<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. MEDIQ INCORPORATED
(Exact Name of Registrant as Specified in Its (Exact Name of Registrant as Specified in Its
Charter) Charter)
</TABLE>
<TABLE>
<S> <C> <C> <C>
DELAWARE 95-3692387 DELAWARE 51-0219413
(State or Other (I.R.S. Employer (State or Other (I.R.S. Employer
Jurisdiction Identification No.) Jurisdiction Identification No.)
of Incorporation or of Incorporation or
Organization) Organization)
</TABLE>
7352
(Primary Standard Industrial Classification Code Number)
------------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
------------------------
<TABLE>
<S> <C>
ONE MEDIQ PLAZA JAY M. KAPLAN
Pennsauken, New Jersey 08110 One Mediq Plaza
(609) 665-9300 Pennsauken, New Jersey 08110
(609) 665-9300
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrants' Including Area Code,
Principal Executive Offices) of Agent for Service)
</TABLE>
------------------------
WITH COPIES TO:
BRUCE B. WOOD, ESQ.
DECHERT PRICE & RHOADS
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-3500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF
OF SECURITIES AMOUNT TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED UNIT (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
11% Senior Subordinated Notes due 2008 of
MEDIQ/PRN Life Support Services, Inc. $190,000,000 $1,000.00 $190,000,000 $56,050
Guarantees of Senior Subordinated Notes $190,000,000 -- -- None
13% Senior Discount Debentures due 2009 of
MEDIQ Incorporated(2) $140,885,000 $539.65 $76,028,787 $22,428
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) The "Amount to be Registered" with respect to the 13% Senior Discount
Debentures due 2009 represents the aggregate principal amount at maturity of
such debentures. The 13% Senior Discount Debentures due 2009 were sold at a
substantial discount from their principal amount at maturity. The
registration fee with respect to the 13% Senior Discount Debentures due 2009
was calculated based on the approximate accreted value thereof as of July 6,
1998 determined pursuant to the provisions of the indenture governing such
debentures.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
MEDIQ INCORPORATED
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION INDUSTRIAL I.R.S. EMPLOYER
OF CLASSIFICATION CODE IDENTIFICATION
NAME INCORPORATION NUMBER NO.
- ----------------------------------------------------------------- -------------- ------------------- ----------------
<S> <C> <C> <C>
MEDIQ Diagnostic Centers, Inc.................................... Delaware 8741 22-2703398
MEDIQ Diagnostic Centers- I, Inc................................. Delaware 8741 22-2721914
MEDIQ Imaging Services, Inc...................................... Delaware 6719 22-2888200
MEDIQ Investment Services, Inc................................... Delaware 6719 51-0261761
MEDIQ Management Services, Inc................................... Delaware 8742 22-2744388
MEDIQ Mobile X-Ray Services, Inc................................. Delaware 6719 23-6764081
MDTC Haddon, Inc................................................. Delaware 8741 22-2987001
Value-Med Products, Inc.......................................... Delaware 6719 22-3387171
American Cardiovascular Imaging Labs, Inc........................ Pennsylvania 6719 23-2485277
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 13, 1998
PRELIMINARY PROSPECTUS
<TABLE>
<S> <C>
OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES 13% SENIOR DISCOUNT DEBENTURES
DUE 2008 DUE 2009
IN EXCHANGE FOR IN EXCHANGE FOR
11% SENIOR SUBORDINATED NOTES 13% SENIOR DISCOUNT DEBENTURES
DUE 2008 DUE 2009
OF OF
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. MEDIQ INCORPORATED
</TABLE>
THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 1998, UNLESS EXTENDED
--------------
Pursuant to the terms and subject to the conditions set forth in this
Prospectus and the accompanying letters of transmittal, (i) MEDIQ/PRN Life
Support Services, Inc., a Delaware Corporation ("MEDIQ/PRN"), and the Subsidiary
Guarantors (as defined) hereby offer (the "Notes Exchange Offer") to exchange
$1,000 principal amount of registered 11% Senior Subordinated Notes Due 2008
(the "New Notes") issued by MEDIQ/PRN for each $1,000 principal amount of
unregistered 11% Senior Subordinated Notes Due 2008 (the "Old Notes" and,
together with the New Notes, the "Notes") issued by MEDIQ/PRN, of which an
aggregate principal amount of $190,000,000 is outstanding and (ii) MEDIQ
Incorporated, a Delaware corporation and the sole stockholder of MEDIQ/PRN
("Holdings") hereby offers (the "Debenture Exchange Offer" and, together with
the Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal
amount at maturity of registered 13% Senior Discount Debentures Due 2009 (the
"New Debentures") issued by Holdings for each $1,000 principal amount at
maturity of unregistered 13% Senior Discount Debentures Due 2009 (the "Old
Debentures" and, together with the New Debentures, the "Debentures") issued by
Holdings, of which an aggregate principal amount at maturity of $140,885,000 is
outstanding. The Old Notes and the Old Debentures are sometimes collectively
referred to herein as the "Old Securities," the New Notes and the New Debentures
are sometimes collectively referred to herein as the "New Securities" and the
Notes and Debentures are sometimes collectively referred to as the "Securities."
MEDIQ/PRN and Holdings are sometimes collectively referred to herein as the
"Issuers."
The form and terms of the New Securities are identical to the form and terms
of the Old Securities except that (i) interest on the New Notes shall accrue
from the date of issuance of the Old Notes, (ii) the Accreted Value (as defined)
of the New Debentures will be calculated from the date of issuance of the Old
Debentures, and (iii) the New Securities are being registered under the
Securities Act of 1933, as amended (the "Securities Act"), and will not bear any
legends restricting their transfer. The New Notes will evidence the same debt as
the Old Notes and will be issued pursuant to, and entitled to the benefits of,
the indenture governing the Old Notes. The New Debentures will evidence the same
debt as the Old Debentures and will be issued pursuant to, and entitled to the
benefits of, the indenture governing the Old Debentures. The Exchange Offers are
being made in order to satisfy certain contractual obligations of MEDIQ/PRN and
Holdings. See "The Exchange Offers," "Description of Notes" and "Description of
Debentures."
Each broker-dealer that receives New Securities for its own account pursuant
to the Exchange Offers must acknowledge that it will deliver a prospectus in
connection with any resale of those New Securities. The letters of transmittal
accompanying this Prospectus state that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Securities received in exchange for Old
Securities where such Old Securities were acquired by such broker-dealer as a
result of market-making activities or other trading activities. MEDIQ/ PRN and
Holdings have agreed that, for a period of 180 days after the Expiration Date,
they will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
No public market has existed for the Old Securities before the Exchange
Offers. MEDIQ/PRN and Holdings currently do not intend to list the New
Securities on any securities exchange or to seek approval for quotation through
any automated quotation system, and no active public market for the New
Securities is currently anticipated. MEDIQ/PRN and Holdings will pay all the
expenses incident to the Exchange Offers.
The Exchange Offers are not conditioned upon any minimum principal amount of
Old Notes or Old Debentures being tendered for exchange pursuant to the Exchange
Offers.
(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
NEW SECURITIES.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(CONTINUED FROM FRONT COVER)
The New Notes will bear interest at a rate of 11% per annum, payable on June
1 and December 1 of each year, commencing December 1, 1998. The New Notes will
mature on June 1, 2008. The New Notes will not be redeemable at the option of
MEDIQ/PRN prior to June 1, 2003, except that until June 1, 2001, MEDIQ/PRN may
redeem, at its option, up to 25% of the original principal amount of the Notes
at the redemption price set forth herein with the net proceeds of one or more
Public Equity Offerings (as defined) following which there is a Public Market
(as defined) if at least $142.5 million aggregate principal amount of the Notes
remains outstanding after any such redemption. On or after June 1, 2003, the New
Notes may be redeemed at the option of MEDIQ/PRN, in whole or in part, at the
redemption prices set forth herein plus accrued and unpaid interest to the date
of redemption.
The Old Debentures were issued at a substantial discount from the principal
amount at maturity of such debentures. Principal on each New Debenture will
accrete from the date of issuance of the Old Debentures to a principal amount of
$1,000 on June 1, 2003, representing a yield to maturity of 13% (computed on a
semi-annual bond equivalent basis). Except as described herein, no cash interest
will accrue on the New Debentures prior to June 1, 2003. Thereafter, the New
Debentures will accrue cash interest at a rate of 13% per annum, and cash
interest will be payable on June 1 and December 1 of each year, commencing
December 1, 2003. The New Debentures will mature on June 1, 2009. The New
Debentures will not be redeemable at the option of Holdings prior to June 1,
2003, except that until June 1, 2001, Holdings may redeem, at its option, up to
25% of the Accreted Value (as defined) of the Debentures at the redemption price
set forth herein with the net proceeds of one or more Public Equity Offerings
following which there is a Public Market if at least $105.6 million aggregate
principal amount at maturity of the Debentures remains outstanding after any
such redemption. On or after June 1, 2003, the New Debentures may be redeemed at
the option of Holdings, in whole or in part, at the redemption prices set forth
herein plus accrued and unpaid interest to the date of redemption. The New
Debentures will bear original issue discount ("OID"), and the holders of the New
Debentures will be required to include such OID in gross income for U.S. Federal
income tax purposes on a constant yield to maturity basis, in advance of the
receipt of the cash payments of which such income is attributable. See "Certain
U.S. Federal Income Tax Considerations."
The New Notes will be unsecured senior subordinated obligations of
MEDIQ/PRN, will rank junior in right of payment to all existing and future
Senior Indebtedness (as defined) of MEDIQ/PRN, including MEDIQ/ PRN's
obligations under the New Credit Facility (as defined), and will rank PARI PASSU
to all future senior subordinated indebtedness of MEDIQ/PRN. The New Notes will
be fully and unconditionally guaranteed on a senior subordinated basis by the
Subsidiary Guarantors (as defined). As of March 31, 1998, on a Pro Forma Basis
(as defined), the amount of Senior Indebtedness of MEDIQ/PRN would have been
approximately $202.3 million and MEDIQ/PRN would have had the ability to borrow
up to an additional $50.0 million under the Revolving Credit Facility (as
defined) and, subject to certain conditions, up to an additional $75.0 million
under the Acquisition Facility (as defined).
The New Debentures will be unsecured senior obligations of Holdings, will
rank PARI PASSU in right of payment with all existing and future Senior
Indebtedness of Holdings and will rank senior in right of payment to all future
subordinated indebtedness of Holdings. The New Debentures will be effectively
subordinated to all indebtedness and obligations of MEDIQ/PRN and its
subsidiaries (including the Notes, obligations under the New Credit Facility,
trade payables and other accrued liabilities). As of March 31, 1998, on a Pro
Forma Basis, the amount of Senior Indebtedness of Holdings and the amount of
indebtedness and obligations of MEDIQ/ PRN and its subsidiaries would have been
approximately $74.3 million and $448.0 million, respectively.
