SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report - April 24, 1998
(Date of earliest event reported)
MEDIQ INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-8147 51-0219413
- ------------------------------- ------------ -------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification No.)
One MEDIQ Plaza, Pennsauken, New Jersey 08110
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(Address of principal executive offices, zip code)
Area Code (609) 662-3200
------------------------
(Telephone number)
<PAGE>
Item 5. Other Events.
MEDIQ Incorporated (the "Company"), through its wholly-owned subsidiary,
MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") entered into an Asset
Purchase Agreement (the "Asset Purchase Agreement"), dated as of April 24, 1998,
with CH Industries, Inc. ("CHI"), certain direct and indirect subsidiaries of
CHI and certain other parties, including CH Medical, Inc. and subsidiaries ("CH
Medical"), (collectively, the "Sellers") to purchase certain of the assets and
rights of the Sellers (the "CH Medical Business") including, but not limited to,
accounts receivable, inventory, rental equipment and other tangible property,
intellectual property rights, key records (including customer lists, customer
files, supplier information) and certain contract rights (the "CHI Acquisition")
for a purchase price of approximately $50.0 million in cash, including related
costs and expenses, and the assumption of certain specified obligations related
to the acquired assets.
CHI is a Texas-based corporation which has specialized in the development of
various medical products utilized in patient care treatment and therapy for over
thirty years. In addition to its development of medical products, CHI is a
national sales, rental and service corporation specializing in patient beds,
overlays, mattress replacement systems, pressure relieving pads and surfaces and
other therapeutic support surfaces with approximately 75 business locations
nationwide. CHI has, among other things, developed technology used in the
manufacture of beds and frameless systems for hospitals, extended care
facilities and homes to effectively treat the severe conditions and
complications inherent to patients who are bed confined. CHI offers a complete
line of portable pressure relieving products to provide hospitals and extended
care facilities with an array of bed therapies in a cost effective manner. The
assets acquired under the Asset Purchase Agreement involve only the Sellers'
assets related to the manufacture, sale and rental of beds and other support
surfaces and do not include the Sellers' other fabrication businesses.
The obligations of MEDIQ/PRN under the Asset Purchase Agreement are conditioned
upon receipt of all statutory and regulatory consents and approvals under the
laws or regulations of the United States necessary to permit the consummation of
the acquisition and necessary to own and operate the acquired assets, including
approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"). Accordingly, on April 2, 1998, MEDIQ/PRN and the Sellers each filed
a notification report together with requests for early termination of the
waiting period under the HSR Act with the Federal Trade Commission (the "FTC")
and the Antitrust Division in respect of the transaction and on April 13, 1998,
the FTC and the Antitrust Division granted early termination of the waiting
period under the HRS Act in respect of the transaction. In addition to approval
under the HSR Act, the obligations of MEDIQ/PRN under the Asset Purchase
Agreement are also subject to, among other things, the fulfillment or waiver of
the following conditions:
(a) The representations and warranties made by the Sellers and qualified by
the words "material" or "material adverse effect" or like words shall be true
and correct, and the representations and warranties not so qualified shall be
true in all material respects as of the closing.
2
<PAGE>
(b) The Sellers shall have performed and complied with all covenants,
agreements, and conditions required by the Asset Purchase Agreement to be
performed or complied with by them prior to or at the closing.
(c) The consents necessary or advisable to transfer the acquired assets and
for MEDIQ/PRN to operate the business from and after the closing shall have been
secured in a form reasonably satisfactory to MEDIQ/PRN.
(d) There shall not have been any material adverse effect in respect of the
acquired assets or the acquired business prior to the closing.
(e) All of the liens and other encumbrances (excluding certain permitted
exceptions) outstanding on any of the acquired assets shall have been terminated
and released prior to or at the closing.
(f) There shall not be any order of any court or administrative agency in
effect which restrains or prohibits the transactions contemplated by the Asset
Purchase Agreement or which would materially limit or adversely affect
MEDIQ/PRN's ownership or control of any of the acquired assets or the acquired
businesses, and there shall not have been threatened, nor shall there be
pending, any action or proceeding by or before any court or governmental agency
or other regulatory or administrative agency or commission, (i) challenging any
of the transactions contemplated by the Asset Purchase Agreement or seeking
monetary relief by reason of the consummation of such transactions or (ii) which
might have a material adverse effect on the acquired assets or on the business,
prospects or condition (financial or otherwise) of the Sellers.
(g) MEDIQ/PRN shall have completed arrangements for the financing of the
purchase of the acquired assets on terms and conditions to MEDIQ/PRN's sole
satisfaction and it shall have received the proceeds thereof.
All obligations of the Sellers under the Asset Purchase Agreement are subject
to, among other things, the fulfillment or waiver prior to or at the closing, of
the following conditions.
(a) The representations and warranties made by MEDIQ/PRN in the Asset
Purchase Agreement and qualified by the words "material" or "material adverse
effect" or like words shall be true and correct, and the representations and
warranties not so qualified shall be true in all material respects as of the
closing.
(b) MEDIQ/PRN shall have performed and complied with all covenants,
agreements and conditions required by the Asset Purchase Agreement to be
performed or complied with by it prior to or at the closing.
3
<PAGE>
In addition to the foregoing, the Asset Purchase Agreement contains certain
covenants by the Sellers including, but not limited to, conduct of the business
prior to the effective time; corporate name changes after the effective time;
cooperation; obtaining of necessary consents; confidential information; no
solicitation of alternative transactions; non-competition provisions; delivery
of interim financial statements; access to the Sellers' books and records; and
termination of certain agreements. The Asset Purchase Agreement also contains
covenants made by MEDIQ/PRN, including, but not limited to, cooperation and
employee hiring and other employee related matters.
Provided all of the conditions to the closing have been satisfied or
waived, it is anticipated that the closing of the CHI Acquisition will take
place on a date which is the earlier of (i) 8 days after the closing of the
Merger by and among a Company organized by Bruckmann, Rosser, Sherrill & Co.,
L.P. and MEDIQ Incorporated (the "Merger"), or; (ii) the fiftieth day after the
Registration Statement on Form S-4 relating to the Merger has been declared
effective. The consummation of the Merger is not conditioned upon the closing of
the CHI Acquisition, and the CHI Acquisition is not conditioned upon the
consummation of the Merger.
There can be no assurance that the Company will ultimately consummate the CHI
Acquisition or that, if consummated, the terms of the CHI Acquisition will be
described herein. The Company presently expects to finance the purchase price
of the CHI Acquisition with $50.0 million of Term Loans under a new credit
facility to be entered into as a result of the Merger.
The Company has recently received the CH Medical, Inc. unaudited interim
financial statements as of and for the six month period ended February 28, 1998
and is filing these financial statements herewith. In addition, the Company has
also included in this report, a Pro Forma Statement of Operations for the six
months ended March 31, 1998 and fiscal year ended September 30, 1997, and a Pro
Forma Balance Sheet as of March 31, 1998 prepared on the basis set forth
therein.
RECENT DEVELOPMENTS -- STANDARD & POOR'S RATINGS SERVICES
In connection with financing the Merger, the Company currently expects to
issue $75.0 million (gross proceeds) of Senior Discount Debentures due 2009 (the
"Debentures") and MEDIQ/PRN currently expects to issue $240.0 million aggregate
principal amount of Senior Subordinated Notes due 2008 (the "Notes").
On May 15, 1998, Standard & Poor's Ratings Services ("Standard & Poor's")
assigned its rating of "B-" to the Company's proposed Debentures and its "CCC+"
rating to the Company's proposed $78.2 million Series A 13% Cumulative
Compounding Preferred Stock.
At the same time, Standard & Poor's assigned its "B-" rating to MEDIQ/PRN's
proposed Notes and its "B+" rating to MEDIQ/PRN's proposed $275.0 million senior
secured bank facility (the "bank facility"), such bank facility to be secured by
substantially all of the assets of MEDIQ/PRN and its subsidiaries.
Also, Standard & Poor's affirmed its "B+" corporate credit ratings on the
Company and MEDIQ/PRN and its "B+" bank loan rating on MEDIQ/PRN and removed
these ratings from CreditWatch, where they were placed January 20, 1998
following announcement of the Merger. Standard & Poor's rating outlook is now
negative.
On May 18, 1998, Moody's Investors Service ("Moody's") assigned its "B1" rating
to MEDIQ/PRN's bank facility, assigned its "B3" rating to MEDIQ/PRN's proposed
Notes and assigned its "Caa1" rating to the Company's Debentures. In addition,
Moody's lowered its rating on the Company's 7.5% Exchangeable Subordinated
Debentures due 2003 to "Caa1" from "B3". Moody's rating outlook is stable.
