitoring, newborn care, respiratory care
and specialty beds.
On April 4, 1997, the shareholders of Universal approved the acquisition subject
to Hart-Scott-Rodino approval.
On July 24, 1997, the Company and Universal amended the merger agreement to
extend its terms through October 31, 1997. The amendment also established a
termination right whereby the Company and Universal each have the right to
terminate the agreement any time during a five business day period subsequent to
the issuance of a preliminary injunction against the merger.
On July 29, 1997, the Company and Universal were informed by the FTC that it had
authorized its staff to seek a preliminary injunction against the consummation
of the proposed transaction. MEDIQ and Universal believe that the merger fully
complies with the federal antitrust laws and both companies have stated they
will vigorously oppose any attempt by the government to block the merger. The
Company has deferred approximately $2.3 million of costs associated with the
acquisition as of July 31, 1997. If the transaction is not consummated, the
Company will recognize a pretax charge as a result of the write-off of these
costs in addition to any related costs yet to be incurred.
Note I - New Accounting Pronouncements
For fiscal 1997, the Company has formally adopted SFAS No. 123, "Accounting for
Stock-based Compensation Plans," which will result in disclosure of the proforma
net income and net earnings per share amounts assuming the fair value method in
the fiscal year end financial statements, as required. As a result, the adoption
of this statement will not have any impact on reported results of operations and
financial position.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings Per
Share," which will result in changes to the computation and presentation of
earnings per share. The Company will be required to adopt this standard during
its quarter ended December 31, 1997 with earlier adoption not permitted. At this
time, the Company has not determined the impact this standard will have on the
Company's earnings per share.
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which will result in disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company is not required to adopt this
standard until fiscal 1999. At this time, the Company has not determined the
impact this standard will have on the Company's financial statements.
11
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I - New Accounting Pronouncements (Continued)
The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company is not required to adopt this standard until fiscal 1999.
At this time, the Company has not determined the impact this standard will have
on the Company's financial statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of the Company as of
June 30, 1997 and results of operations for the three and nine month periods
ended June 30, 1997 and 1996. 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 Annual
Report on Form 10-K for the year ended September 30, 1996 to which the reader is
directed for additional information.
Seasonality
The Company's rental business is seasonal, with demand historically peaking
during periods of increased hospital census, which generally occur in the winter
months during the Company's second fiscal quarter.
Results of Operations
Third Quarter 1997 Compared with Third Quarter 1996
Revenues from continuing operations were $39.6 million for the third quarter of
fiscal 1997, as compared to $34.4 million in the prior year period, an increase
of $5.2 million, or 15%. The revenue growth was attributable to an 11% increase
in rental revenue, a 42% increase in sales and an 18% increase in other revenue.
The growth in rental revenue was primarily attributable to new revenue-share
arrangements (see Note B) in addition to an increase in traditional rental
revenue as a result of additional volume. The increase in sales of disposable
products was the result of additional volume attributable to an expanded
customer base, a wider variety of product offerings and new revenue share
arrangements. The increase in other revenue was achieved principally from
outsourcing services as a result of an expanded customer base.
Operating income was $7.8 million as compared to $6.9 million in the prior year
period, an increase of $.9 million, or 13%. While revenues increased, operating
margins were consistent with the prior year period, principally as a result of
the Company's growth in revenue-share and sales activities. Such activities
provide lower gross margins than the traditional rental of equipment but do not
require any capital investment. The Company continued to make additional
investments of people and information systems in the third quarter of fiscal
1997 to facilitate the accelerated growth of sales of disposable products and
revenues from outsourcing activities.
Interest expense decreased 52% to $3.3 million for the third quarter of fiscal
1997 primarily as a result of substantial reductions of debt with the proceeds
from the sales of discontinued operations and lower interest rates associated
with the refinancing that occurred on October 1, 1996.
In the third quarter of fiscal 1997, the Company repurchased $3.8 million of the
7.50% Exchangeable Subordinated Debentures ("7.50% debentures") in the open
market which resulted in the release of 248,039 shares of NutraMax Products,
Inc. ("NutraMax") common stock from escrow. The shares were delivered to
NutraMax resulting in cash payments on the NutraMax note receivable (the "Note")
of $3.4 million and the realization of a $.6 million pretax gain as a result of
the recognition of a portion of the discount on the Note.
13
<PAGE>
The Company's effective tax rate was disproportionate compared to the statutory
rate as a result of goodwill amortization and non-recognition of certain
operating losses and certain non-operating gains for state income tax purposes.