Upon a Change of Control (as defined), each holder of New Securities may
require the Issuer thereof to repurchase such New Securities at a purchase price
equal to 101% of (i) in the case of the New Notes, the principal amount thereof,
and (ii) in the case of the New Debentures, the Accreted Value thereof, in each
case plus accrued and unpaid interest, if any, to the date of repurchase.
<PAGE>
AVAILABLE INFORMATION
The Issuers have filed with the Securities and Exchange Commission (the
"Commission" or the "SEC") a Registration Statement on Form S-4 (the
"Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the New Securities being offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement. For further information with respect to the Issuers and
the Exchange Offers, reference is made to the Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. Although this Prospectus
describes the material terms of certain contracts, agreements and other
documents filed as exhibits to the Registration Statement, with respect to each
such contract, agreement or other document reference is made to the exhibit for
a more complete description of the document or matter involved, and each
description thereof contained in this Prospectus shall be deemed qualified in
its entirety by such reference. The Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding registrants, like the Issuers, that file electronically with the
Commission. The address of such Web site is: http://www.sec.gov.
Holdings is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Commission. Each of the Issuers has agreed that, whether or not it is required
to do so by the rules and regulations of the Commission, for so long as any of
the Securities remain outstanding, it will furnish to the holders thereof, and
file with the Commission (unless the Commission will not accept such a filing)
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if it were
required to file such forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by its certified independent
accountants and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if it were required to file such reports. Holdings has
also agreed under the Merger Agreement to comply with the periodic reporting
requirements of the Exchange Act and to provide reports or information to its
public stockholders for twenty-four months following consummation of the
Transactions so long as at least 500,000 shares of Series A Preferred Stock
remain outstanding. In addition, for so long as any of the Securities remain
outstanding, each of the Issuers has agreed to make available to any prospective
purchaser of the Securities or beneficial owner thereof in connection with any
sale thereof, the information required by Rule 144A(d)(4) under the Securities
Act.
i
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, such statements under "Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business", regarding the Issuers, the Transactions, the CHI
Acquisition or the SpectraCair Acquisition (as defined) (including the timing,
financing, strategies and effects thereof) are forward-looking statements.
Although the Issuers believe that the expectations reflected in such
forward-looking statements are reasonable, they can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from expectations ("Cautionary Statements")
are disclosed in this Prospectus, including, without limitation, in conjunction
with the forward-looking statements included in this Prospectus and/or under
"Risk Factors." The following additional factors could cause actual results to
differ materially from any such results which might be projected, forecast,
estimated or budgeted by the Issuers in forward-looking statements: (i)
heightened competition, including specifically price competition, the entry of
new competitors or the introduction of new products by new and existing
competitors; (ii) adverse state and Federal legislation and regulation,
including changes in Medicare and Medicaid reimbursement policies; (iii) the
termination of contracts with major customers or renegotiation of these
contracts at less cost-effective rates or with longer payment terms; (iv)
unanticipated price increases in medical equipment or other rented equipment and
supplies; (v) higher service, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative or management
information systems expenditures; and (vi) the inability to consummate proposed
and future acquisitions or to successfully integrate any consummated acquisition
with existing operations. All subsequent written or oral forward-looking
statements attributable to the Issuers or persons acting on behalf of the
Issuers are expressly qualified in their entirety by the Cautionary Statements.
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, (I) THE TERM "HOLDINGS" REFERS TO MEDIQ
INCORPORATED, (II) THE TERM "MEDIQ/PRN" REFERS TO MEDIQ/PRN LIFE SUPPORT
SERVICES, INC., (III) THE TERM "THE COMPANY" REFERS TO HOLDINGS AND ITS
SUBSIDIARIES, INCLUDING MEDIQ/PRN, ON A COMBINED BASIS AND (IV) THE TERM
"MANAGEMENT" REFERS TO THE MANAGEMENT TEAM OF THE COMPANY. REFERENCES HEREIN TO
"FISCAL YEARS" ARE TO THE FISCAL YEARS OF THE COMPANY, WHICH END ON SEPTEMBER 30
IN THE CALENDAR YEAR, AND REFERENCES TO THE "LTM PERIOD" ARE TO THE COMBINED
PERIODS DESCRIBED IN FOOTNOTE (B) UNDER "--SUMMARY CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION." INFORMATION PROVIDED HEREIN ON A "PRO FORMA
BASIS" FOR ANY PERIOD OR AS OF ANY DATE GIVES EFFECT TO THE SPECTRACAIR
ACQUISITION, THE TRANSACTIONS AND/OR THE CHI ACQUISITION IN THE MANNER DESCRIBED
UNDER "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS." CERTAIN MARKET
DATA USED IN THIS PROSPECTUS REFLECT MANAGEMENT ESTIMATES; WHILE SUCH ESTIMATES
ARE BELIEVED BY THE COMPANY TO BE RELIABLE, NO ASSURANCE CAN BE GIVEN THAT SUCH
DATA IS ACCURATE IN ALL MATERIAL RESPECTS.
THE COMPANY
The Company operates the largest critical care, life support and other
movable medical equipment rental business in the United States. Through its
national distribution network, the Company serves more than 5,000 hospitals,
alternate care and home care providers, nursing homes and other health care
providers nationwide. The Company rents over 650 different types of critical
care, life support and other movable medical equipment ("Medical Equipment"),
including adult and infant ventilators, adult, infant, neonatal and fetal
monitors, infusion and suction pumps, incubators, infant warmers, pulse
oximeters, sequential compression devices and oxygen concentrators.
Approximately 70% of the Company's rental revenues are generated from over 70
contracts with national health care providers and group purchasing
organizations, including some of the largest hospital chains in the United
States. In addition, the Company rents therapeutic support surfaces, overlays
and mattresses ("Support Surfaces"). On a Pro Forma Basis, the Company generated
$197.4 million of revenue and $71.1 million of Adjusted EBITDA (as defined)
during the LTM Period.
In addition to its core rental business, the Company sells a variety of
disposable products, accessories and repair parts ("Parts and Disposables") to
its customers primarily for use with the types of Medical Equipment it rents. In
addition, the Company provides several outsourcing services to health care
providers. The Company's outsourcing services and sales of Parts and Disposables
are natural complements to the Company's core rental business, as they enable
the Company to generate incremental revenues within an existing customer
relationship and leverage the Company's extensive distribution network and broad
customer base.
The Company believes that rentals of Medical Equipment and Support Surfaces
and outsourcing of non-core functions of hospitals and other health care
providers have benefited from certain industry trends. In recent years,
hospitals have faced increasing pressure to reduce operating costs and capital
expenditures, while continuing to offer state-of-the-art health care. Equipment
rental programs can be more cost effective for health care providers than the
purchase or lease of movable medical equipment because they enable health care
providers to incur the cost for equipment only when demand for such equipment
exists, thus increasing the providers' equipment utilization rates and
decreasing their overall cost structure. Additionally, by shifting the
management of activities such as asset management and repair and maintenance to
third parties, hospitals and other health care providers can reduce operating
costs, increase efficiency and/or minimize technological obsolescence of
equipment.
In fiscal 1997, rentals of Medical Equipment and Support Surfaces accounted
for approximately 80% of the Company's revenues, sales of Parts and Disposables
and equipment accounted for approximately
1
<PAGE>
13% of the Company's revenues and the provision of outsourcing services and
other revenues accounted for approximately 7% of the Company's revenues.
RENTALS. In its rental business, the Company rents, on a Pro Forma Basis,
its approximately 148,000 unit Medical Equipment and Support Surfaces inventory
to customers through 92 branch locations in major metropolitan areas nationwide.
Such locations operate 24 hours a day, 365 days a year, with deliveries of
patient-ready equipment typically made to customers within two hours of a
request. The Company's customers receive a full range of rental and related
services, including equipment delivery, inspection, maintenance, repair and
documentation. In September 1997, the Company acquired the remaining 50%
interest in MEDIQ PRN/HNE, LLC ("SpectraCair") that it did not already own (the
"SpectraCair Acquisition") in order to broaden its equipment rental product
lines to include rentals of Support Surfaces. In addition, the Company on May
29, 1998 purchased certain assets and rights of CH Industries, Inc. ("CHI"),
certain subsidiaries of CHI and certain other parties related to the
manufacture, sale and rental of specialty patient beds and Support Surfaces (the
"CHI Acquisition"), which acquisition the Company anticipates will increase its
Support Surface rental business. On a Pro Forma Basis, the Company's rental
activities generated $157.7 million or 79.9% of total revenue during the LTM
Period.
In addition to standard rentals, the Company has entered into several
revenue-share arrangements with original equipment manufacturers ("OEMs")
pursuant to which the Company rents Medical Equipment and sells disposable
products produced by the OEMs to the Company's customers. Because the OEMs own
the equipment, such arrangements permit the Company to generate additional
revenues without any additional capital investment. In fiscal 1997, the Company
began to focus its efforts on increasing revenue sharing revenues as it believes
there are significant growth opportunities in this area. On a Pro Forma Basis,
revenue sharing rental revenues generated $10.9 million or 6.9% of the Company's
total rental revenue during the LTM Period.
PARTS AND DISPOSABLES. The Company sells a variety of Parts and Disposables
to its customers, primarily for use with the types of Medical Equipment it
rents. The sales of such Parts and Disposables are a natural complement to the
Company's Medical Equipment business. The Company distributes products to its
customers in order to enable them to fill smaller turnaround needs more quickly
and to smaller health care providers which do not meet the minimum order
requirements of the major medical supply distributors. The Company currently
supplies 4,000 disposable products, primarily through a contracted, centralized
distribution center located in Salt Lake City, Utah and through a Company
operated facility in Pennsauken, New Jersey. The Company also sells repair parts
to its clients for the repair of their owned equipment. On a Pro Forma Basis,
the Company's sales of Parts and Disposables and equipment generated $27.3
million or 13.8% of total revenue during the LTM Period.