4
<PAGE>
Item 7. Financial Statements and Exhibits.
Page
----
(b) Pro Forma Financial Information:
Unaudited Proforma Statement of Operations for the Year ended
September 30, 1997. 9
Unaudited Proforma Statement of Operations for the Six Months
ended March 31, 1998 and 1997. 11
Unaudited Proforma Balance Sheet as of March 31, 1998. 21
(c) Exhibits.
Exhibit 2 - Asset Purchase Agreement.(a)
Exhibit 23 - Consent of BDO Seidman, LLP Independent Certified
Public Accountants.(a)
Exhibit 99.1 Press Release dated April 27, 1998.(a)
Exhibit 99.2 - Audited Financial Statements of CH Medical, Inc.
and Subsidiaries.(a)
Statements of Income for the three years ended
August 31, 1997.
Statements of Net Assets as of August 31, 1997 and 1996.
Statements of Cash Flows for the three years ended
August 31, 1997.
Exhibit 99.3 - Unaudited Financial Statements of CH Medical, Inc.
and Subsidiaries.(a)
Statements of Income for the three months ended
November 30, 1997 and 1996.
Statements of Net Assets as of November 30, 1997 and
1996.
Statements of Cash Flows for the three months ended
November 30, 1997 and 1996.
.
Exhibit 99.4 - Unaudited Financial Statements of CH Medical, Inc.
and Subsidiaries.
Statements of Income for the six months ended
February 28, 1998 and 1997.
Statements of Net Assets as of February 28, 1998
Statements of Cash Flows for the six months ended
February 28, 1998 and 1997.
- ----------
(a) Previously filed with the Company's Current Report on Form 8-K on
April 28, 1998.
5
<PAGE>
Item 7(b). Pro Forma Financial Information
The term "Holdings" refers to MEDIQ Incorporated, the term "the Company"
refers to Holdings and all of its subsidiaries including MEDIQ/PRN on a
consolidated basis, and all other capitalized terms used but not defined herein
have the meanings ascribed to them in the Company's Registration Statement on
Form S-4 (Reg. No. 333-46233) declared effective by the Securities and Exchange
Commission on April 28, 1998 if not defined herein.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Pro Forma Financial Statements") are based on the historical
consolidated financial statements of the Company, MEDIQ PRN/HNE, LLC
("SpectraCair") and CH Medical. SpectraCair was acquired on September 1, 1997
(the "SpectraCair Acquisition"), and, accordingly, the Company's historical
consolidated statements of operations include the results of operations of
SpectraCair beginning September 1, 1997 and the Company's historical balance
sheet as of March 31, 1998 includes the assets and liabilities of SpectraCair.
The Company has entered into a definitive agreement with respect to the CHI
Acquisition and presently expects to consummate this transaction simultaneously
with the Merger, subject to the satisfaction of certain conditions.
The pro forma condensed consolidated statements of operations for the year
ended September 30, 1997 and the six months ended March 31, 1997 give effect to
the SpectraCair Acquisition, the Transactions and the CHI Acquisition as if they
were consummated on October 1, 1996. The pro forma condensed consolidated
statements of operations for the six months ended March 31, 1998 give effect to
the Transactions and the CHI Acquisition as if they were consummated on October
1, 1996. The pro forma condensed consolidated balance sheet gives effect to
the Transactions and the CHI Acquisition as if they were consummated on March
31, 1998. All the pro forma adjustments are described more fully in the
accompanying notes.
The CH Medical historical financial information reflected in the Pro Forma
Financial Statements represents the accounts and operations of CH Medical with
respect to the CH Medical Business. During the period covered by the CH Medical
Financial Statements, the CH Medical Business was conducted as an integral part
of CHI's overall operations, and separate financial statements were not
prepared. The Company has been advised by CHI that the CH Medical Financial
Statements were prepared from the historical accounting records of CHI and
include various allocations for costs and expenses.
6
<PAGE>
Therefore, the statements of operations of CH Medical may not be indicative of
the results of operations that would have resulted if CH Medical had operated on
a stand-alone basis. The Company has been advised by CHI that all of the
allocations and estimates reflected in the CH Medical Financial Statements are
based on assumptions that CHI management believes are reasonable under the
circumstances.
As a result of the SpectraCair Acquisition on September 1, 1997, the
Company anticipates the elimination of duplicative costs for functional areas
and the reduction of certain expenses as a result of expected synergies of
$.4 million. In addition, SpectraCair recognized a change in its statement of
operations for the eleven months ended August 31, 1997 of $.6 million related to
the revenue generated in fiscal 1996 from its acquisition of the rental assets
of Bio Clinic Corporation, a subsidiary of Sunrise Medical, Inc. ("Bio Clinic")
on January 31, 1996.
Management also expects that the CHI Acquisition will generate certain
synergies and result in a lower cost structure for the combined entity. Certain
anticipated cost savings for the closing of duplicate facilities and the
elimination of personnel are reflected in the Pro Forma Financial Statements.
Although management also anticipates that there will be additional cost savings
from the CHI Acquisition in such areas as insurance, advertising and telephone
costs, travel, meals and entertainment expenses and taxes other than income
taxes, such additional cost savings are not reflected in the Pro Forma Financial
Statements. Management estimates that such additional cost savings will
approximate $1.8 million per year. However, there can be no assurance that the
Company will be able to generate the expected cost savings in connection with
the CHI Acquisition, or realize the anticipated cost reductions with respect to
the SpectraCair Acquisition.
For the pro forma last twelve months ended March 31, 1998, the Company
would have reported EBITDA (as defined below) of $68.5 million and Adjusted
EBITDA (as defined below) of $71.2 million. The pro forma last twelve months
ended March 31, 1998 operating results were derived by adding the pro forma
operating results for the fiscal year ended September 30, 1997 to the pro forma
operating results for the six months ended March 31, 1998 and subtracting the
pro forma operating results for the six months ended March 31, 1997. EBITDA is
defined as income from continuing operations before interest, taxes,
depreciation, amortization and non-recurring merger costs. The Company's
definition of EBITDA includes non-recurring merger costs and accordingly, may
not be comparable to other companies' EBITDA disclosures. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an alternative
to income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating performance or
as a measure of liquidity. Adjusted EBITDA is defined as EBITDA for the Company
plus (A) cost savings of approximately $0.2 million related to the elimination
of duplicative costs for functional areas and the reduction of certain costs
which the Company expects to realize in connection with the SpectraCair
Acquisition, (B) SpectraCair's non-cash charge of $0.6 million related to
revenue generated in fiscal 1996 from the acquisition of Bio Clinic rental
assets SpectraCair recognized in its statement of operations for the eleven
months ended August 31, 1997 and (C) annualized cost savings relating to the CHI
Acquisition of approximately $1.9 million in such areas as insurance,
advertising and telephone costs, travel, meals and entertainment expenses and
taxes other than income taxes.
The Pro Forma Financial Statements are presented for informational purposes
only and do not purport to be indicative of the results of operations that
actually would have been achieved had such transactions been consummated on the
date or for the periods indicated and do not purport to be indicative of the
balance sheet data or results of operations as of any future date or for any
future period.
The pro forma adjustments were applied to the respective historical
statements to reflect and account for the Merger as a recapitalization.
Accordingly, the historical basis of the Company's assets and liabilities has
not been affected by the Merger. The SpectraCair Acquisition was and the CHI
Acquisition, if consummated, will be accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The allocation of the aggregate purchase price for the CH Medical
Business reflected in the Pro Forma Financial Statements is preliminary. The
final allocation of the aggregate purchase price is contingent upon studies and
valuations which have not yet been completed. Management is unable to predict
whether any adjustments as a result of the foregoing will have a material effect
on the Pro Forma Financial Statements.