On May 7, 1997, the Company sold the stock of Health Examinetics, Inc. to the
management of Health Examinetics for approximately $1.7 million, consisting of
$.1 million in cash and an interest-bearing promissory note ("promissory note")
in the amount of $1.6 million. The promissory note bears interest at 7% per
annum and matures in April 2003. Interest only is due on the note for the first
eighteen months. Quarterly principal and interest payments commence on January
1, 1999. The sale resulted in an after-tax charge of $1.1 million, or $.04 per
share in addition to the estimated net loss on the disposal recorded in fiscal
1996.
Revenues and operating income from discontinued operations were $.7 million and
$58,000, respectively, as compared to revenues and operating income of $8.7
million and $.7 million, respectively, in the prior year period.
As a result of the repurchase of the Company's 7.50% debentures, the Company
recognized in the third quarter of 1997, an extraordinary charge of $115,000
($76,000, net of taxes) resulting primarily from the write-off of related
deferred charges.
Nine Months Ended June 30, 1997 Compared with Nine Months Ended June 30, 1996
Revenues from continuing operations were $117.7 million for the nine months
ended June 30, 1997, as compared to $103.5 million in the prior year period, an
increase of $14.2 million, or 14%. The revenue growth was attributable to an 8%
increase in rental revenue, a 78% increase in sales, and a 5% increase in other
revenue. The growth in rental revenue was primarily attributable to new
revenue-share arrangements (see Note B), a sustained flu season and increased
volume. The increase in sales was derived primarily from a significant
distribution contract which was in place during the entire nine months ended
June 30, 1997 as compared to two months in the comparable prior year period as
well as increases in sales of disposable products as a result of additional
volume attributable to an expanded customer base, a wider variety of product
offerings and a new revenue share arrangement. The increase in other revenue was
achieved principally through outsourcing services as a result of an expanded
customer base.
Operating income increased $2.3 million, or 10% to $24.5 million, for the nine
months ended June 30, 1997, as compared to $22.2 million, exclusive of a $2.2
million restructuring charge, in the prior year period. The restructuring charge
was incurred in connection with the downsizing of corporate functions and
consolidation of certain activities with the operations of MEDIQ/PRN. The
improvement in operating income was attributable to the growth in revenue-share
and sales activities and reductions in corporate overhead of $.8 million related
to the downsizing of corporate functions. This improvement was partially offset
by an additional investment in people and information systems to facilitate the
accelerated growth of sales of disposable products and revenues from outsourcing
activities and higher variable costs associated with the sustained flu season.
Operating margins declined modestly as a result of the Company's growth in
revenue-sharing activities and sales of disposable products which provide a
lower gross margin than the traditional rental of equipment but do not require
any capital investment.
Interest expense decreased 25% to $15.2 million for the nine months ended June
30, 1997 primarily as a result of substantial reductions of debt with the
proceeds from the sales of discontinued operations and lower interest rates
associated with the refinancing that occurred on October 1, 1996.
14
<PAGE>
In October 1996, the Company incurred a non-recurring charge of $11 million for
the repurchase of warrants to purchase 10% of MEDIQ/PRN issued in connection
with financing the KCI acquisition in 1994.
During the second and third quarters of fiscal 1997, the Company repurchased
$17.8 million of the 7.50% debentures in the open market which resulted in the
release of 1,161,961 shares of NutraMax common stock from escrow. The shares
were delivered to NutraMax resulting in cash payments on the Note of $10.5
million and the realization of a $1.8 million pretax gain as a result of the
recognition of a portion of the discount on the Note.
The Company's effective tax rate was disproportionate compared to the statutory
rate as a result of the non-deductibility of the expense associated with the
repurchase of the MEDIQ/PRN warrants, goodwill amortization and non-recognition
of certain operating losses and non-operating gains for state income tax
purposes.
On December 31, 1996, the Company sold to NutraMax, all of the 4,037,258 shares
of NutraMax common stock owned by the Company at a price of $9.00 per share. The
Company received from NutraMax $19.9 million in cash and an interest-bearing
promissory note in the amount of $16.4 million. The Note matures in July 2003
and bears interest at 7.5% per annum for the first eighteen months with
decreasing interest rates over the remaining term. The Note is payable when
NutraMax shares owned by the Company, which are held in escrow in support of the
Company's 7.50% debentures are delivered to NutraMax upon release from escrow.