OUTSOURCING. To address the needs of hospitals and other health care
providers to better manage their assets and increase profits, the Company also
offers its customers the following services, none of which require substantial
capital investment by the Company: (i) a Comprehensive Asset Management Program
("CAMP") which analyzes the critical care equipment activity of a customer and
provides a variety of logistics and outsourcing services designed to manage,
track and service the customer's movable medical equipment; (ii) a biomedical
repair service which provides safety inspections, preventive maintenance and
repairs for most critical care equipment through a team of more than 170
experienced biomedical technicians; (iii) a logistics and distribution service
to assist equipment manufacturers in reducing their transportation costs through
utilization of the Company's nationwide branch office network; (iv) a medical
gas supply program designed to complement the Company's respiratory equipment
rentals and provide "one-stop" service to health care providers in a fragmented
market; and (v) a health care consulting and management service designed to
assist the Company's customers in the management of their businesses
(collectively, the "Outsourcing Services"). On a Pro Forma Basis, the Company's
Outsourcing Services and other revenues generated $12.4 million or 6.3% of total
revenue during the LTM Period.
2
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths contribute to
its position as a leader in renting Medical Equipment in the United States and
serve as a foundation for the Company's growth strategy:
- LEADING MARKET POSITION. The Company is the largest critical care, life
support and other movable medical equipment rental company in the United
States. The Company's Medical Equipment rental revenues during the LTM
Period were approximately twice as large as those reported by its nearest
rental competitor. The Company has achieved and maintained a market
leadership position by making strategic acquisitions, investing in a
national distribution network and providing high-quality customer service
and competitive pricing. The Company believes that its leading market
position provides it with significant advantages in competing with other
rental companies.
- LARGEST DISTRIBUTION NETWORK AND BROADEST PRODUCT LINE. The Company has
invested significant amounts to establish a national distribution network
and the broadest product line in its industry. On a Pro Forma Basis, the
Company's national distribution network has the most expansive geographic
coverage in its industry with 92 office locations in 40 states and the
Company's product line consists of approximately 148,000 units of Medical
Equipment and Support Surfaces rental inventory. Accordingly, the Company
can provide Medical Equipment and Support Surfaces directly to its
customers on a rapid and efficient basis, with 84% of the Company's
customers located within approximately two hours of a Company office
location. Moreover, because the Company has substantially completed its
domestic branch network, including its gross investment in rental
inventory of $234.6 million as of March 31, 1998, the Company can focus
its capital expenditures on pursuing its growth strategy and purchasing
Medical Equipment and Support Surfaces for which customer demand is
already identified. The Company believes that it is uniquely positioned to
leverage its installed base of rental equipment and distribution network
to increase revenue sharing rentals, sales of Parts and Disposables and
the provision of Outsourcing Services to its existing customers.
- SOLID CUSTOMER BASE. During fiscal 1997, approximately 70% of the
Company's Medical Equipment rental revenues were from national accounts
and group purchasing organizations. Substantially all of the Company's
national accounts have been doing business with the Company for several
years. The Company believes that such national health care providers will
increasingly require services on a national level, which the Company
expects will increase its sales to national accounts and group purchasing
organizations.
- ADVANCED INFORMATION SYSTEMS. The Company's sophisticated information
system gives it the ability to track the location of each unit of
equipment, as well as the maintenance history and scheduled maintenance
requirements related to such unit. Accordingly, when a customer requests a
certain piece of equipment, the Company can immediately determine whether
or not such equipment is available at the local office which typically
services such customer. In addition, if the requested equipment is
unavailable at the local office, the Company's information system
automatically determines what potential substitutes are locally available
as well as the approximate time of delivery for the next closest piece of
requested equipment. The Company believes that its advanced information
system makes it well positioned to service the needs of the increasingly
larger and more complex health care providers and provides it with a
competitive advantage in servicing the needs of national accounts and
rapidly growing group purchasing organizations.
- DISCIPLINED APPROACH TO CAPITAL SPENDING. The Company generally makes new
Medical Equipment and Support Surfaces purchases only after customer
demand is identified. As such, new equipment purchases generally have
specifically identifiable cash flows associated with them. Prior to
approving any new equipment purchase, the Company requires that the new
equipment meets certain minimum financial criteria, such as return on
investment, and certain operating criteria, such as
3
<PAGE>
expected utilization rates and maintenance costs. The Company estimates
that its cost recovery period for most new equipment purchases is between
12 and 18 months. Additionally, the Company's Outsourcing Services and
revenue sharing businesses do not require substantial capital investment.
- STABLE BASE OF CASH FLOW. The Company's rental business has historically
provided it with a stable base of cash flows. Moreover, the Company
believes that its core rental business does not have significant exposure
to economic downturns, because cost pressures during such downturns may
lead to increased rentals and fewer purchases of medical equipment by
customers.
- STRONG AND COMMITTED MANAGEMENT TEAM. The Company is led by a seven person
senior management team with over 180 years combined experience in the
health care industry. In connection with the Transactions, Management
reinvested approximately $4.2 million in common and preferred equity of
Holdings.
GROWTH STRATEGY
In order to take full advantage of its market leadership and national
distribution network, the Company has introduced new services for its customers
and is pursuing strategic acquisition candidates. The following are the primary
elements of the Company's growth strategy:
- GROW CORE RENTAL BUSINESS. The Company expects that certain regulatory and
industry trends will cause an increase in overall demand for equipment
rentals. The Company believes that it will be able to take advantage of
these industry trends and grow its core rental revenues by (i)
capitalizing on its national customer base, which the Company believes is
the largest in the Medical Equipment rental industry, (ii) focusing on
sub-acute and long term health care providers which are facing substantial
pressure to reduce operating costs, (iii) identifying incremental rental
opportunities through its CAMP programs as it increases the number of
hospitals under CAMP contracts, (iv) increasing revenue sharing
opportunities with rental equipment manufacturers and (v) continuing to
market and grow Support Surfaces as a clinically efficient lower cost
alternative to specialty beds.
- LEVERAGE INFRASTRUCTURE TO INCREASE REVENUES IN NON-CAPITAL INTENSIVE
BUSINESSES. Because the Company's national distribution network has the
most expansive geographic coverage and broadest product line in its
industry, the Company believes that it can increase revenues in certain
non-capital intensive businesses by leveraging its infrastructure. In
particular, the Company expects to expand its marketing of Outsourcing
Services, revenue sharing activities and sales of Parts and Disposables to
its existing rental customer base. Moreover, the Company plans to utilize
its established distribution channels to develop these businesses without
incurring significant incremental costs. The Company believes that
leveraging its infrastructure to develop these businesses will produce an
increased return on assets, as these businesses require relatively low
levels of capital investment.
- FOCUS ON DEVELOPING ASSET MANAGEMENT PROGRAMS. The Company believes that
its CAMP programs will continue to grow as a result of an increase in
outsourcing trends related to equipment management and equipment related
services as well as an increase in competitive pressure facing health care
providers. Certain health care providers that have adopted CAMP have been
able to achieve cost savings through a reduction of biomedical and other
hospital staff, a decrease in equipment maintenance expenses and an
increase in asset utilization rates. Additionally, they have been able to
increase equipment utilization and capture increased patient charges as a
result of the superior information gathering capability of CAMP. Hospitals
under CAMP contracts increased from three as of December 31, 1996 to 15 as
of March 31, 1998.
- ENTER INTO STRATEGIC PARTNERSHIPS. The Company has and will continue to
seek new strategic partnerships to increase revenues. In biomedical
repair, the Company plans to increase revenues by
4
<PAGE>
partnering with equipment manufacturers to provide biomedical repair
services for their equipment. In December 1997, the Company entered into
an agreement with Siemens Medical Systems, Inc. USA ("Siemens"), a leading
provider of medical equipment, to jointly provide biomedical repair
services to hospitals and other health care providers. The Company
believes that strategic partnerships such as the Siemens relationship will
provide continued growth opportunities. In 1997, the Company entered into
a contract with KCI New Technologies, Inc. ("NuTech"), a wholly owned
subsidiary of Kinetic Concepts, Inc., to be the exclusive rental source of
circulatory foot pumps manufactured by NuTech and the exclusive
distributor of related disposables. The Company also entered into a
contract with Siemens to be the exclusive distributor of certain Siemens
accessories and parts in 1996. Principally as a result of these efforts,
sales related to strategic partnerships increased in fiscal 1997 to $17.4
million from $2.6 million in fiscal 1996.
- PURSUE STRATEGIC ACQUISITIONS. The Company has historically acquired
complementary Medical Equipment and Support Surfaces rental companies and
integrated them effectively into its existing operations. Upon acquiring
such businesses, the Company has typically been able to realize cost
savings by eliminating corporate overhead, rationalizing branch locations
and reducing personnel. Since September 30, 1994, acquisitions in its core
rental business coupled with internal growth have resulted in an increase
in the Company's revenues from $81.5 million in fiscal 1994 to $170.1
million on a Pro Forma Basis (but not including the CHI Acquisition)
during the LTM Period. The Company has been able to successfully complete
and integrate these acquisitions by adhering to an acquisition strategy
which primarily focuses on acquisitions that (i) present a relatively low
level of integration risk, (ii) allow the Company to effectively leverage
its national distribution network, (iii) are complementary to the
Company's lines of business and (iv) have identifiable synergies. The
Company intends to continue to pursue acquisitions that it believes are
consistent with this acquisition strategy as well as its overall growth
strategy. In addition to the recently completed CHI Acquisition, the
Company has entered into a non-binding letter of intent with respect to
another potential acquisition.
RECENT AND POTENTIAL ACQUISITIONS
In January 1995, the Company and a subsidiary of Huntleigh Technology, Inc.
("Huntleigh") entered into a 50/50 joint venture and formed SpectraCair, a
provider of Support Surfaces on a rental basis to acute care, long-term care and
home care providers nationwide. In January 1996, SpectraCair acquired the low
air loss specialty mattress overlay business of Bio Clinic Corporation (a
subsidiary of Sunrise Medical, Inc.) for $6.7 million, and, in September 1997,
SpectraCair was merged with and into MEDIQ/PRN following the SpectraCair
Acquisition.
The SpectraCair Acquisition has created several opportunities to bolster
SpectraCair's competitive presence. The Company's national agreements provide a
wider group of customers with access to SpectraCair's product lines.
Additionally, the enhanced operational support provided by the Company and the
availability of the Company's complementary product lineup are generating
synergistic opportunities for SpectraCair. The Company expects to achieve
annualized cost savings of approximately $0.4 million as a result of the
elimination of duplicative costs for functional areas and the reduction of
certain expenses as a result of expected synergies resulting from the
SpectraCair Acquisition. In addition, SpectraCair recognized a charge on its
statement of operations for the eleven months ended August 31, 1997 of $0.6
million related to the revenue generated in fiscal 1996 from its acquisition of
the rental assets of Bio Clinic Corporation. The unaudited pro forma condensed
consolidated financial statements included elsewhere in this Prospectus give
effect to the SpectraCair Acquisition but do not reflect the elimination of the
above noted items. However, there can be no assurance that the Company will be
able to generate the expected cost savings.