7
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 1997
------------------------------------------------------------------------------------
MEDIQ/PRN
Pro Forma Pro Forma
Adjustments Pro Forma for
Historical for the Adjustments SpectraCair
---------------------------- SpectraCair for the and the
MEDIQ/PRN SpectraCair Acquisition Transactions Transactions
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental ..................... $124,316 $9,647 $ -- $ -- $133,963
Sale of parts, disposables
and equipment ............ 19,922 142 -- -- 20,064
Other ...................... 11,915 -- (1,475)(A) -- 10,440
-------- ------ ------ -------- --------
156,153 9,789 (1,475) -- 164,467
Costs and Expenses:
Cost of sales .............. 16,334 112 -- -- 16,446
Operating................... 46,138 2,638 (1,475)(A) -- 47,301
Selling..................... 13,353 2,804 -- -- 16,157
General and
Administrative............ 18,049 1,545 -- 1,000(C) 20,594
Management fees-
MEDIQ..................... 3,341 -- -- -- 3,341
Depreciation and
amortization.............. 30,333 2,313 -- -- 32,646
-------- ------ ------ -------- --------
Operating Income............ 28,605 377 -- (1,000) 27,982
Other (Charges)
Credits:
Interest
expense.................. (16,912) (499) -- (16,780)(D) (34,191)
Interest income............. 985 -- -- -- 985
Other - net................. 6,989 -- 61(A) -- 7,050
-------- ------ ------ -------- --------
Income from Continuing
Operations before
Income Taxes.............. 19,667 (122) 61 (17,780) 1,826
Income Taxes................ 7,438 -- (24)(B) (7,112)(B) 302
-------- ------ ------ -------- --------
Income (Loss) from
Continuing
Operations................ $12,229 $ (122) $ 85 $(10,668) $ 1,524
======== ====== ====== ======== ========
<CAPTION>
Year Ended September 30, 1997
----------------------------------------------------------------------
Consolidated
Consolidated Holdings
Holdings Pro Forma
Pro Forma for
Holdings for Pro Forma SpectraCair,
Pro Forma/ SpectraCair Adjustments the
Consolidating and the for the CHI Transactions
Adjustments(E) Transactions Acquisition(F) and CHI
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Rental ..................... $ -- $133,963 $22,154 $156,117
Sale of parts, disposables
and equipment ............ -- 20,064 4,556 24,620
Other ...................... (193) 10,247 -- 10,247
-------- -------- ------- --------
(193) 164,274 26,710 190,984
Costs and Expenses:
Cost of sales .............. -- 16,446 1,355 17,801
Operating................... -- 47,301 8,268 55,569
Selling..................... -- 16,157 3,233 19,390
General and
Administrative............ 2,223 22,817 6,208 29,025
Management fees-
MEDIQ..................... (3,341) -- -- --
Depreciation and
amortization.............. 26 32,672 3,588 36,260
-------- -------- ------- --------
Operating Income............ 899 28,881 4,058 32,939
Other (Charges)
Credits:
Interest
expense.................. (9,922) (44,113) (4,297) (48,410)
Interest income............. 1,084 2,069 -- 2,069
Other - net................. (16,562) (9,512) 193 (9,319)
-------- -------- ------- --------
Income from Continuing
Operations before
Income Taxes.............. (24,501) (22,675) (46) (22,721)
Income Taxes................ (5,395) (5,093) (18) (5,111)
-------- -------- ------- --------
Income (Loss) from
Continuing
Operations................ $(19,106) $(17,582) $ (28) $(17,610)
======== ======== ======= ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
8
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended March 31, 1997
--------------------------------------------------------------------------------------------
MEDIQ/PRN
Pro Forma ProForma
Adjustments Pro Forma for Holdings
Historical for the Adjustments SpectraCair Pro Forma/
------------------------ SpectraCair for the and the Consolidating
MEDIQ/PRN SpectraCair Acquisition Transactions Transactions Adjustments(E)
--------- ----------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental ..................... $ 63,193 $ 5,885 $ -- $ -- $ 69,078 $ --
Sale of parts, disposables
and equipment ........... 9,459 96 -- -- 9,555 --
Other ...................... 5,495 -- (854)(A) -- 4,641 (98)
-------- -------- -------- -------- -------- --------
78,147 5,981 (854) -- 83,274 (98)
Costs and Expenses:
Cost of sales .............. 7,759 76 -- -- 7,835 --
Operating .................. 22,228 1,242 (854)(A) -- 22,616 --
Selling .................... 6,570 1,632 -- -- 8,202 --
General and administrative . 8,802 946 -- 500(C) 10,248 1,232
Management fees-MEDIQ ...... 148 -- -- -- 148 (148)
Depreciation and
amortization ............ 14,715 1,463 -- -- 16,178 16
-------- -------- -------- -------- -------- --------
Operating Income .............. 17,925 622 -- (500) 18,047 (1,198)
Other (Charges) Credits:
Interest expense ........... (10,194) (295) -- (6,607)(D) (17,096) (4,960)
Interest income ............ 519 -- -- -- 519 547
Other-net .................. 10,654 -- (163)(A) -- 10,491 (11,217)
-------- -------- -------- -------- -------- --------
Income (Loss) from
Continuing Operations
before Income Taxes ........ 18,904 327 (163) (7,107) 11,961 (16,828)
Income Taxes .................. 7,309 -- 65 (B) (2,843)(B) 4,531 (2,158)
-------- -------- -------- -------- -------- --------
Income (Loss) from
Continuing Operations ...... $ 11,595 $ 327 $ (228) $ (4,264) $ 7,430 $(14,670)
======== ======== ======== ======== ======== ========
<CAPTION>
Six Months Ended March 31, 1997
------------------------------------------------------------
Consolidated
Holdings Consolidated
Pro Forma Holdings
for Pro Forma Pro Forma for
SpectraCair Adjustments SpectraCair,
and the for the CHI the Transactions
Transactions Acquisition(F) and CHI
------------ -------------- ----------------
<S> <C>
Revenues
Rental ..................... $ 69,078 $10,631 $79,709
Sale of parts, disposables
and equipment ........... 9,555 1,692 11,247
Other ...................... 4,543 -- 4,543
-------- ------- -------
83,176 12,323 95,499
Costs and Expenses:
Cost of sales .............. 7,835 537 8,372
Operating .................. 22,616 4,472 27,088
Selling .................... 8,202 1,453 9,655
General and administrative . 11,480 2,746 14,226
Management fees-MEDIQ ...... -- -- --
Depreciation and
amortization ............ 16,194 1,795 17,989
-------- ------- -------
Operating Income .............. 16,849 1,320 18,169
Other (Charges) Credits:
Interest expense ........... (22,056) (2,148) (24,204)
Interest income ............ 1,066 4 1,070
Other-net .................. (726) 382 (344)
-------- ------- -------
Income (Loss) from
Continuing Operations
before Income Taxes ........ (4,867) (442) (5,309)
Income Taxes .................. 2,373 (177) 2,196
-------- ------- -------
Income (Loss) from
Continuing Operations ...... $ (7,240) $ (265) $(7,505)
======== ======= =======
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
9
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended March 31, 1998
-------------------------------------------------------------------------------------
Consolidated
Pro Forma MEDIQ/PRN Holdings Holdings
Adjustments Pro Forma Pro Forma/ Pro Forma
Historical for the for the Consolidating for the
MEDIQ/PRN Transactions Transactions Adjustments(E) Transactions
--------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental .................................. $ 69,993 $ -- $ 69,993 $ -- $ 69,993
Sales of parts, disposables and
equipment ............................ 13,979 -- 13,979 -- 13,979
Other ................................... 5,145 -- 5,145 (138) 5,007
-------- -------- -------- -------- --------
89,117 -- 89,117 (138) 88,979
Cost and Expenses:
Cost of sales ........................... 11,270 -- 11,270 -- 11,270
Operating ............................... 28,449 -- 28,449 -- 28,449
Selling ................................. 7,557 -- 7,557 -- 7,557
General and administrative .............. 9,486 500 (C) 9,986 (138) 9,848
Management fees-MEDIQ ................... 279 -- 279 (279) --
Nonrecurring-merger costs ............... 363 -- 363 -- 363
Depreciation and amortization ........... 16,586 -- 16,586 -- 16,586
-------- -------- -------- -------- --------
Operating Income ........................ 15,127 (500) 14,627 279 14,906
Other (Charges) Credits:
Interest expense ........................ (6,739) (10,291)(D) (17,030) (5,478) (22,508)
Interest income ......................... 475 -- 475 -- 475
Other-net ............................... 4 -- 4 -- 4
-------- -------- -------- -------- --------
Income (Loss) from Continuing
Operations before Income Taxes ....... 8,867 (10,791) (1,924) (5,199) (7,123)
Income Taxes ............................ 3,962 (4,316)(B) (354) (2,067) (2,421)
-------- -------- -------- -------- --------
Income (Loss) from Continuing
Operations ........................... $ 4,905 $ (6,475) $ (1,570) $ (3,132) $ (4,702)
======== ======== ======== ======== ========
<CAPTION>
Six Months Ended March 31, 1998
------------------------------------
Consolidated
Holdings
Pro Forma Pro Forma
Adjustments for the
for the CHI Transactions
Acquisition(F) and CHI
-------------- ------------
<S> <C> <C>
Revenues:
Rental .................................. $11,292 $ 81,285
Sales of parts, disposables and
equipment ............................ 1,636 15,615
Other ................................... -- 5,007
------- --------
12,928 101,907
Cost and Expenses
Cost of sales ........................... 294 11,564
Operating ............................... 4,642 33,091
Selling ................................. 1,475 9,032
General and administrative .............. 2,921 12,769
Management fees-MEDIQ ................... -- --
Nonrecurring-merger costs ............... -- 363
Depreciation and amortization ........... 1,795 18,381
------- --------
Operating Income ........................ 1,801 16,707
Other (Charges) Credits:
Interest expense ........................ (2,148) (24,656)
Interest income ......................... 10 485
Other-net ............................... 189 193
------- --------
Income (Loss) from Continuing
Operations before Income Taxes ....... (148) (7,271)
(59) (2,480)
Income Taxes ............................ ------- --------
Income (Loss) from Continuing
Operations ........................... $ (89) $ (4,791)
======= ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
10
<PAGE>
Notes to Pro Forma Condensed Consolidated Statements of Operations
(unaudited)
(in thousands)
(A) Reflects the elimination of transactions between MEDIQ/PRN and SpectraCair
for logistical services, and the elimination of MEDIQ/PRN's portion of
SpectraCair's historical income (loss), which was recognized on the equity
method of accounting.