The NutraMax shares are to be released from escrow upon the purchase or
redemption of the 7.50% debentures. The Note does not bear a market rate of
interest for its full term. Accordingly, the Company discounted the Note to
$13.6 million. The Company recognized an after-tax gain of $4.6 million, or $.18
per share on the sale of the NutraMax stock which is included in Discontinued
Operations in the Company's Condensed Consolidated Statement of Operations.
On November 6, 1996, the Company sold substantially all of the assets of MEDIQ
Mobile X-Ray Services, Inc. ("Mobile X-Ray") to Symphony Diagnostics, Inc., a
subsidiary of Integrated Health Services, Inc. ("IHS"), for $5.3 million in cash
and shares of IHS common stock with a value of $5.2 million. Through July 31,
1997, the Company received additional proceeds of $.9 million, with the
possibility of the Company receiving additional cash consideration based upon
the occurrence of certain future events. The loss on the disposal of these
assets was recorded in fiscal 1996. In July 1997, the Company sold the IHS
shares at an amount which approximated carrying value. The proceeds from these
transactions reduced borrowings under the Credit Agreement. (See Liquidity and
Capital Resources).
On October 11, 1996, PCI Services, Inc., was acquired by Cardinal. As a result,
the Company received 966,000 shares of Cardinal stock which, based on the
closing price on October 11, 1996, had a market value of $79.2 million. The
Company recognized an after-tax gain of $32.6 million on this transaction. In
December 1996, Cardinal's common stock split 3 for 2 and, as of December 31,
1996, the Company owned 1,449,000 shares which had an aggregate market value of
$84.4 million based upon the closing price of $58.25 per share on that date.
Accordingly, the Company recognized market appreciation of $5.2 million on the
Cardinal shares in the first quarter of fiscal 1997. The Company sold its
Cardinal shares in January 1997 for $88.4 million and recognized an additional
pretax gain of $4 million.
Revenues and operating loss from discontinued operations were $4.1 million and
$.1 million, respectively, as compared to revenues and operating income of $28.8
million and $4.2 million, respectively, in the prior year period.
As a result of the refinancing and repurchases of the Company's 7.25%
Convertible Subordinated Debentures ("7.25% debentures") and 7.50% debentures,
15
<PAGE>
the Company recognized an extraordinary charge of $13.4 million ($7.0 million,
net of taxes) resulting primarily from premiums incurred related principally to
the tender offer to purchase the $100 million 11 1/8% Senior Secured Notes due
1999 and the write-off of related deferred charges.
The nine month period ended June 30, 1997 reflects several significant
non-recurring transactions as discussed above. In addition, the Company
refinanced a significant portion of its debt and reduced its average borrowing
rate. The following table provides a proforma analysis of the Company's results
of operations as if the Company: (a) had not repurchased the MEDIQ/PRN warrants
in fiscal 1997, (b) applied the proceeds from the sales of its investments in
discontinued operations in the first quarter of fiscal 1997 to its outstanding
debt as of October 1, 1996 and (c) tax effected the adjustments described in (a)
and (b).
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 1997 Proforma June 30, 1997
Actual Adjustments Proforma
----------------- ----------- -----------------
<S> <C> <C> <C>
Revenues $117,674 $117,674
Operating Income 24,508 24,508
Other (Charges) Credits:
Interest expense (15,205) 3,380 (b) (11,825)
Equity participation - repurchase of
MEDIQ/PRN warrants (11,047) 11,047 (a) --
Gain on sale of Cardinal Health
stock 9,213 (9,213) (b) --
Gain on NutraMax note receivable 1,760 (1,760) (b) --
Other - net 842 842
-------- --------
Income from Continuing Operations before
Income Taxes and Extraordinary Item 10,071 13,525
Income Tax Expense 8,644 (2,379) (c) 6,265
-------- --------
Net Income from Continuing Operations $ 1,427 $ 7,260
======== ========
Per Share Data:
Net Income from Continuing Operations $ .05 $ .28
======== ========
</TABLE>
Liquidity and Capital Resources
Cash used in operating activities was $2.7 million in the nine months ended June
30, 1997, as compared to cash provided by operations of $16.2 million in the
prior year period. The decrease in cash flows from operating activities in the
current period was primarily attributable to an increase in accounts receivable
associated with the Company's revenue growth, higher investments in inventories
to support the increase in the Company's sales activities and the payment of
income taxes.
Net cash provided by investing activities was $98.5 million, and consisted of
cash proceeds from the sales of the Company's investments in NutraMax and
Cardinal stock and certain assets of Mobile X-Ray aggregating $125.0 million,
partially offset by capital expenditures for equipment of $11.6 million and the
repurchase of the MEDIQ/PRN warrants for $12.5 million.