On May 29, 1998, MEDIQ/PRN purchased certain assets and rights of CHI,
certain subsidiaries of CHI (including CH Medical, Inc.) and certain other
parties ("Sellers") related to the manufacture, sale
5
<PAGE>
and rental of specialty patient beds and Support Surfaces (the "CH Medical
Business") for a purchase price of approximately $50.0 million in cash,
including related costs and expenses, and the assumption of certain obligations
related to the CH Medical Business. Management expects the CHI Acquisition to
improve the Company's competitive position in the acute health care sector. For
the year ended August 31, 1997 and the six months ended February 28, 1997 and
1998, the CH Medical Business generated $26.7 million, $12.3 million and $12.9
million, respectively, of revenue.
Management expects the CHI Acquisition to generate certain synergies and
result in a lower cost structure for the combined entity. The unaudited pro
forma condensed consolidated financial statements included elsewhere in this
Prospectus give effect to the CHI Acquisition, and annualized cost savings on a
LTM basis of approximately $4.5 million related to the closing of duplicate
facilities and the elimination of personnel are reflected therein. Management
also anticipates additional cost savings of approximately $1.8 million per year
to result from the CHI Acquisition in such areas as insurance, advertising and
telephone costs, travel, meals and entertainment expenses and taxes other than
income taxes, although such additional cost savings are not reflected in such
unaudited pro forma condensed consolidated financial statements. However, there
can be no assurance that the Company will be able to generate the expected cost
savings.
The Company believes that consummation of the SpectraCair Acquisition and
the CHI Acquisition will (i) generate financial leverage, (ii) strengthen the
Company's market leadership position, (iii) enable existing customers to reduce
their costs by consolidating vendors, (iv) enhance the quality and selection of
products offered by the Company, (v) expand the presence of the Company's
national accounts and (vi) enhance the operations of the Company by providing
additional dedicated and experienced employees. The Company is continually
reviewing other acquisition opportunities.
THE TRANSACTIONS
Pursuant to the terms of an Agreement and Plan of Merger dated as of January
14, 1998 (as amended as of April 27, 1998, the "Merger Agreement") between
Holdings and MQ Acquisition Corporation ("MQ"), on May 29, 1998 MQ was merged
with and into Holdings (the "Merger") with Holdings continuing as the surviving
corporation (the "Surviving Corporation"). MQ was a Delaware corporation
organized by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") solely to effect
the Merger. Prior to or simultaneously with the consummation of the Merger, (i)
Holdings contributed certain of its assets and liabilities (including the
capital stock of all the subsidiaries of Holdings other than MEDIQ/PRN) to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new senior
secured credit facility (the "New Credit Facility") providing for up to $200.0
million of Term Loans (as defined), up to $50.0 million of Revolving Loans (as
defined) and up to $75.0 million of Acquisition Loans (as defined) and (iii) all
indebtedness of the Company except approximately $10.1 million of Holdings' 7.5%
exchangeable subordinated debentures due 2003 (the "Exchangeable Debentures")
and $2.3 million of MEDIQ/PRN's capital leases was repaid (the "Refinancing").
The aggregate consideration paid in connection with the Merger (the "Merger
Consideration") was approximately $390.7 million, which amount included $20.0
million of Series A 13% Cumulative Compounding Preferred Stock, par value $.01
per share, of the Surviving Corporation ("Series A Preferred Stock"). In
addition, in connection with the Merger (i) certain controlling stockholders of
Holdings (the "Rotko Entities") converted a portion of their preferred equity in
Holdings into $14.5 million of common and preferred equity of the Surviving
Corporation (the "Rotko Rollover"), (ii) Thomas E. Carroll, Jay M. Kaplan and
certain other members of Management (the "Management Stockholders") purchased
$4.2 million of common and preferred equity of MQ (the "Management Investment"
and, together with the issuance of Series A Preferred Stock as part of the
Merger Consideration and the Rotko Rollover, the "Equity Rollover") and (iii)
BRS, certain entities and individuals affiliated with BRS (together with BRS,
the "BRS Entities") and certain funds affiliated with Ferrer Freeman Thompson &
Co. LLC and Galen
6
<PAGE>
Partners III, L.P. (the "Co-Investors") purchased $109.5 million of common and
preferred equity of MQ (the "Equity Contribution").
The Merger, the Reorganization, the Refinancing, the Equity Rollover and the
Equity Contribution, together with the Offerings, the other financing
arrangements described above, the application of the proceeds therefrom and the
payment of related fees and expenses, are collectively referred to herein as the
"Transactions." See "The Transactions."
The authorized capital stock of the Surviving Corporation consists of (i)
Common Stock, par value $.01 per share ("Common Stock"), (ii) Series A Preferred
Stock, (iii) Series B 13.25% Cumulative Compounding Perpetual Preferred Stock,
par value $.01 per share ("Series B Preferred Stock"), and (iv) Series C 13.5%
Cumulative Compounding Preferred Stock, par value $.01 per share ("Series C
Preferred Stock"). Immediately following consummation of the Merger, the BRS
Entities and the Co-Investors held approximately 82.9% of the Common Stock,
71.9% of the Series A Preferred Stock, 53.4% of the Series B Preferred Stock and
96.5% of the Series C Preferred Stock; the Management Stockholders held
approximately 6.1% of the Common Stock, 2.6% of the Series A Preferred Stock,
1.9% of the Series B Preferred Stock and 3.5% of the Series C Preferred Stock;
the Rotko Entities held approximately 11.0% of the Common Stock, 8.1% of the
Series A Preferred Stock and 44.7% of the Series B Preferred Stock; and the
stockholders of Holdings prior to the Merger (other than the Rotko Entities)
held approximately 17.4% of the Series A Preferred Stock. See "Ownership of
Capital Stock."
7
<PAGE>
The following table sets forth the sources and uses of funds in connection
with the Transactions and the CHI Acquisition. To reflect the issuance of Series
A Preferred Stock as part of the Merger Consideration, the Rotko Rollover and
the Management Investment, the following table includes the Equity Rollover as
both a source and use of funds.
<TABLE>
<CAPTION>
AMOUNT
(IN
SOURCES OF FUNDS: MILLIONS)
-----------
<S> <C>
Term Loans....................................................... $ 200.0
Notes............................................................ 190.0
Units............................................................ 75.0
Equity Contribution.............................................. 109.5
Equity Rollover.................................................. 38.7
-----------
Total sources................................................ $ 613.2
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS:
<S> <C>
Cash portion of Merger Consideration(a).......................... $ 352.0
Equity Rollover.................................................. 38.7
Refinancing(b)................................................... 131.5
CHI Acquisition.................................................. 50.0
Working capital.................................................. 3.3
Fees and expenses................................................ 37.7
-----------
Total uses................................................... $ 613.2
-----------
-----------
</TABLE>
- ------------------------
(a) Amount equals (i)(x) the cash portion of the Merger Consideration of $13.75
multiplied by (y) the number of fully diluted shares outstanding less the
1,000,000 Rolled Shares (as defined) less (ii) the sum of the Management
Investment and the net proceeds received by the Company upon the exercise of
all outstanding Options (as defined).
(b) The outstanding indebtedness repaid pursuant to the Refinancing consisted of
$21.6 million of term loans that were to mature quarterly in varying amounts
through September 30, 2002, $95.4 million of term loans that were to mature
quarterly in varying amounts through September 30, 2004 and $14.5 million of
revolving loans that were to mature on September 30, 2002. At March 31,
1998, the weighted average interest rate with respect to all such
indebtedness was approximately 8.3%.
8
<PAGE>
THE EXCHANGE OFFERS
THE NOTE EXCHANGE OFFER
The Note Exchange Offer applies to up to $190.0 million aggregate principal
amount of the Old Notes. The form and terms of the New Notes will be the same as
the form and terms of the Old Notes except that (i) interest on the New Notes
will accrue from the date of issuance of the Old Notes, and (ii) the New Notes
are being registered under the Securities Act and, therefore, will not bear
legends restricting their transfer. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Note Indenture (as
defined) pursuant to which the Old Notes were issued. The Old and the New Notes
are sometimes referred to collectively herein as the "Notes." See "Description
of New Notes."
<TABLE>
<S> <C>
The Note Exchange Offer............. $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount of Old Notes. As of the
date hereof, Old Notes representing $190.0 million
aggregate principal amount are outstanding. The terms
of the New Notes and the Old Notes are substantially
identical.
Based on an interpretation by the Commission's staff
set forth in no-action letters issued to third
parties unrelated to MEDIQ/PRN and the Subsidiary
Guarantors, MEDIQ/PRN and the Subsidiary Guarantors
believe that New Notes issued pursuant to the Note
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred
by any person receiving the New Notes, whether or not
that person is the holder (other than any such holder
or such other person that is an "affiliate" of
MEDIQ/PRN, Holdings or any Subsidiary Guarantor
within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that (i) the New Notes are acquired in the
ordinary course of business of that holder or such
other person, (ii) neither the holder nor such other
person is engaging in or intends to engage in a
distribution of the New Notes, and (iii) neither the
holder nor such other person has an arrangement or
understanding with any person to participate in the
distribution of the New Notes. See "The Exchange
Offers -- Purpose and Effect." Each broker-dealer
that receives New Notes for its own account in
exchange for Old Notes, where those Old Notes were
acquired by the broker-dealer as a result of its
market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"Plan of Distribution."
Registration Rights Agreement....... The Old Notes were sold by MEDIQ/PRN on May 29, 1998,
in a private placement. In connection with the sale,
MEDIQ/ PRN and Holdings entered into a Registration
Rights Agreement with the initial purchasers (the
"Initial Purchasers") of the Old Notes (the
"Registration Rights Agreement") providing for, among
other things, the Note
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Exchange Offer. See "The Exchange Offers--Purpose and
Effect."
Expiration Date..................... The Note Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, or such later date
and time to which it is extended.
Withdrawal.......................... The tender of Old Notes pursuant to the Note Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of
the Note Exchange Offer.
Interest on the New Notes and Old
Notes............................. Interest on each New Note will accrue from the date
of issuance of the Old Note for which such New Note
is exchanged.
Conditions to the Note Exchange The Note Exchange Offer is subject to certain
Offer............................. customary conditions, certain of which may be waived
by MEDIQ/PRN. See "The Exchange Offers -- Conditions
to the Exchange Offers."