(B) Reflects the effect on income tax expense of the historical income (loss)
of SpectraCair and/or the pro forma adjustments described in the footnotes
herein at an incremental effective tax rate of 40%. Prior to the
SpectraCair Aquisition, SpectraCair was a limited liability company and,
therefore, was not subject to income taxes.
(C) For the year ended September 30, 1997, reflects a $1.0 million annual
management fee pursuant to the Management Agreement. For the six months
ended March 31, 1998 and 1997, reflects one half of such annual management
fee.
(D) Reflects the increased interest cost related to the New Credit Facility and
the Notes, as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Six Months
September 30, Ended March 31, Ended March 31,
1997 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
New Credit Facility:
Revolving Credit Facility $ 280 $ 140 $ 140
Acquisition Loans ....... 375 188 188
Term Loans .............. 8,594 4,297 4,292
Notes ...................... 22,800 11,400 11,400
Amortization of
financing fees/debt
issue costs over the
period of the related
financing ............... 1,704 852 852
Existing borrowings to
carry forward
(capital leases) ........ 438 219 158
-------- -------- --------
34,191 17,096 17,030
Historical interest costs:
MEDIQ/PRN ............... (16,912) (10,194) (6,739)
SpectraCair ............. (499) (295) --
-------- -------- --------
$ 16,780 $ 6,607 $ 10,291
======== ======== ========
</TABLE>
11
<PAGE>
The Revolving Credit Facility is assumed to bear interest at an annual rate
of LIBOR plus margins of 2.25% on amounts borrowed; bear interest at 2.25%
for amounts reserved for letters of credit; and bear a fee of 0.5% for the
undrawn portion of the unused commitments. Interest on the Revolving Credit
Facility represents commitment fees on the undrawn portion of the
commitments and the amount reserved for letters of credit. The Term Loans
are assumed to bear interest at an annual rate of LIBOR plus 2.75%. The
Company will pay a commitment fee of 0.5% per annum on the amount of unused
commitments for Acquisition Loans. Interest on the Acquisition Loans
represents commitment fees on $75.0 million of unused commitments. Under
the Term Loan Facility (as defined), $100.0 million was assumed to be
utilized to consummate the Transactions. If the CHI Acquisition is
consummated, an additional $50.0 million of Term Loans are expected to be
utilized to acquire the CH Medical Business (see footnote F). Should the
CHI Acquisition not be consummated simultaneously with the Merger, the
Company will pay a commitment fee of 0.5% per annum on $50.0 million of the
unused commitments under the Term Loan Facility from the date of the Merger
until such commitments expire and interest on the Term Loans noted above
would increase by a corresponding amount. LIBOR is based on the Company's
average LIBOR rate for fiscal 1997 of 5.84%. The Notes are assumed to bear
interest at 9.5%. A 0.125% change in the interest rate on the above loans
would increase or decrease annual interest expense and income (loss) from
continuing operations by:
Annual Loss from
Interest Continuing
Expense Operations
----------- ----------
New Credit Facility.......... $125 $ 75
Notes........................ $300 $180
A 0.125% change in the interest rate on the above loans would increase or
decrease semi-annual interest expense and income (loss) from continuing
operations by:
Semi-Annual Loss from
Interest Continuing
Expense Operations
----------- ----------
New Credit Facility.......... $ 63 $ 38
Notes........................ $150 $ 90
Deferred financing fees on the New Credit Facility are allocated between
the tranches based on each tranche's relative value to the total facility.
Amortization periods for deferred financing fees related to the Revolving
Credit Facility and the Acquisition Loans are six years and eight years for
the Term Loans. Debt issue costs on the Notes are amortized over ten years.
12
<PAGE>
(E) The following unaudited pro forma statements of operations have been based
on the unaudited accounting records of Holdings for the year ended
September 30, 1997 and the six months ended March 31, 1997 and 1998. No
separate financial statements have been prepared for Holdings for any
period. The pro forma statements of operations reflect the adjustments
required to consolidate Holdings with MEDIQ/PRN and to reflect the
SpectraCair Acquisition and/or the Transactions related solely to Holdings
as if they had occurred on October 1, 1996. The pro forma statements of
operations may not be indicative of the results of operations that actually
would have been achieved had the SpectraCair Acquisition and/or the
Transactions been consummated on October 1, 1996.
<TABLE>
<CAPTION>
Year Ended September 30, 1997
------------------------------------------------------------------
Holdings Pro Forma Consolidating Pro Forma/
Historical Adjustments Adjustments Consolidating
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Other............................ $33 $ -- $(226)(iii) $ (193)
Costs and Expenses:
General and administrative....... 2,553 -- (330)(iii) 2,223
Management fees-MEDIQ............ (3,341) -- -- (3,341)
Depreciation and amortizati...... 26 -- -- 26
-------- ------- ----- --------
Operating Income................... 795 -- 104 899
Other (Charges) Credits:
Interest expense................. (2,195) (7,727)(i) -- (9,922)
Interest income.................. 1,084 -- -- 1,084
Other-net........................ (16,562) -- -- (16,562)
-------- ------- ----- -------
Loss from Continuing Operations
before Income Taxes.............. (16,878) (7,727) 104 (24,501)
Income Taxes....................... (1,981) (3,091)(ii) (323)(iii) (5,395)
-------- ------- ----- --------
Income (Loss) from Continuing
Operations....................... $(14,897) $(4,636) $ 427 $(19,106)
======== ======= ===== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, 1997
------------------------------------------------------------------
Holdings Pro Forma Consolidating Pro Forma/
Historical Adjustments Adjustments Consolidating
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Other............................ $ 21 $ -- $(119)(iii) $ (98)
Costs and Expenses:
General and administrative....... 1,351 -- (119)(iii) 1,232
Management fees-MEDIQ............ (148) -- -- (148)
Depreciation and amortization.... 16 -- -- 16
-------- ------- ----- --------
Operating Income................... (1,198) -- -- (1,198)
Other (Charges) Credits:
Interest expense................. (1,728) (3,232)(i) -- (4,960)
Interest income.................. 547 -- -- 547
Other-net........................ (11,217) -- -- (11,217)
-------- ------- ----- --------
Loss from Continuing Operations
before Income Taxes.............. (13,596) (3,232) -- (16,828)
Income Taxes....................... (865) (1,293)(ii) -- (2,158)
-------- ------- ----- --------
Income (Loss) from Continuing
Operations....................... $(12,731) $(1,939) $ -- $(14,670)
======== ======= ===== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, 1998
------------------------------------------------------------------
Holdings Pro Forma Consolidating Pro Forma/
Historical Adjustments Adjustments Consolidating
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Other............................ $ -- $ -- $(138)(iii) $ (138)
Costs and Expenses:
General and administrative....... -- -- (138)(iii) (138)
Management fees-MEDIQ............ (279) -- -- (279)
-------- ------- ----- --------
Operating Income................... 279 -- -- 279
Other (Charges) Credits:
Interest expense................. (496) (4,982)(i) -- (5,478)
-------- ------- ----- --------
Loss from Continuing Operations
before Income Taxes.............. (217) (4,982) -- (5,199)
Income Taxes....................... (74) (1,993)(ii) -- (2,067)
-------- ------- ----- --------
Income (Loss) from Continuing
Operations....................... $ (143) $(2,989) $ -- $ (3,132)
======== ======= ===== ========
</TABLE>
15
<PAGE>
(i) Reflects the increased interest cost related to the Debentures, as
follows:
<TABLE>
<CAPTION>
Year Ended Six Months Six Months
September 30, Ended March 31, Ended March 31,
1997 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Debentures .................................. $8,813 $4,406 $4,924
Amortization of debt issue costs over the
period of the related financing .......... 355 177 177
Existing borrowings to carry forward
(Exchangeable Debentures) ................ 754 377 377
------ ------ ------
9,922 4,960 5,478
Holding's historical interest costs ......... (2,195) (1,728) (496)
------ ------ ------
$7,727 $3,232 $4,982
====== ====== ======
</TABLE>
- ----------
The Debentures are assumed to bear interest at 11.75%. A 0.125% change in
the interest rate on the Debentures would increase or decrease annual
interest expense and income (loss) from continuing operations by $94 and
$56, respectively, and semi-annual interest expense and loss from
continuing operations by $47 and $28, respectively. Debt issue costs on
the Debentures are amortized over 11 years.