Net cash used in financing activities consisted of debt repayments of $302.2
million related to the refinancing, subordinated debenture repurchases and debt
service and deferred financing fees of $8.9 million related to the refinancing.
These cash disbursements were partially offset by borrowings of $214 million.
On October 1, 1996, the Company, together with MEDIQ/PRN, entered into a $260
million Credit Agreement with a group of lenders (the "Credit Agreement"). The
16
<PAGE>
Credit Agreement provided for four separate loans, a Term A loan ($35 million),
a Term B loan ($100 million), an Acquisition Revolver ($100 million) and a
Working Capital Revolver ($25 million). The amounts available under the Credit
Agreement provided the funds for the Company to refinance substantially all of
its existing senior debt, its outstanding lines of credit, all of MEDIQ/PRN's
subordinated debt and $100 million 11 1/8% Senior Secured Notes (the
"Refinancing"). On January 24, 1997, the Company amended the Credit Agreement to
increase the Term B loan by $45 million and the Working Capital Revolver by $5
million. The additional funds will only be available at the time of consummation
of the acquisition of Universal Health Services, Inc. ("Universal").
Substantially all of the cash proceeds from the sale of NutraMax stock, Mobile
X-Ray assets and Cardinal stock were used to reduce borrowings under the Credit
Agreement. As of June 30, 1997, the Company had $100 million available under the
Acquisition Revolver and $18.7 million available under the Working Capital
Revolver both of which were available to the Company upon continued compliance
with certain financial covenants and/or ratios.
Borrowings under the Credit Agreement bear interest at either the prime rate
plus a factor or at a Eurodollar rate plus a factor. The factor may change
quarterly based upon the Company's leverage ratio. As of June 30, 1997 the
Company's interest rate on the Term A loan, the Acquisition Revolver and the
Working Capital Revolver was prime (8.50% at June 30, 1997) plus 0.5% or
Eurodollar (6.06% at June 30, 1997) plus 2.0% and the interest rate on the Term
B loan was prime plus 1.25% or Eurodollar plus 2.75%. The loans are
collateralized by substantially all of the assets of the Company.
In accordance with the terms of the Credit Agreement, effective November 15,
1996, the Company entered into interest rate hedge transactions which terminate
in January 2000. Under one of these transactions, on $50 million of borrowings,
the Company's base Eurodollar borrowing rate is fixed at 6.26% per annum,
instead of a floating Eurodollar rate. Under the second hedge transaction, on an
additional $50 million of borrowings, the Company's base Eurodollar rate cannot
be lower than 5.25% or greater than 7.43%.
During fiscal 1997, the Company repurchased an aggregate of $24.4 million of the
7.50% debentures at a discount in the open market. The Company has borrowed on
its new credit facility to redeem or repurchase a portion of the 7.50%
exchangeable subordinated debentures. However, except to the extent required by
the terms of the indenture pursuant to which this debenture was issued, there
can be no assurance that any additional redemption or repurchase will occur.
During fiscal 1997, the Company repurchased or redeemed $23 million of the 7.25%
debentures. The Company funded the repurchase/redemption with proceeds from its
Credit Agreement. The remaining balance of $6.2 million of the 7.25% debentures
were converted into 833,446 shares of the Company's common stock.
On February 11, 1997, the Company entered into a definitive agreement with
Universal to acquire the outstanding shares of Universal for $17.50 per share.
Including the assumption of debt, the total purchase price is approximately $138
million. The transaction is structured as a cash merger and is anticipated to be
funded with proceeds from the existing Credit Agreement. Universal provides
movable medical equipment to over 3,300 hospitals and alternate care providers.
In addition, Universal sells disposable supplies related to the equipment it
rents. Universal operates in 46 states in five primary categories - critical
care, monitoring, newborn care, respiratory care and specialty beds.
On April 4, 1997, the shareholders of Universal approved the acquisition subject
to Hart-Scott-Rodino approval.
On July 24, 1997, the Company and Universal amended the merger agreement to
17
<PAGE>
extend its terms through October 31, 1997. The amendment also established a
termination right whereby the Company and Universal each have the right to
terminate the agreement any time during a five business day period subsequent to
the issuance of a preliminary injunction against the merger.