Procedures for Tendering Old Each holder of Old Notes wishing to accept the Note
Notes............................. Exchange Offer must complete, sign and date the
accompanying letter of transmittal relating to the
Note Exchange Offer (the "Notes Letter of
Transmittal"), or a copy thereof, in accordance with
the instructions contained herein and therein, and
mail or otherwise deliver the Notes Letter of
Transmittal, together with the Old Notes and any
other required documentation, to the Exchange Agent
(as defined) at the address set forth in the Notes
Letter of Transmittal. Persons holding Old Notes
through the Depository Trust Company ("DTC") and
wishing to accept the Note Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer Program,
by which each tendering Participant will agree to be
bound by the Notes Letter of Transmittal. By
executing or agreeing to be bound by the Note Letter
of Transmittal, each holder will represent to
MEDIQ/PRN that, among other things, (i) the New Notes
acquired pursuant to the Note Exchange Offer are
being obtained in the ordinary course of business of
the person receiving such New Notes, whether or not
such person is the holder of the Old Notes, (ii)
neither the holder nor any such other person has an
arrangement or understanding with any person to
participate in the distribution of such New Notes
within the meaning of the Securities Act, (iii)
neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 promulgated
under the Securities Act, of MEDIQ/PRN or any
Subsidiary Guarantor, or if it is an affiliate, such
holder or such other person will comply with the
registration and prospectus delivery requirements of
the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Securities Act to the extent applicable, (iv) if such
holder or other person is not a broker-dealer,
neither the holder nor any such other person is
engaged in or intends to engage in the distribution
of such New Notes, and (v) if such holder or other
person is a broker-dealer, that it will receive New
Notes for its own account in exchange for Old Notes
that were acquired as a result of market-making
activities or other trading activities and that it
acknowledges that it will be required to deliver a
prospectus in connection with any resale of such New
Notes. See "The Exchange Offers -- Procedures for
Tendering."
Shelf Registration Requirement...... Pursuant to the Registration Rights Agreement, MEDIQ/
PRN is required to file a "shelf" registration
statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of the Old
Notes (and use its reasonable best efforts to cause
such shelf registration statement to be declared
effective by the Commission and keep it continuously
effective, supplemented and amended for prescribed
periods) if (i) MEDIQ/PRN is not permitted to effect
the Note Exchange Offer because of any change in law
or in applicable interpretations thereof by the staff
of the Commission, (ii) the Note Exchange Offer is
not consummated within 180 days of the date of
issuance of the Old Notes, (iii) any Initial
Purchaser so requests with respect to Old Notes not
eligible to be exchanged for New Notes in the Note
Exchange Offer and held by it following consummation
of the Note Exchange Offer, or (iv) any holder of Old
Notes (other than a broker-dealer electing to
exchange Old Notes, acquired for its own account as a
result of market-making activities or other trading
activities, for New Notes (an "Exchanging Dealer"))
is not eligible to participate in the Note Exchange
Offer or, in the case of any holder of Old Notes
(other than an Exchanging Dealer) that participates
in the Note Exchange Offer, such holder does not
receive freely tradable New Notes upon consummation
of the Note Exchange Offer receive freely tradable
New Notes upon consummation of the Note Exchange
Offer.
Acceptance of Old Notes and Delivery
of New Notes...................... MEDIQ/PRN will accept for exchange any and all Old
Notes which are properly tendered in the Note
Exchange Offer prior to the Expiration Date. The New
Notes issued pursuant to the Note Exchange Offer will
be delivered promptly following the Expiration Date.
See "The Exchange Offers -- Terms of the Note
Exchange Offer."
Exchange Agent...................... United States Trust Company of New York is serving as
Exchange Agent (the "Exchange Agent").
Federal Income Tax Considerations... The exchange pursuant to the Note Exchange Offer
should not be a taxable event for federal income tax
purposes. See
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
"Certain Federal Income Tax Considerations of the
Exchange Offers."
Effect of Not Tendering............. Following the completion of the Note Exchange Offer,
Notes that are not tendered will not have any further
registration rights (except in certain circumstances
with respect to shelf registration as noted above)
and will continue to be subject to the existing
restrictions upon transfer thereof. See "The Exchange
Offers--Consequences of Failure to Exchange."
</TABLE>
THE DEBENTURE EXCHANGE OFFER
The Debenture Exchange Offer applies to $140,885,000 aggregate principal
amount at maturity of the Old Debentures, which were issued by Holdings in
connection with the sale of 140,885 Units (the "Units"), each Unit consisting of
one Debenture with a principal amount at maturity of $1,000 and one Warrant (a
"Warrant") to purchase .6474 shares of Common Stock at an exercise price of $.01
per share.
The form and terms of the New Debentures will be the same as the form and
terms of the Old Debentures except that (i) the Accreted Value (as defined) of
the New Debentures will be calculated from the date of issuance of the Old
Debentures, and (ii) the New Debentures are being registered under the
Securities Act and, therefore, will not bear legends restricting their transfer.
The New Debentures will evidence the same debt as the Old Debentures and will be
entitled to the benefits of the Debenture Indenture (as defined) pursuant to
which the Old Debentures were issued. The Old Debentures and the New Debentures
are sometimes referred to collectively herein as the "Debentures." See
"Description of New Debentures."
<TABLE>
<S> <C>
The Debentures Exchange Offer....... $1,000 principal amount at maturity of New Debentures
in exchange for each $1,000 principal amount at
maturity of Old Debentures. As of the date hereof,
Old Debentures representing $140,885,000 aggregate
principal amount at maturity are outstanding. The
terms of the New Debentures and the Old Debentures
are substantially identical.
Based on an interpretation by the Commission's staff
set forth in no-action letters issued to third
parties unrelated to Holdings, Holdings believes that
New Debentures issued pursuant to the Debenture
Exchange Offer in exchange for Old Debentures may be
offered for resale, resold and otherwise transferred
by any person receiving the New Debentures, whether
or not that person is the holder (other than any such
holder or such other person that is an "affiliate" of
Holdings within the meaning of Rule 405 under the
Securities Act), without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that (i) the New
Debentures are acquired in the ordinary course of
business of that holder or such other person, (ii)
neither the holder nor such other person is engaging
in or intends to engage in a distribution of the New
Debentures, and (iii) neither the holder nor such
other person has an arrangement or understanding with
any person to participate in the distribution of the
New Debentures. See "The Exchange Offers -- Purpose
and Effect." Each broker-
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
dealer that receives New Debentures for its own
account in exchange for Old Debentures, where those
Old Debentures were acquired by the broker-dealer as
a result of its market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of
such New Debentures. See "Plan of Distribution."
Registration Rights Agreement....... The Old Debentures were sold by Holdings on May 29,
1998, in a private placement. In connection with the
sale, MEDIQ/ PRN and Holdings entered into the
Registration Rights Agreement providing for, among
other things, the Exchange Offer. See "The Exchange
Offers -- Purpose and Effect."
Expiration Date..................... The Debenture Exchange Offer will expire at 5:00
p.m., New York City time, on , 1998, or
such later date and time to which it is extended.
Withdrawal.......................... The tender of Old Debentures pursuant to the
Debenture Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Debenture not
accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Debenture Exchange Offer.
Accreted Value of the New Debentures
and Old Debentures................ The Accreted Value of each New Debenture will be
calculated from the date of issuance of the Old
Debenture for which such New Debenture is exchanged.
Conditions to the Debentures
Exchange Offer.................... The Debenture Exchange Offer is subject to certain
customary conditions, certain of which may be waived
by Holdings. See "The Exchange Offers -- Conditions
to the Exchange Offers."
Procedures for Tendering Old
Debentures........................ Each holder of Old Debentures wishing to accept the
Debenture Exchange Offer must complete, sign and date
the accompanying letter of transmittal relating to
the Debenture Exchange Offer (the "Debentures Letter
of Transmittal"; the Debentures Letter of Transmittal
and the Notes Letter of Transmittal are sometimes
referred to herein individually as a "Letter of
Transmittal" and collectively as the "Letters of
Transmittal"), or a copy thereof, in accordance with
the instructions contained herein and therein, and
mail or otherwise deliver the Debentures Letter of
Transmittal, or the copy, together with the Old
Debentures and any other required documentation, to
the Exchange Agent (as defined) at the address set
forth in the Debentures Letter of Transmittal.
Persons holding Old Debentures through (DTC) and
wishing to accept the Debenture Exchange Offer must
do so pursuant to DTC's Automated Tender Offer
Program, by
</TABLE>
13
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<TABLE>
<S> <C>
which each tendering Participant will agree to be
bound by the Debentures Letter of Transmittal. By
executing or agreeing to be bound by the Debentures
Letter of Transmittal, each holder will represent to
Holdings that, among other things, (i) the New
Debentures acquired pursuant to the Debenture
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New
Debentures, whether or not such person is the holder
of the Old Debentures, (ii) neither the holder nor
any such other person has an arrangement or
understanding with any person to participate in the
distribution of such New Debentures within the
meaning of the Securities Act, (iii) neither the
holder nor any such other person is an "affiliate,"
as defined under Rule 405 promulgated under the
Securities Act, of Holdings, or if it is an
affiliate, such holder or such other person will
comply with the registration and prospectus delivery
requirements of the Securities Act to the extent
applicable, (iv) if such holder or other person is
not a broker-dealer, neither the holder nor any such
other person is engaged in or intends to engage in
the distribution of such New Debentures, and (v) if
such holder or other person is a broker-dealer, that
it will receive New Debentures for its own account in
exchange for Old Debentures that were acquired as a
result of market-making activities or other trading
activities and that it acknowledges that it will be
required to deliver a prospectus in connection with
any resale of such New Debentures.
Shelf Registration Requirement...... Pursuant to the Registration Rights Agreement,
Holdings is required to file a "shelf" registration
statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of the Old
Debentures (and use its reasonable best efforts to
cause such shelf registration statement to be
declared effective by the Commission and keep it
continuously effective, supplemented and amended for
prescribed periods) if (i) Holdings is not permitted
to effect the Debenture Exchange Offer because of any
change in law or in applicable interpretations
thereof by the staff of the Commission, (ii) the
Debenture Exchange Offer is not consummated within
180 days of the date of issuance of the Old
Debentures, (iii) any Initial Purchaser so requests
with respect to Old Debentures not eligible to be
exchanged for New Debentures in the Debenture
Exchange Offer and held by it following consummation
of the Debenture Exchange Offer, or (iv) any holder
of Old Debentures (other than an Exchanging Dealer)
is not eligible to participate in the Debenture
Exchange Offer or, in the case of any holder of Old
Debentures (other than an Exchanging Dealer) that
participates in the Debenture Exchange Offer, such
holder does not receive freely tradeable New
Debentures upon consummation of the Debenture
Exchange Offer.