(ii) Reflects the effects on income tax expense at an incremental effective
rate of 40%.
(iii) Reflects the historical adjustments required to consolidate Holdings and
MEDIQ/PRN.
16
<PAGE>
(F) The following unaudited pro forma statements of operations have been based
on the CH Medical Financial Statements for the year ended August 31, 1997
and the six months ended February 28, 1997 and 1998. The pro forma
statements of operations are based on management's best estimate of the
effects of the CHI Acquisition as if such acquisition and the initial
financing thereof had occurred on October 1, 1996. The pro forma statements
of operations may not be indicative of the results of operations that
actually would have been achieved had the CHI Acquisition been consummated
on October 1, 1996.
<TABLE>
<CAPTION>
Year Ended August 31, 1997
------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Rental .................................................... $ 22,154 $ -- $ 22,154
Sales of parts, disposables and equipment ................. 4,556 -- 4,556
-------- -------- --------
26,710 -- 26,710
Costs and Expenses:
Cost of sales ............................................. 1,355 -- 1,355
Operating ................................................. 10,244 (1,976)(i) 8,268
Selling ................................................... 4,005 (772)(i) 3,233
General and administrative ................................ 7,692 (1,484)(i) 6,208
Depreciation and amortization ............................. 1,740 1,848 (ii) 3,588
-------- -------- --------
Operating Income ............................................. 1,674 2,384 4,058
Other (Charges) Credits:
Interest expense .......................................... (245) (4,052)(iii) (4,297)
Other - net ............................................... 193 -- 193
-------- -------- --------
Income (Loss) from Continuing Operations before Income Taxes.. 1,622 (1,668) (46)
Income Taxes ................................................. 616 (634)(iv) (18)
-------- -------- --------
Income (Loss) from Continuing Operations ..................... $ 1,006 $ (1,034) $ (28)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended February 28, 1997
------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Rental .................................................... $ 10,631 $ -- $ 10,631
Sales of parts, disposables and equipment ................. 1,692 -- 1,692
-------- -------- --------
12,323 -- 12,323
Costs and Expenses:
Cost of sales ............................................. 537 -- 537
Operating ................................................. 5,255 (783)(i) 4,472
Selling ................................................... 1,707 (254)(i) 1,453
General and administrative ................................ 3,227 (481)(i) 2,746
Depreciation and amortization ............................. 875 920 (ii) 1,795
-------- -------- --------
Operating Income ............................................. 722 598 1,320
Other (Charges) Credits:
Interest expense .......................................... (75) (2,073)(iii) (2,148)
Interest income ........................................... 4 -- 4
Other ..................................................... 382 -- 382
-------- -------- --------
Income (Loss) from Continuing Operations before Income Taxes.. 1,033 (1,475) (442)
Income Taxes ................................................. 431 (608)(iv) (177)
-------- -------- --------
Income (Loss) from Continuing Operations ..................... $ 602 $ (867) $ (265)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended February 28, 1998
------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Rental .................................................... $ 11,292 $ -- $ 11,292
Sales of parts, disposables and equipment ................. 1,636 -- 1,636
-------- -------- --------
12,928 -- 12,928
Costs and Expenses:
Cost of sales ............................................. 294 -- 294
Operating ................................................. 5,587 (945)(i) 4,642
Selling ................................................... 1,775 (300)(i) 1,475
General and administrative ................................ 3,516 (595)(i) 2,921
Depreciation and amortization ............................. 888 907 (ii) 1,795
-------- -------- --------
Operating Income ............................................. 868 933 1,801
Other (Charges) Credits:
Interest expense .......................................... (154) (1,994)(iii) (2,148)
Interest income ........................................... 10 -- 10
Other ..................................................... 189 -- 189
-------- -------- --------
Income (Loss) from Continuing Operations before Income Taxes.. 913 (1,061) (148)
Income Taxes ................................................. 347 (406)(iv) (59)
-------- -------- --------
Income (Loss) from Continuing Operations ..................... $ 566 $ (655) $ (89)
======== ======== ========
</TABLE>
17
<PAGE>
- -----------
(i) Reflects management's estimate of cost savings related to the closing of
duplicate facilities and the elimination of personnel partially offset by
increases in Company personnel. There can be no assurance, however, that
the Company will realize such cost savings.
(ii) Reflects the increase in depreciation and amortization from the allocation
of the purchase price to property, plant and equipment and intangible
assets, including goodwill. Property, plant and equipment, which is
assumed to approximate historic net book value, will be depreciated over
three years. The intangible assets represent a covenant not to compete
which will be amortized over five years, five patents which will be
amortized over the remaining life of each respective patent (which
averages approximately 11 years), and goodwill which will be amortized
over 20 years. Depreciation and amortization is calculated as follows:
<TABLE>
<CAPTION>
Year Six Months Six Months
Ended Ended Ended
August 31, February 28, February 28,
1997 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Property, plant and equipment............................ $1,573 $ 787 $ 787
Covenant not to compete.................................. 100 50 50
Patents.................................................. 455 228 228
Goodwill................................................. 1,460 730 730
------ ------ ------
3,588 1,795 1,795
Historical............................................... (1,740) (875) (888)
------ ------ ------
$1,848 $ 920 $ 907
====== ====== ======
</TABLE>
(iii) Reflects the increase in interest expense as a result of $50.0 million of
borrowings to consummate the CHI Acquisition, including related costs and
expenses. Funds to consummate the acquisition were assumed to have been
borrowed under the Term Loan Facility at an interest rate of 8.59% (LIBOR
plus 2.75%).
(iv) Reflects the effects on income tax expense of the historical operations of
the CH Medical Business and the adjustments described in the footnotes
herein at an incremental effective tax rate of 40%.