On July 29, 1997, the Company and Universal were informed by the FTC that it had
authorized its staff to seek a preliminary injunction against the consummation
of the proposed transaction. MEDIQ and Universal believe that the merger fully
complies with the federal antitrust laws and both companies have stated they
will vigorously oppose any attempt by the government to block the merger. The
Company has deferred approximately $2.3 million of costs associated with the
acquisition as of July 31, 1997. If the transaction is not consummated, the
Company will recognize a pretax charge as a result of the write-off of these
costs in addition to any related costs yet to be incurred.
The Company expects that its primary sources of liquidity for operating
activities will be generated through cash flows from MEDIQ/PRN. Proceeds from
the sale of discontinued operations and miscellaneous assets will continue to be
used to repay long-term debt. The Company believes that sufficient funds will be
available from operating cash flows, the sale of assets and its credit facility
to meet the Company's anticipated operating and capital requirements.
18
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1997
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 2.1 Agreement and Plan of Merger, dated February 10, 1997
among MEDIQ Incorporated, PRN Merger Corporation and
Universal Hospital Services, Inc., is incorporated
herein by reference to Exhibit 1 to the Form 8-K filed
by Universal Hospital Services, Inc. on February 27,
1997.
Exhibit 2.2 Amendment No. 1 dated as of July 24, 1997 to Agreement
and Plan of Merger dated February 10, 1997 by and among
MEDIQ Incorporated, PRN Merger Corporation and Universal
Hospital Services, Inc., is incorporated herein in
reference to Exhibit 99.1 to Current Report on Form 8-K
filed July 31, 1997.
Exhibit 11 - Computation of Net Income Per Share appears on page 21.
Exhibit 27 - Financial Data Schedule appears on page 22.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30,
1997.
19
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
Quarter Ended June 30, 1997
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, 1997
- ---------------
(Date) /s/ Michael F. Sandler
---------------------------
Michael F. Sandler
Senior Vice President Finance
and Chief Financial Officer
20
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,
------------------- -------------------
1997 1996 1997 1996
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Computation of Primary Earnings Per Share:
Net Income (Loss) $ 1,393 $ (1,068) $ 30,508 $ 1,380
======= ======== ======== =======
Weighted average of primary shares:
Common stock 19,364 18,391 18,869 18,173
Preferred stock 6,284 6,337 6,295 6,354
Assumed conversion of options 722 516 632 363
------- -------- -------- -------
Total 26,370 25,244 25,796 24,890
======= ======== ======== =======
Primary Earnings Per Share $ .06 $ (.04) $ 1.18 $ .06
======= ======== ======== =======
Computation of Fully Diluted Earnings Per Share (1)
Net Income (Loss) $ 1,393 $ (1,068) $ 30,508 $ 1,380
Interest and amortization of deferred costs on convertible
debentures - net of tax -- 456 -- 1,367
------- -------- -------- -------
Total $ 1,393 $ (612) $ 30,508 $ 2,747
======= ======== ======== =======
Weighted average of fully diluted shares:
Common stock 19,364 18,391 18,869 18,173
Preferred stock 6,284 6,337 6,295 6,354
Assumed conversion of options 833 519 710 408
Assumed conversion of convertible debenture -- 5,397 -- 5,397
------- -------- -------- -------
Total 26,481 30,644 25,874 30,332
======= ======== ======== =======
Fully Diluted Earnings Per Share $ .05 $ (.02) $ 1.18 $ .09
======= ======== ======== =======
</TABLE>
(1) This calculation is provided in accordance with Regulation S-K, Item
601(b)(II) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15, because it is anti-dilutive on results in dilution of less
than 3%.
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,152
<SECURITIES> 0
<RECEIVABLES> 43,963
<ALLOWANCES> 2,802
<INVENTORY> 12,375
<CURRENT-ASSETS> 62,860
<PP&E> 241,885
<DEPRECIATION> 127,391
<TOTAL-ASSETS> 269,319
<CURRENT-LIABILITIES> 42,796
<BONDS> 139,055
0
3,330
<COMMON> 20,053
<OTHER-SE> 31,092
<TOTAL-LIABILITY-AND-EQUITY> 269,319
<SALES> 14,785
<TOTAL-REVENUES> 102,889
<CGS> 12,020
<TOTAL-COSTS> 81,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,205
<INCOME-PRETAX> 10,071
<INCOME-TAX> 8,644
<INCOME-CONTINUING> 1,427
<DISCONTINUED> 36,083
<EXTRAORDINARY> (7,002)
<CHANGES> 0
<NET-INCOME> 30,508
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
</TABLE>