</TABLE>
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<TABLE>
<S> <C>
Acceptance of Old Debentures and
Delivery of New Debentures........ Holdings will accept for exchange any and all Old
Debentures which are properly tendered in the
Debenture Exchange Offer prior to the Expiration
Date. The New Debentures issued pursuant to the
Debenture Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offers -- Terms of the Debenture Exchange Offer."
Exchange Agent...................... United States Trust Company of New York is serving as
Exchange Agent.
Federal Income Tax Considerations... The exchange pursuant to the Debenture Exchange Offer
should not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations of the Exchange Offers."
Effect of Not Tendering............. Following the completion of the Debenture Exchange
Offer. Old Debentures that are not tendered or that
are tendered but not accepted will not have any
further registration rights (except in certain
circumstances with respect to shelf registration as
noted above) and will continue to be subject to the
existing restrictions upon transfer thereof. See "The
Exchange Offers--Consequences of Failure to
Exchange."
</TABLE>
TERMS OF THE NEW SECURITIES
<TABLE>
<S> <C>
NEW NOTES
Issuer.............................. MEDIQ/PRN Life Support Services, Inc.
Notes Offered....................... $190,000,000 aggregate principal amount of 11% Senior
Subordinated Notes Due 2008.
Maturity Date....................... June 1, 2008.
Interest Payment Dates.............. June 1 and December 1 of each year, commencing
December 1, 1998.
Optional Redemption................. The New Notes will not be redeemable at the option of
MEDIQ/PRN prior to June 1, 2003, except that until
June 1, 2001, MEDIQ/PRN may redeem, at its option, up
to 25% of the original principal amount of the New
Notes at the redemption price set forth herein plus
accrued and unpaid interest to the date of redemption
with the net proceeds of one or more Public Equity
Offerings following which there is a Public Market if
at least $142.5 million aggregate principal amount of
the Notes remains outstanding after any such
redemption. On or after June 1, 2003, the New Notes
may be redeemed at the option of MEDIQ/PRN, in whole
or in part, at the redemption prices set forth herein
plus accrued and unpaid interest to the date of
redemption. See "Description of the Notes--Optional
Redemption."
Change of Control................... Upon a Change of Control, each holder of New Notes
may require MEDIQ/PRN to repurchase all or any
portion of
</TABLE>
15
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<TABLE>
<S> <C>
such holder's New Notes at a purchase price equal to
101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
See "Description of the Notes--Change of Control."
Ranking............................. The New Notes will be unsecured senior subordinated
obligations of MEDIQ/PRN. The New Notes will be
subordinated in right of payment to all existing and
future Senior Indebtedness of MEDIQ/PRN, including
MEDIQ/ PRN's obligations under the New Credit
Facility, and will rank PARI PASSU to all future
senior subordinated indebtedness of MEDIQ/PRN. As of
March 31, 1998, on a Pro Forma Basis, the amount of
Senior Indebtedness of MEDIQ/PRN would have been
approximately $202.3 million and MEDIQ/ PRN would
have had the ability to borrow up to an additional
$125.0 million under the New Credit Facility.
Subsidiary Guaranties............... The New Notes will be fully and unconditionally
guaranteed on a senior subordinated basis by the
Subsidiary Guarantors. Each Subsidiary Guaranty (as
defined) will be subordinated to all existing and
future Senior Indebtedness of the respective
Subsidiary Guarantor, including the guarantee by such
Subsidiary Guarantor of MEDIQ/PRN's obligations under
the New Credit Facility. See "Description of the
Notes--Subsidiary Guaranties."
Restrictive Covenants............... The Note Indenture (as defined) contains certain
covenants that, among other things, limit (i) the
incurrence of additional debt by MEDIQ/PRN and
certain of its subsidiaries, (ii) the payment of
dividends on capital stock of MEDIQ/PRN and the
purchase, redemption or retirement of capital stock
or subordinated indebtedness, (iii) investments, (iv)
certain transactions with affiliates, (v) sales of
assets, including capital stock of subsidiaries, and
(vi) certain consolidations, mergers and transfers of
assets. The Note Indenture also prohibits certain
restrictions on distributions from certain
subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of
important qualifications. See "Description of the
Notes--Certain Covenants."
Use of Proceeds..................... MEDIQ/PRN will not receive any proceeds from the Note
Exchange Offer.
NEW DEBENTURES
Debentures Offered.................. $140,885,000 aggregate principal amount at maturity
of 13% Senior Discount Debentures Due 2009 ($75.0
million aggregate initial Accreted Value).
Maturity Date....................... June 1, 2009.
Yield and Interest.................. 13% per annum (computed on a semi-annual bond
equivalent basis). Except as described herein, no
cash
interest will accrue on the New Debentures prior to
June 1, 2003. Thereafter, the New Debentures will
accrue cash
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
interest, and cash interest will be payable on June 1
and December 1 of each year, commencing December 1,
2003.
Original Issue Discount............. The New Debentures will bear OID, and the holders of
the New Debentures will be required to include such
OID in gross income for U.S. Federal income tax
purposes on a constant yield to maturity basis, in
advance of the receipt of the cash payments to which
such income is attributable. See "Certain U.S.
Federal Income Tax Considerations."
Optional Redemption................. The New Debentures will not be redeemable at the
option of Holdings prior to June 1, 2003, except that
until June 1, 2001, Holdings may redeem, at its
option, up to 25% of the Accreted Value of the New
Debentures at the redemption price set forth herein
with the net proceeds of one or more Public Equity
Offerings following which there is a Public Market if
at least $105.6 million aggregate principal amount at
maturity of the New Debentures remains outstanding
after any such redemption. On or after June 1, 2003,
the New Debentures may be redeemed at the option of
Holdings, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid
interest to the date of redemption. See "Description
of the Debentures--Optional Redemption."
Change of Control................... Upon a Change of Control, each holder of New
Debentures may require Holdings to repurchase all or
any portion of such holder's New Debentures at a
purchase price equal to 101% of the Accreted Value
thereof plus accrued and unpaid interest, if any, to
the date of repurchase. See "Description of the
Debentures--Change of Control."
Ranking............................. The New Debentures will be unsecured senior
obligations of Holdings. The New Debentures will rank
PARI PASSU in right of payment with all existing and
future Senior Indebtedness of Holdings and will be
senior in right of payment to all future subordinated
indebtedness of Holdings. The New Debentures will be
effectively subordinated to all indebtedness and
obligations of MEDIQ/PRN and its subsidiaries
(including the New Notes, obligations under the New
Credit Facility, trade payables and other accrued
liabilities). As of March 31, 1998, on a Pro Forma
Basis, the amount of Senior Indebtedness of Holdings
and the amount of indebtedness and obligations of
MEDIQ/PRN and its subsidiaries would have been
approximately $74.3 million and $448.0 million,
respectively.
Restrictive Covenants............... The Debenture Indenture (as defined and, together
with the Note Indenture, the "Indentures") will limit
(i) the incurrence of additional debt by Holdings and
certain of its subsidiaries, (ii) the payment of
dividends on capital stock of Holdings and the
purchase, redemption or retirement of capital stock
or subordinated indebtedness, (iii) investments, (iv)
certain transactions with affiliates, (v) sales of
assets,
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
including capital stock of subsidiaries, and (vi)
certain consolidations, mergers and transfers of
assets. The Debenture Indenture will also prohibit
certain restrictions on distributions from certain
subsidiaries, including MEDIQ/ PRN. All of these
limitations and prohibitions, however, are subject to
a number of important qualifications. See
"Description of the Debentures--Certain Covenants."
</TABLE>
RISK FACTORS
Prospective investors in the Securities should carefully consider the
matters set forth herein under "Risk Factors."
18
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth (i) summary consolidated historical financial
information of the Company for the three fiscal years ended September 30, 1997
and for the six months ended March 31, 1997 and 1998 and (ii) summary pro forma
consolidated financial information of the Company for the fiscal year ended
September 30, 1997 and for the LTM Period. The historical statement of
operations data for the three years ended September 30, 1997 was derived from
the audited consolidated financial statements of the Company included elsewhere
in this Prospectus. The historical statement of operations data for the six
months ended March 31, 1997 and 1998 was derived from the unaudited consolidated
financial statements of the Company included elsewhere in this Prospectus which,
in the opinion of Management, include all adjustments necessary for a fair
presentation of the financial condition and results of operations of the Company
for such periods. The results of operations for interim periods are not
necessarily indicative of a full year's operations. The other historical data
for the three years ended September 30, 1997 and the six months ended March 31,
1997 and 1998 was derived from Company prepared schedules. The pro forma
statement of operations data, other pro forma data and supplemental pro forma
data (other than net debt) for the fiscal year ended September 30, 1997 and for
the LTM Period gives effect to the Transactions, the SpectraCair Acquisition and
the CHI Acquisition as if they were consummated on October 1, 1996. The pro
forma balance sheet data as of March 31, 1998 and the net debt included within
the supplemental pro forma data for the LTM Period gives effect to the
Transactions and the CHI Acquisition as if they were consummated on March 31,
1998. The pro forma financial information is presented for informational
purposes only and does not purport to be indicative of the results of operations
that actually would have been achieved had the Transactions, the SpectraCair
Acquisition and the CHI Acquisition 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. This
table should be read in conjunction with "Pro Forma Condensed Consolidated
Financial Statements," "Selected Consolidated Historical Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS
YEAR ENDED ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, PRO FORMA
------------------------------- --------------- -------------------- LTM
1995 1996 1997(A) 1997 1997 1998 PERIOD(B)
--------- --------- --------- --------------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 132,241 $ 136,066 $ 155,960 $ 190,984 $ 78,049 $ 88,979 $ 197,392
Non-recurring items......................... -- (2,200) -- -- -- -- --
Operating income............................ 24,202 25,446 29,504 32,939 16,727 15,406 31,477
Interest expense............................ (29,241) (27,307) (19,107) (52,019) (11,922) (7,235) (52,620)
Other (charges) and credits(c).............. 1,381 (4,695) (7,504) (7,250) 505 479 (7,298)
Income (Loss) from continuing operations
before income taxes....................... (3,658) (6,556) 2,893 (26,330) 5,310 8,650 (28,441)
Income (Loss) from continuing operations.... (3,346) (6,178) (2,241) (19,775) (1,134) 4,762 (17,150)
OTHER DATA:
Rental revenues............................. $ 117,043 $ 114,275 $ 124,316 $ 156,117 $ 63,193 $ 69,993 $ 157,693
Sales revenues.............................. 7,036 11,696 19,922 24,620 9,459 13,979 28,988
Other revenues.............................. 8,162 10,095 11,722 10,247 5,397 5,007 10,711
EBITDA(d)................................... 54,363 55,603 59,863 69,199 31,458 32,355 68,492
Adjusted EBITDA(e).......................... 54,363 55,603 59,863 72,017 31,458 32,355 71,091
Depreciation and amortization............... 30,161 30,157 30,359 36,260 14,731 16,586 36,652
Capital expenditures........................ 13,356 18,913 15,458 17,717 8,005 15,275(f) 23,448
Branches and distributors (at end of
period)................................... 84 84 84 92 84 84 92
Equipment units (at end of period).......... 123,309 120,388 131,897 143,035 128,292 137,197 148,368
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF MARCH 31, 1998
-----------------------
MEDIQ/PRN HOLDINGS
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $ 58,944 $ 57,390
Property, plant and equipment, net....................................................... 118,048 118,048
Total assets............................................................................. 319,788 324,215
Total debt (including current portion of long-term debt)................................. 392,318 476,630
Net debt(g).............................................................................. 385,156 463,474
Stockholders' deficit.................................................................... (128,187) (316,115)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
LTM PERIOD(B)
----------------------------
MEDIQ/PRN HOLDINGS
--------------- -----------
<S> <C> <C>
SUPPLEMENTAL PRO FORMA DATA:
Ratio of Adjusted EBITDA to interest expense (excluding deferred financing fees)......... 1.82x 1.40x
Ratio of net debt to Adjusted EBITDA..................................................... 5.42 6.52
</TABLE>
- ------------------------------
(a) On September 1, 1997, the Company consummated the SpectraCair Acquisition
for $1.9 million and the assumption of its former joint venture partner's
portion of SpectraCair's outstanding debt of $4.4 million. Accordingly, the
results of operations of SpectraCair for the one month ended September 30,
1997 are included in the Company's operating results.