18
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
As of March 31, 1998
-----------------------------------------------------------------------------------------------------
Consolidated Pro Forma
Pro Forma MEDIQ/PRN Holdings Holdings Adjustments
Adjustments Pro Forma Pro Forma/ Pro Forma for the
Historical for the for the Consolidating for the CHI
MEDIQ/PRN Transactions Transactions Adjustments(H) Transactions Acquisition(I)
--------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash ................. $ 3,846 $ 2,116(A) $ 5,962 $ 79 $ 6,041 $ --
Accounts receivable,
net ............... 46,385 -- 46,385 -- 46,385 7,757
Inventories .......... 15,428 -- 15,428 -- 15,428 5,024
Deferred income
taxes ............. 3,728 -- 3,728 569 4,297 --
Other
current assets .... 1,197 2,636(F) 3,833 -- 3,833 --
-------- -------- -------- -------- -------- --------
Total
current assets.. 70,584 4,752 75,336 648 75,984 12,781
Property, plant and
equipment, net .... 113,703 -- 113,703 -- 113,703 4,345
Goodwill ............. 55,558 -- 55,558 -- 55,558 30,069
Other assets ......... 13,408 8,383(B) 21,791 3,779 25,570 6,205
-------- -------- -------- -------- -------- --------
Total assets .... $253,253 $ 13,135 $266,388 $ 4,427 $270,815 $ 53,400
======== ======== ======== ======== ======== ========
<CAPTION>
As of March 31, 1998
--------------------
Consolidated
Holdings
Pro Forma
for the
Transactions
and CHI
------------
<S> <C>
ASSETS
Cash ................. $ 6,041
Accounts receivable,
net ............... 54,142
Inventories .......... 20,452
Deferred income
taxes ............. 4,297
Other
current assets .... 3,833
--------
Total
current assets.. 88,765
Property, plant and
equipment, net .... 118,048
Goodwill ............. 85,627
Other assets ......... 31,775
--------
Total assets .... $324,215
========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheets
19
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
As of March 31, 1998
------------------------------------------------------------------------------------------------
Consolidated Pro Forma
Pro Forma MEDIQ/PRN Holdings Holdings Adjustments
Adjustments Pro Forma Pro Forma/ Pro Forma for the
Historical for the for the Consolidating for the CHI
MEDIQ/PRN Transactions Transactions Adjustments(H) Transactions Acquisition(I)
--------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
AND STOCKHOLDERS' EQUITY
Accounts payable ............ $ 10,667 $ -- $ 10,667 $ -- $ 10,667 $ --
Accrued expenses ............ 13,075 -- 13,075 2,169 15,244 --
Federal & state taxes
payable .................. 837 -- 837 33 870 --
Other current liabilities ... 558 -- 558 -- 558 3,400
Current portion of
long-term debt ........... 6,534 (4,698)(C) 1,836 -- 1,836 --
--------- --------- --------- --------- --------- ---------
Total current
liabilities ......... 31,671 (4,698) 26,973 2,202 29,175 3,400
Existing senior debt ........ 127,311 (126,829)(D) 482 -- 482 --
New Credit Facility ......... -- 100,000 (E) 100,000 -- 100,000 50,000
Debentures .................. -- -- -- 75,000 75,000 --
Notes ....................... -- 240,000 (E) 240,000 -- 240,000 --
Exchangeable Debentures ..... -- -- -- 10,055 10,055 --
Deferred income
taxes and
other liabilities ........ 29,851 (2,731)(F) 27,120 (2,394) 24,726 --
--------- --------- --------- --------- --------- ---------
Total liabilities ...... 188,833 205,742 394,575 84,863 479,438 53,400
Mandatorily Redeemable
Preferred Stock:
Series A
Preferred Stock .......... -- -- -- 78,235 78,235 --
Series C
Preferred Stock ......... -- -- -- 30,000 30,000 --
--------- --------- --------- --------- --------- ---------
-- -- -- 108,235 108,235 --
Stockholders'
Equity: Holdings
Preferred Stock .......... -- -- -- -- -- --
Series B Preferred Stock .... -- -- -- 30 30 --
Common Stock ................ 10 -- 10 -- 10 --
Capital in excess of
par value ................ 86,457 -- 86,457 (46,497) 39,960 --
Retained earnings ........... 58,830 (8,050)(F) 50,780 (407,638) (356,858) --
Treasury stock .............. -- -- -- -- -- --
Advances to affiliates ...... (80,877) (184,557)(G) (265,434) 265,434 -- --
--------- --------- --------- --------- --------- ---------
Total stockholders'
equity............... 64,420 (192,607) (128,187) (188,671) (316,858) --
--------- --------- --------- --------- --------- ---------
Total Liabilities and
Stockholders'
Equity .............. $ 253,253 $ 13,135 $ 266,388 $ 4,427 $ 270,815 $ 53,400
========= ========= ========= ========= ========= =========
<CAPTION>
As of March 31, 1998
--------------------
Consolidated
Holdings
Pro Forma
for the
Transactions
and CHI
------------
<S> <C>
LIABILITIES
AND STOCKHOLDERS' EQUITY
Accounts payable ............ $ 10,667
Accrued expenses ............ 15,244
Federal & state taxes
payable .................. 870
Other current liabilities ... 3,958
Current portion of
long-term debt ........... 1,836
---------
Total current
liabilities ......... 32,575
Existing senior debt ........ 482
New Credit Facility ......... 150,000
Debentures .................. 75,000
Notes ....................... 240,000
Exchangeable Debentures ..... 10,055
Deferred income
taxes and
other liabilities ........ 24,726
---------
Total liabilities ...... 532,838
Mandatorily Redeemable
Preferred Stock:
Series A
Preferred Stock .......... 78,235
Series C
Preferred Stock ......... 30,000
---------
108,235
Stockholders'
Equity: Holdings
Preferred Stock .......... --
Series B Preferred Stock .... 30
Common Stock ................ 10
Capital in excess of
par value ................ 39,960
Retained earnings ........... (356,858)
Treasury stock .............. --
Advances to affiliates ...... --
---------
Total stockholders'
equity............... (316,858)
---------
Total Liabilities and
Stockholders'
Equity .............. $ 324,215
=========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheets
20
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
(A) The pro forma adjustments to cash reflect the following:
<TABLE>
<S> <C>
Total Sources:
New Credit Facility.............................................. $100,000
Debentures....................................................... 75,000
Notes............................................................ 240,000
Preferred Stock.................................................. 138,235
Common Stock..................................................... 10,000
--------
563,235
--------
Total Uses:
Merger Consideration............................................. 390,704
Repayment of Existing Credit Facility (see Notes C and D below).. 131,527
Financing fees and expenses...................................... 18,700
Other fees and expenses.......................................... 18,600
Deferred compensation payments................................... 1,588
--------
561,119
--------
Working Capital................................................ $ 2,116
========
(B) Reflects the increase in deferred financing fees/debt issue costs
related to the New Credit Facility and the Notes, as follows:
Existing deferred financing fees related to debt to
be refinanced as a result of the Merger.............................. $ (6,417)
Deferred financing fees related to the debt to be
issued as a result of the Merger..................................... 14,800
--------
$ 8,383
========
</TABLE>
(C) Represents the repayment of the funds outstanding under the Existing Credit
Facility with a portion of the proceeds from the New Credit Facility. The
New Credit Facility is not anticipated to require principal payments in the
first year. The remaining indebtedness of $1,836 represents the current
portion of capital lease obligations.
(D) Represents the repayment of the funds outstanding under the Existing Credit
Facility with a portion of the proceeds from the New Credit Facility. The
remaining indebtedness of $482 represents the long-term portion of capital
lease obligations.
(E) Reflects the borrowings under the New Credit Facility and the Notes.
(F) Reflects the costs associated with employment contracts providing for
additional compensation as a result of the Merger, net of related income
tax effects, and the write-off of financing fees, net of related income tax
effects, related to the Existing Credit Facility repaid as a result of the
Merger, as follows:
Gross Tax Effect Net
------- ---------- ------
Additional Compensation................ $ 7,000 $2,800 $4,200
Write-off of Deferred Fees............. 6,417 2,567 3,850
------- ------ ------
$13,417 $5,367 $8,050
======= ====== ======
Taxes were calculated at an incremental effective tax rate of 40%. Of the
$5,367 of total taxes, $2,636 of the tax effect of the above transactions
were used to increase the Company's income tax receivable reflected in
"Other current assets." Such amount represents the Company's historical
fiscal 1997 income tax liability. The remainder of the tax effect of $2,731
is reflected in "Deferred income taxes and other liabilities."
(G) Reflects funds advanced to Holdings from the proceeds of the New Credit
Facility and the Notes to consummate the Merger.
21
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheets (Continued)
(unaudited)
(in thousands)
(H) The following unaudited pro forma balance sheet has been based on the
unaudited accounting records of Holdings as of March 31, 1998. No separate
financial statements of Holdings have been prepared for any period. The pro
forma/consolidating adjustments reflect the adjustments required to
consolidate Holdings with MEDIQ/PRN and to reflect the Transactions related
solely to Holdings as if they had occurred on March 31, 1998.
<TABLE>
<CAPTION>
As of March 31, 1998
---------------------------------------------------------------------
Historical Pro Forma Consolidating Pro Forma/
Holdings Adjustments Adjustments(ix) Consolidating
---------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash ........................................ $ 79 $-- $-- $ 79
Deferred income taxes ....................... -- -- 569 569
--------- --------- --------- ---------
Total current assets ..................... 79 -- 569 648
Other assets ................................ 141,371 3,900 (i) (141,492) 3,779
--------- --------- --------- ---------
Total assets ............................. $ 141,450 $ 3,900 $(140,923) $ 4,427
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ............................ $ 1,859 -- $ 310 $ 2,169
Federal and state taxes payable ............. 513 -- (480) 33
--------- --------- --------- ---------
Total current liabilities ................ 2,372 -- (170) 2,202
Debentures .................................. -- 75,000 (ii) -- 75,000
Exchangeable Debentures(viii) ............... 10,055 -- -- 10,055
Deferred income taxes and other liabilities . (30,582) (1,588)(iii) 29,776 (2,394)
--------- --------- --------- ---------
Total liabilities ........................ (18,155) 73,412 29,606 84,863
Mandatory Redeemable Preferred Stock:
Series A Preferred Stock .................... -- 78,235 (iv) -- 78,235
Series C Preferred Stock .................... -- 30,000 (iv) -- 30,000
--------- --------- --------- ---------
-- 108,235 -- 108,235
Stockholders' Equity:
Holdings
Preferred Stock .......................... 3,322 (3,322)(v) -- --
Series B Preferred Stock .................... -- 30 (iv) -- 30
Common Stock ................................ 20,068 10 (iv) (10) --
-- (20,068)(v) -- --
Capital in excess of par value .............. 27,102 29,970 (iv) (86,457) (46,497)
-- 9,990 (iv) -- --
-- (27,102)(v) -- --
Retained earnings ........................... 1,685 (344,458)(v) (53,265) (407,638)
-- (11,600)(vi) -- --
Treasury stock .............................. (4,246) 4,246 (v) -- --
Advances to affiliates ...................... 111,674 184,557 (vii) (30,797) 265,434
--------- --------- --------- ---------
Total stockholders' equity ............... 159,605 (177,747) (170,529) (188,671)
--------- --------- --------- ---------
Total liabilities and
stockholders' equity ................. $ 141,450 $ 3,900 $(140,923) $ 4,427
========= ========= ========= =========
</TABLE>
- -----------
(i) Reflects the increase in debt issue costs for the Debentures.
(ii) Reflects the borrowings under the Debentures.
(iii) Reflects the payout of Holdings' deferred compensation plan of $1,588
under its provisions for change of control as a result of the Merger.
(iv) Reflects the presently anticipated issuance of securities of Holdings to
the BRS Entities, the Co-Investors, the Rotko Entities and the Management
Stockholders, as well as shares of Series A Preferred Stock issued to
holders of Holdings Shares in the Merger (including the Rotko Entities and
the Management Stockholders), as follows:
22
<PAGE>
<TABLE>
<CAPTION>
BRS Entities Holders of
and the Rotko Management Holdings
Co-Investors Entities Stockholders Shares Total
------------ -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Mandatorily Redeemable Preferred Stock:
Series A Preferred Stock ............. $ 56,246 $ -- $2,015 $19,974 $ 78,235
Series C Preferred Stock.............. 28,962 -- 1,038 -- 30,000
-------- ------- ------ ------- --------
Total mandatorily redeemable
preferred stock................. 85,208 -- 3,053 19,974 108,235
Series B Preferred Stock:
At par................................ 16 13 1 -- 30
Capital in excess of par.............. 16,008 13,389 573 -- 29,970
-------- ------- ------ ------- --------
Total Series B Preferred Stock...... 16,024 13,402 574 -- 30,000
-------- ------- ------ ------- --------
Total preferred stock .............. $101,232 $13,402 $3,627 $19,974 $138,235
======== ======= ====== ======= ========
Common Stock:
At par................................ 8 1 1 -- 10
Capital in excess of par.............. 8,284 1,097 609 -- 9,990
-------- ------- ------ ------- --------
Total common stock................. $ 8,292 $ 1,098 $ 610 $ -- $ 10,000
======== ======= ====== ======= ========
</TABLE>
Year 1 dividends on the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock are anticipated to be $10.2 million, $4.0
million, $4.1 million, respectively. Each series of preferred stock
includes compounding features which will increase the amount of dividends
in future years if accrued dividends from prior years have not been paid.
(v) Reflects the purchase of Holdings Shares for the Merger Consideration, as
follows:
Preferred stock................................................. $ 3,322
Common stock.................................................... 20,068
Capital in excess of par........................................ 27,102
Retained earnings............................................... 344,458
Treasury stock.................................................. (4,246)
--------
Total..................................................... $390,704
========
(vi) Reflects the fees and expenses anticipated to be paid to effect the
Transactions.
(vii) Reflects funds advanced from MEDIQ/PRN from the proceeds of the New
Credit Facility and the Notes to consummate the Merger.
(viii) On December 31, 1996, the Company sold to NutraMax all the shares of
NutraMax Common Stock owned by the Company at a price of $9.00 per share.
Under the terms of the agreement, the Company received from NutraMax cash
and an interest bearing promissory note. The note is payable when
NutraMax shares owned by the Company, which currently are held in escrow
in support of the Company's Exchangeable Debentures, are released from
escrow. Upon consummation of the Merger, the holders of Exchangeable
Debentures may require the Company to repurchase them.
(ix) Reflects the historical adjustments required to consolidate Holdings and
MEDIQ/PRN.
23
<PAGE>
(I) The following unaudited pro forma statement of net investment in assets
has been based on the CH Medical Financial Statements as of February 28,
1998. The pro forma statement of net investment in assets is based on
management's best estimate of the effects of the CHI Acquisition and the
initial financing thereof. The CHI Acquisition will be accounted for
using the purchase method of accounting whereby the aggregate purchase
price will be allocated to the assets acquired and liabilities assumed
based upon their respective fair values. The allocation of the aggregate
purchase price reflected below is preliminary. The final allocation of
the purchase price is contingent upon studies and valuations which have
not yet been completed. Management is unable to predict whether any
adjustment as a result of the foregoing will have a material effect.
<TABLE>
<CAPTION>
As of February 28, 1998
--------------------------------------------------------------------------
Elimination
of Items Not Acquisition
Historical Acquired(i) Adjustments Pro Forma
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash .......................... $ 251 $ (251) $ -- $ --
Accounts receivable, net ...... 7,757 -- -- 7,757
Inventories ................... 5,024 -- -- 5,024
-------- -------- -------- --------
Total current assets ....... 13,032 (251) -- 12,781
Property, plant and
equipment, net ............. 4,379 (34) -- 4,345
Goodwill ...................... -- -- 30,069(ii) 30,069
Other assets .................. 1,518 (813) 5,500(ii) 6,205
-------- -------- -------- --------
Total assets ............... 18,929 (1,098) 35,569 53,400
-------- -------- -------- --------
LIABILITIES
Accounts payable .............. 1,231 (1,231) -- --
Accrued expenses .............. 552 (552) -- --
Other current liabilities ..... 110 (110) 3,400(ii) 3,400
Current portion of
long-term debt ............. 4,148 (4,148) -- --
-------- -------- -------- --------
Total current liabilities .. 6,041 (6,041) 3,400 3,400
Senior debt ................... 151 (151) -- --
Senior credit facility ........ -- -- 50,000(iii) 50,000
Deferred income taxes and other
liabilities ................ 338 (338) -- --
-------- -------- -------- --------
Total liabilities .......... 6,530 (6,530) 53,400 53,400
-------- -------- -------- --------
Net investment
in assets .......... $ 12,399 $ 5,432 $(17,831)(ii) $ --
======== ======== ======== ========
</TABLE>
- -----------
(i) Reflects the elimination of assets and liabilities not acquired or
assumed by the Company.
(ii) Reflects the preliminary allocation of the purchase price for the CHI
Acquisition, as follows:
Other assets:
Patents............................................. $ 5,000
Covenants not to compete............................ 500
Goodwill.............................................. 30,069
Reserves for closing duplicate
facilities and eliminating CHI
personnel........................................... (3,400)
Net investment in assets after
eliminating the effects of assets
and liabilities not to be acquired
or assumed (see footnote (i) above)................. 17,831
--------
Purchase price........................................ $ 50,000
========
(iii) Reflects the indebtedness incurred to finance the CHI Acquisition and
related costs and expenses.
24
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
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 hereunto duly authorized.
MEDIQ Incorporated
(Registrant)
May 20, 1998
(Date)
/s/ Jay M. Kaplan
-------------------------------
Jay M. Kaplan
Senior Vice President-Finance
and Chief Financial Officer
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
1998 1997
----------- -----------
Six Months Ended
February 28,
----------------------------
Net Rental and Sales ......................... $12,927,435 $12,322,897
Rental Expenses and Cost of Goods Sold ....... 5,881,390 5,791,887
----------- -----------
Gross Profit ................................. 7,046,045 6,531,010
----------- -----------
Operating Expenses (Note 4):
Selling expenses .......................... 1,774,325 1,707,220
Depreciation .............................. 887,951 874,783
General and administrative expenses ....... 3,515,483 3,226,643
----------- -----------
Total Operating Expenses ..................... 6,177,759 5,808,646
----------- -----------
Operating Income ............................. 868,286 722,364
----------- -----------
Other Income (Expense):
Interest expenses ......................... (154,007) (74,713)
Interest income ........................... 9,808 3,867
Other income .............................. 189,142 381,658
----------- -----------
Total Other Income (Expense) ................. 44,943 310,812
----------- -----------
Income Before Income Taxes ................... 913,229 1,033,176
----------- -----------
Income Taxes (Note 6) ........................ 347,028 431,456
----------- -----------
Net Income ................................... $ 566,201 $ 601,720
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
1
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF NET ASSETS
February 28, 1998
ASSETS
Current:
Cash and cash equivalents .................................... $ 250,862
Accounts receivable-trade, net of allowance for doubtful
accounts of $1,172,837 (Note 3)............................ 7,047,924
Accounts receivable-other .................................... 709,054
Inventories (Note 1 and 3) ................................... 5,023,788
-----------
Total current assets ............................................ 13,031,628
-----------
Net property and equipment (Notes 2, 3 and 5) ................... 4,379,151
-----------
Other assets .................................................... 1,517,539
-----------
$18,928,318
===========
LIABILITIES
Current
Accounts payable ............................................. $ 1,231,560
Accrued expenses ............................................. 551,918
Dealer deposits .............................................. 25,470
Revolving line of credit (Note 3) ............................ 4,148,002
Other liabilities ............................................ 84,000
-----------
Total current liabilities ....................................... 6,040,950
-----------
Notes payable-other ............................................. 88,000
Note
payable officer ............................................ 62,609
Federal income taxes payable (Note 7)............................ --
Deferred income taxes (Note 7) .................................. 338,442
-----------
Total liabilities ............................................... 6,530,001
-----------
Net assets ...................................................... $12,398,317
===========
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
February 28,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net Income ......................................... $ 566,201 $ 601,720
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation .................................... 887,951 874,783
Allowance for Bad Debts ......................... 440,000 --
Changes in operating assets and liabilities:
Accounts receivable-trade ....................... 101,596 (1,929,099)
Accounts receivable-other ....................... (508,627) 1,000
Inventories ..................................... (797,505) (159,858)
Other assets .................................... (18,796) (7,508)
Accounts payable ................................ 248,126 893,132
Accrued expenses ................................ (250,425) (158,118)
Other liabilities ............................... (374,891) --
Notes payable-other ............................. (39,000) --
----------- -----------
Cash provided by operating activities ................. 254,630 116,052
----------- -----------
Cash Used in Investing Activities:
Capital expenditures ............................... (54,481) (1,503,256)
----------- -----------
Financing Activities:
Net borrowing under notes payable-officer .......... (222,706) 167,037
Net borrowings under revolving line of credit ...... (33,661) 1,149,437
----------- -----------
Cash provided by (used in) financing activities ....... (256,367) 1,316,474
----------- -----------
Net decrease in cash and cash equivalents ............. (56,218) (70,730)
Cash and cash equivalents at beginning of year ........ 307,080 297,473
----------- -----------
Cash and cash equivalent at end of period ............. $ 250,862 $ 226,743
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Description of Business and Basis Presentation -- The statements of net
assets, of income and cash flows relate to the operations of CH Medical, Inc.