(b) The Pro Forma LTM data was derived from the Pro Forma Condensed Consolidated
Financial Statements included elsewhere herein and represent the pro forma
results of operations from April 1, 1997 to March 31, 1998 (the "LTM
Period"). Data for the LTM Period was derived by subtracting the pro forma
results of operations for the six months ended March 31, 1997 from the pro
forma results of operations for the year ended September 30, 1997 and then
adding the pro forma results of operations for the six months ended March
31, 1998 to such pro forma September 30, 1997 results of operations.
20
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(c) Fiscal 1995 includes $1.5 million of interest income partially offset by a
$0.4 million net loss on the sale of assets. Fiscal 1996 includes a $6.0
million reserve on the note receivable from MHM Services, Inc. ("MHM"),
interest income of $1.5 million and a net gain on the sale of assets of $0.6
million. Fiscal 1997 includes an equity participation charge related to the
repurchase of MEDIQ/PRN warrants of $11.0 million, a gain on the sale of
stock of $9.2 million, a reserve on amounts due from MHM of $5.5 million,
the write-off of deferred acquisition costs of $4.0 million, a gain on a
note receivable of $1.8 million and interest income of $2.1 million. The six
months ended March 31, 1997 include an equity participation charge related
to the repurchase of a MEDIQ/PRN warrant of $11.0 million, a gain on the
sale of stock of $9.2 million, a gain on a note receivable of $1.2 million
and interest income of $1.1 million. The six months ended March 31, 1998
include approximately $0.5 million of interest income.
(d) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation, amortization and non-recurring merger costs. 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.
(e) Adjusted EBITDA is defined (i) for historical periods, as EBITDA, (ii) for
the pro forma year ended September 30, 1997, as EBITDA plus (A) annualized
cost savings of approximately $0.4 million relating 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 an acquisition of rental assets which
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 $1.8 million in such areas as insurance,
advertising and telephone costs, travel, meals and entertainment expenses
and taxes other than income taxes and (iii) for the pro forma LTM Period, 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 an
acquisition of rental assets which 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 $1.8 million
in such areas as insurance, advertising and telephone costs, travel, meals
and entertainment expenses and taxes other than income taxes.
(f) During the first six months of fiscal 1998, the Company spent approximately
$3.1 million to exercise end of term buyout options under two capital lease
obligations, repair and refurbish a portion of the Company's corporate
headquarters, purchase Medical Equipment and the related revenue stream from
a vendor and enter into purchase/rent-back transactions. Excluding the items
noted above, the Company expects to spend approximately $16.0 million on
capital expenditures in fiscal 1998.
(g) Net debt is total debt (including current portion of long-term debt) net of,
(i) with respect to MEDIQ/PRN, $7.2 million of cash as of March 31, 1998, on
a Pro Forma Basis, and (ii) with respect to consolidated Holdings, (A) $7.2
million of cash as of March 31, 1998, on a Pro Forma Basis, and (B) a $5.9
million note payable by NutraMax Products, Inc. ("NutraMax") which is
secured by a letter of credit. Such note was issued to Holdings in
connection with the sale to NutraMax of all the shares of NutraMax common
stock owned by the Company. See "Description of Certain
Indebtedness--Exchangeable Debentures."
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<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CAREFULLY CONSIDER THE RISK
FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING IN THIS
PROSPECTUS, BEFORE MAKING ANY INVESTMENT IN THE SECURITIES.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
Holdings and MEDIQ/PRN have incurred substantial indebtedness in connection
with the Transactions and the CHI Acquisition. At March 31, 1998, on a Pro Forma
Basis, Holdings would have had $476.6 million of consolidated indebtedness and a
shareholders' deficit of $316.1 million, and MEDIQ/PRN would have had $392.3
million of consolidated indebtedness and a shareholders' deficit of $128.2
million. See "MEDIQ/PRN Capitalization," "Holdings Capitalization" and "Pro
Forma Condensed Consolidated Financial Statements." Accordingly, Holdings and
MEDIQ/PRN have significant debt service obligations. On a Pro Forma Basis, the
ratio of earnings to fixed charges of Holdings and MEDIQ/PRN would have been .48
to 1 and .67 to 1, respectively, for the LTM Period. On a Pro Forma Basis but
without giving effect to the CHI Acquisition, the ratio of earnings to fixed
charges of Holdings and MEDIQ/PRN would have been .42 to 1 and .62 to 1,
respectively, for the LTM Period. In addition, Holdings and MEDIQ/PRN are likely
to incur additional indebtedness in the future, subject to certain limitations
contained in the instruments and documents governing their respective
indebtedness. See "Description of Certain Indebtedness--New Credit Facility,"
"Description of the Notes" and "Description of the Debentures."
The degree to which the Company is leveraged has important consequences for
the Company, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
debt service requirements or other purposes may be impaired; (ii) a substantial
portion of MEDIQ/PRN's cash flow from operations will be required to pay its
interest expense and principal repayment obligations and will not be available
for its general corporate needs (including distributions to Holdings for
payments with respect to the Debentures); (iii) the Company's flexibility to
adjust to changing market conditions may be limited, and its ability to compete
against its less highly leveraged competitors may be reduced; (iv) the Company
may be more vulnerable in the event of a downturn in its business or in the
economy generally; and (v) to the extent that MEDIQ/PRN incurs borrowings under
the New Credit Facility, which borrowings will be at variable rates, it will be
vulnerable to increases in interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The successful implementation of the Company's business strategy is
necessary for the Company to be able to meet its anticipated debt service
requirements. In addition, the Company's ability to meet its debt service
requirements (including its obligations with respect to the Securities and the
New Credit Facility) will depend on the Company's future performance, which is
subject to a number of factors, most of which are outside the Company's control.
There can be no assurance that the Company will generate sufficient cash flow
from operating activities to meet its debt service and working capital
requirements. Although the New Debentures do not require cash interest payments
until 2003, at such time the New Debentures will have accreted to $140.9 million
and will require annual cash interest payments thereafter of $18.3 million.
Moreover, the New Credit Facility currently requires cash interest payments, and
the Notes will require cash interest payments beginning December 1, 1998. In
addition, principal on Term Loans made pursuant to the New Credit Facility will
require quarterly amortization payments beginning June 1999, and will begin to
mature by the end of the sixth calendar year following the making of such loans.
Accordingly, the entire principal amount of such loans must be repaid prior to
the maturity of the Securities. See "Description of Certain Indebtedness--New
Credit Facility." All or a portion of such indebtedness may need to be
refinanced at or prior to maturity. There can be no assurance that any
refinancing will be possible at that time or that any possible refinancing will
be on terms that are acceptable to the Company. In the absence of such
refinancing, the Company could be forced to dispose of assets in order to make
up for any shortfall in the payments due on its indebtedness under circumstances
that might not be favorable to realizing the highest price for such assets, and
there can be no assurance that the Company's assets
22
<PAGE>
could be sold quickly enough, or for sufficient amounts, to enable the Company
to meet its obligations, including its obligations with respect to the
Securities.
RESTRICTIVE COVENANTS
The Indentures and the New Credit Facility contain, and any additional
financing agreements are likely to contain, certain restrictive covenants. The
restrictions contained in the Indentures and the New Credit Facility affect, and
in some cases will significantly limit or prohibit, among other things, the
ability of the Company to incur indebtedness, make prepayments of certain
indebtedness, pay dividends, make acquisitions and other investments, engage in
transactions with stockholders and affiliates, issue capital stock, create
liens, sell assets and engage in mergers and consolidations. In addition to the
restrictive covenants described above, the New Credit Facility requires
MEDIQ/PRN to maintain a number of financial ratios. The failure of MEDIQ/PRN and
its subsidiaries to maintain such ratios would constitute events of default
under the New Credit Facility, notwithstanding the ability of the Company to
meet its debt service obligations (including its obligations with respect to the
Securities). In the event Holdings or MEDIQ/PRN fails to comply with the various
covenants contained in the New Credit Facility or the Indentures, as applicable,
it would be in default thereunder, and in any such case, the maturity of
substantially all of its long-term indebtedness could be accelerated. A default
under either of the Indentures would also constitute an event of default under
the New Credit Facility. The New Credit Facility prohibits the repayment,
purchase, redemption, defeasance or other payment of any of the principal of the
Securities at any time prior to their stated maturity. See "Description of the
Notes," "Description of the Debentures" and "Description of Certain
Indebtedness--New Credit Facility."
SUBORDINATION AND RANKING OF THE SECURITIES
The indebtedness evidenced by the New Notes, like the Old Notes, and the
Subsidiary Guaranties will be senior subordinated obligations of MEDIQ/PRN and
the Subsidiary Guarantors, respectively. The payment of the principal of,
premium (if any), and interest on the New Notes and the payment of the
Subsidiary Guaranties are each subordinate in right of payment, as set forth in
the Note Indenture, to the prior payment in full of all Senior Indebtedness of
MEDIQ/PRN or the Subsidiary Guarantors, as the case may be, including the
obligations of MEDIQ/PRN under, and the Subsidiary Guarantors' guarantees of
MEDIQ/PRN's obligations with respect to, the New Credit Facility.