and Subsidiaries (the "Company"). The Company is engaged in the manufacture,
sale and rental of special care hospital beds and associated acute care air
support therapy systems. These financial statements are prepared pursuant to a
letter of intent between CH Industries and MEDIQ ("MEDIQ") Incorporated whereby
the net operating assets of CH Medical, Inc. will be acquired by MEDIQ.
During the period covered by the financial statements, the businesses
were conducted as an integral part of CH Industries overall operations, and
separate financial statements were not prepared for the businesses. These
financial statements have been prepared from CH Industries' historical
accounting records. The financial statements also include various allocated
costs and expenses as described herein, which are not necessarily indicative of
the costs and expense which would have resulted if the businesses had been
operated as a separate company. Therefore, the statement of operations may not
be indicative of the results of operation that would have resulted if the
Company were operated on a stand alone basis. All of the allocation and
estimates reflected in the financial statements are based on assumptions that
management believes reasonable under the circumstances.
Certain expenses, consisting primarily of costs related to certain
employees, the shareholder and related parties of the Company, and other
non-operating items have been excluded from the financial statements presented,
as they are not indicative of the net operating assets and liabilities nor the
operations to be acquired under the letter of intent.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of CH Medical, Inc. and the following
wholly-owned subsidiaries:
Cardio Systems International, Inc.
Cardio Systems Manufacturing, Inc.
Cardio Systems-Austin, Ltd
Cardio Systems-Dallas, Ltd.
Cardio Systems-Atlanta, Inc.
Cardio Systems-Chattanooga, Inc.
Cardio Systems-Chicago, Inc.
Cardio Systems-Fort Myers, Inc.
Cardio Systems-Kansas City, Inc.
Cardio Systems-Memphis, Inc.
Cardio Systems-Miami, Inc.
4
<PAGE>
Cardio Systems-Oklahoma City, Inc.
Cardio Systems-Sacramento, Inc.
Cardio Systems-Tampa, Inc.
Cardio Systems North America Dealer Corporation, Inc.
Cardio Systems Operations, Inc.
Cardio Systems Partners, Inc.
Cardio Systems Sales, Inc.
Cardio Systems of Texas-Austin, Inc
Cardio Systems of Texas-Dallas, Inc.
SCD Industries, Inc.
Special Care Delivery, Inc.
All significant intercompany transactions and balances have been
eliminated in consolidation.
Interim Financial Information -- The interim amounts are not
necessarily indicative of the results of operations and cash flows for a
full year.
Revenue Recognition -- Services and rental revenue are recognized as
services are rendered. Sales and other revenue are recognized when products are
shipped.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of ninety days or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value). Costs include material, labor and
manufacturing overhead costs. Inventory expected to be converted into equipment
for short-term rental has been reclassified to property, plant and equipment.
Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Betterment's which extend the useful of the equipment are
capitalized.
Depreciation -- Depreciation on property, plant and equipment is
calculated on the straight-line method over the estimated useful lives (thirty
to forty years for the buildings and between three and ten years for most of the
Company's other property and equipment) of the assets.
Income Taxes -- The Company recognizes certain transactions in
different time periods for the financial reporting and income tax purposes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. The provision for deferred income taxes represents the change in deferred
income tax accounts during the period.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make
5
<PAGE>
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Long Lived Assets -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," management
reviews long-lived assets and intangible assets for impairment whenever events
or changes in circumstances indicate the carrying amount of an asset may not be
fully recoverable. As part of the assessment, management analyzes the
undiscounted cash flows for each product that has significant long-lived or
intangible asset values associated with it. This analysis for the asset values
as of August 31, 1997 indicated there was no impairment to these assets'
carrying values.
New Accounting Pronouncements -- Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") is
effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
has yet to determine the preferred format for presenting this information.
6
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Inventories
Inventories are summarized as follows:
February 28,
1998
------------
Raw materials .............................................. $ 351,665
Work-in-process ............................................ 3,365,938
Finished goods ............................................. 1,306,185
------------
Total ...................................................... $ 5,023,788
============
2. Property and Equipment
Property and equipment consist of the following:
February 28,
1998
------------
Rental medical equipment ................................... $ 9,609,993
Machinery and equipment .................................... 463,336
Office equipment ........................................... 514,196
Building and improvements .................................. 216,933
Vehicles ................................................... 89,142
Land ....................................................... 8,536
------------
Total ...................................................... 10,902,136
Accumulated depreciation ................................... (6,522,985)
------------
Net property and equipment ................................. $ 4,379,151
============
3. Line of Credit
CH Industries has a $7,500,000 revolving line of credit with a bank
which expires, May 1, 1999. The interest rate is at the 30-day LIBOR rate plus
2.25 percent. The Company has been allocated a portion of the line of credit
based on the ratio of debt to current assets. At February 28, 1998, the
Company's interest rate was 7.84 percent. The outstanding borrowings are secured
by CH Industries' accounts receivable, inventories (including those
7
<PAGE>
of the Company) and the guarantee of the parent's stockholder. Certain financial
covenants exist related to CH Industries total debt ratio, tangible net worth,
working capital, capital expenditures and additional debt.
4. Operating Expenses and Other Allocation Expenses
All operating expenses are allocated to the business using procedures
deemed appropriate to the nature of the expense involved. The procedures
utilized various allocation bases such as relative investments and number of
employees, and direct effort expended. Interest expense is determined at the
corporate level based on the consolidated indebtedness of CH Industries and
allocated to the business on the basis of their proportionate share of current
assets of CH Industries. CH Industries management believes the allocations are
reasonable, but they are not necessarily indicative of the costs that would have
been incurred if the businesses had been a separate company.
5. Related Party Transactions
The Company leases certain office space, warehouse facilities and
equipment from its stockholder, CH Realty and CH Leasing, Ltd., limited
partnerships controlled 99 percent by the stockholder. Rental expenses for
operating leases to affiliates was $145,296 and $191,869 for the six months
ended February 28, 1998 and 1997, respectively.
6. Income Taxes
Federal, state and local income taxes are allocated based upon an
effective tax rate of 38 and 42 percent for the six months ended February 28,
1998 and 1997, respectively. The allocation approximates the results that would
occur if the business were a separate taxpayer. Income tax expense differs from
the amount computed by applying the federal statutory rate of 34 percent
primarily due to varying state income taxes.
Deferred taxes result from temporary differences arising from differing
methods of depreciation for tax and financial reporting purposes and from
allowance for doubtful accounts not deductible for tax purposes.
7. Supplemental
Interest and income taxes paid during the six months ended February
28, 1998 was $905,000 compared with interest and income taxes paid during the
six months ended February 28, 1997 of $1,677,000. These amounts were allocated
to the Company based on average outstanding debt and net income before taxes.
8