As of March 31, 1998, on a Pro Forma Basis, (i) the Senior Indebtedness of
MEDIQ/PRN would have been approximately $202.3 million, all of which would have
been secured and (ii) the Senior Indebtedness of the Subsidiary Guarantors would
have been approximately $200.0 million, all of which would have represented
guarantees of Senior Indebtedness of MEDIQ/PRN under the New Credit Facility.
Although the Note Indenture contains limitations on the amount of additional
indebtedness that MEDIQ/PRN may incur, under certain circumstances the amount of
such indebtedness could be substantial and, in any case, such indebtedness may
be Senior Indebtedness. See "Description of the Notes--Certain Covenants--
Limitation on Indebtedness." At March 31, 1998, on a Pro Forma Basis,
approximately $125.0 million of additional borrowings would have been available
to MEDIQ/PRN under the New Credit Facility, which amounts will constitute Senior
Indebtedness of MEDIQ/PRN and the Subsidiary Guarantors if and when incurred.
In the event of the bankruptcy, liquidation or reorganization of MEDIQ/PRN
or any Subsidiary Guarantor, the assets of MEDIQ/PRN or such Subsidiary
Guarantor, as the case may be, will be available to pay the New Notes or such
Subsidiary Guaranty only after all Senior Indebtedness of MEDIQ/PRN or such
Subsidiary Guarantor, as the case may be, has been paid in full. Sufficient
funds may not exist to pay amounts due on the New Notes in such event. In
addition, the subordination provisions of the Note Indenture provide that no
payment (other than certain non-cash payments) may be made with respect to the
New Notes during the continuance of a payment default under certain Senior
Indebtedness. Furthermore, if certain non-payment defaults exist with respect to
certain Senior Indebtedness of MEDIQ/PRN,
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the holders of such Senior Indebtedness will be able to prevent payments on the
Notes for certain periods of time. See "Description of the Notes--Ranking."
The New Debentures, like the Old Debentures, will be senior obligations of
Holdings and will rank PARI PASSU in right of payment with all Senior
Indebtedness of Holdings. Holdings presently has no Senior Indebtedness
outstanding. As a result of the holding company structure, however, the holders
of the New Debentures will effectively rank junior in right of payment to all
creditors of MEDIQ/PRN and its subsidiaries, including, without limitation, the
holders of the New Notes, lenders under the New Credit Facility (the "Senior
Lenders") and trade creditors. See "--Structural Subordination of Debentures."
Accordingly, in the event of the dissolution or reorganization of Holdings or
MEDIQ/PRN, the holders of the New Debentures may not receive any amounts in
respect of the New Debentures until after the payment in full of all claims of
the creditors of MEDIQ/PRN and its subsidiaries. At March 31, 1998, on a Pro
Forma Basis, the New Debentures would have been effectively subordinated to
approximately $448.0 million of aggregate liabilities and obligations
(consisting primarily of indebtedness, trade payables and other accrued
liabilities) of MEDIQ/PRN and its subsidiaries. See "MEDIQ/PRN Capitalization,"
"Holdings Capitalization" and "Description of the Debentures--Ranking."
STRUCTURAL SUBORDINATION OF DEBENTURES
Holdings is a holding company whose only material asset is the capital stock
of MEDIQ/PRN. The New Debentures will be an obligation of Holdings, and the
holders of the New Debentures will have no direct recourse to MEDIQ/PRN or its
assets. Holdings conducts no business (other than in connection with its
ownership of the capital stock of MEDIQ/PRN and the performance of its
obligations with respect to the New Debentures, the Exchangeable Debentures and
certain other administrative obligations), and depends on distributions from
MEDIQ/PRN to meet its obligations, including, without limitation, any
obligations with respect to the New Debentures. Because of the substantial
leverage of both Holdings and MEDIQ/PRN and the dependence of Holdings upon the
operating performance of MEDIQ/PRN to generate distributions to Holdings, there
can be no assurance that any such distributions will be adequate to fund
Holdings' obligations when due. In addition, the New Credit Facility, the Note
Indenture and applicable Federal and state law impose restrictions on the
payment of dividends and the making of loans by MEDIQ/PRN to Holdings. As a
result of the foregoing restrictions, Holdings may be unable to gain access to
the cash flow or assets of MEDIQ/PRN in amounts sufficient to pay cash interest
on the New Debentures on and after December 1, 2003, the date on which cash
interest thereon first becomes payable, and principal of the New Debentures when
due or upon a change of control or the occurrence of any other event requiring
the repayment of principal. In such event, Holdings may be required to (i)
refinance the New Debentures, (ii) seek additional debt or equity financing,
(iii) cause MEDIQ/PRN to refinance all or a portion of MEDIQ/PRN's indebtedness
with indebtedness containing covenants allowing Holdings to gain access to
MEDIQ/PRN's cash flow or assets, (iv) cause MEDIQ/PRN to obtain modifications of
the covenants restricting Holdings' access to cash flow or assets of MEDIQ/PRN
contained in MEDIQ/PRN's financing documents (including, without limitation, the
New Credit Facility and the Note Indenture), (v) merge MEDIQ/PRN with Holdings,
which merger would be subject to compliance with applicable debt covenants and
the consents of certain lenders or (vi) pursue a combination of the foregoing
actions. The measures Holdings may undertake to gain access to sufficient cash
flow to meet its future debt service requirements in respect of the New
Debentures will depend on general economic and financial market conditions, as
well as the financial condition of Holdings and MEDIQ/PRN and other relevant
factors existing at the time. No assurance can be given that any of the
foregoing measures can be accomplished.
ENCUMBRANCES ON ASSETS SECURING NEW CREDIT FACILITY
MEDIQ/PRN's obligations under the New Credit Facility are secured by a first
priority pledge of, or a first priority security interest in, as the case may
be, substantially all the assets of MEDIQ/PRN and the Subsidiary Guarantors, and
by 100% of the common stock of each Subsidiary Guarantor. The New Notes will not
be secured by the assets of MEDIQ/PRN or the Subsidiary Guarantors. If MEDIQ/PRN
becomes
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insolvent or is liquidated, or if payment under the New Credit Facility or in
respect of any other secured Senior Indebtedness is accelerated, the Senior
Lenders or holders of such other secured Senior Indebtedness will be entitled to
exercise the remedies available to a secured lender under applicable law (in
addition to any remedies that may be available under documents pertaining to the
New Credit Facility or such other Senior Indebtedness). Accordingly, holders of
such secured Senior Indebtedness will have a prior claim with respect to the
assets securing such indebtedness. See "Description of Certain Indebtedness--New
Credit Facility," "Description of the Notes" and "Description of the
Debentures."
OBLIGATIONS IN THE EVENT OF A CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each Issuer will be required to
make an offer to repurchase all of such Issuer's outstanding New Securities at a
purchase price in cash equal to 101% of (i) in the case of the New Notes, the
principal amount thereof, and (ii) in the case of the New Debentures, the
Accreted Value thereof, plus in each case accrued and unpaid interest, if any,
thereon to the date of repurchase. See "Description of the Notes--Change of
Control" and "Description of the Debentures-- Change of Control." There can be
no assurance that Holdings or MEDIQ/PRN, as the case may be, will have the funds
necessary to effect such a repurchase if such an event were to occur. In
addition, the New Credit Facility prohibits MEDIQ/PRN from repurchasing any
Securities and also provides that certain changes of control of Holdings and
MEDIQ/PRN will constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Indebtedness to which Holdings and MEDIQ/PRN
become a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when Holdings and MEDIQ/PRN are prohibited
from repurchasing Securities, Holdings and MEDIQ/PRN could seek the consent of
their respective lenders to repurchase the New Securities or could attempt to
refinance the borrowings that contain such prohibition. If Holdings and
MEDIQ/PRN do not obtain such a consent or repay such borrowings, they will
remain prohibited from repurchasing New Securities. In such case, the failure of
Holdings and MEDIQ/PRN to repurchase tendered New Securities would constitute an
event of default under the Indentures, which would cause a default under the New
Credit Facility. In such circumstances, the subordination provisions in the New
Notes would likely restrict payments to the holders of the New Notes. See
"Description of the Notes."
ORIGINAL ISSUE DISCOUNT; APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The New Debentures will be issued at a substantial discount from their
stated principal amount at maturity. Consequently, although cash interest on the
New Debentures generally will not accrue or be payable prior to June 1, 2003,
OID will be includable in the gross income of a holder of the New Debentures for
U.S. Federal income tax purposes in advance of the receipt of such cash payments
on the New Debentures. See "Certain U.S. Federal Income Tax Considerations" for
a more detailed discussion of the U.S. Federal income tax consequences of the
purchase, ownership and disposition of the New Debentures.
Moreover, the New Debentures constitute "applicable high yield discount
obligations" ("AHYDOs") because the yield to maturity of the New Debentures
exceeds the relevant applicable Federal rate (the "AFR") at the time of issue by
five or more percentage points. Since the New Debentures constitute AHYDOs,
Holdings will not be entitled to deduct OID accruing with respect thereto until
such amounts are actually paid. In the event that the yield to maturity equals
or exceeds such AFR by six or more percentage points, then a portion of such OID
will not be deductible at all by Holdings. See "Certain U.S. Federal Income Tax
Considerations" for a more detailed discussion of the Federal income tax
consequences to holders of the New Debentures.
If a bankruptcy case is commenced by or against Holdings under the Federal
bankruptcy law after the issuance of the New Debentures, the claim of a holder
of New Debentures with respect to the principal amount thereof may be limited to
an amount equal to the sum of (i) the initial offering price and (ii) that
portion of the OID that is not deemed to constitute "unmatured interest" for
purposes of the Federal
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bankruptcy law. Any OID that was not accrued as of any such bankruptcy filing
would constitute "unmatured interest."
HISTORICAL OPERATING LOSSES
The Company experienced losses from continuing operations of approximately
$3.3 million, $6.2 million, $2.2 million for the fiscal years ended September
30, 1995, 1996 and 1997, respectively. On a Pro Forma Basis, the Company's loss
from continuing operations for the fiscal year ended September 30, 1997 and for
the LTM Period would have been $19.8 million and $17.2 million, respectively.
See "Pro Forma Condensed Consolidated Financial Statements." There can be no
assurance that the Company will not continue to incur operating losses.
COMPETITION
The movable medical equipment rental industry is highly competitive and the
Company, which operates throughout the United States, encounters competition in
all locations in which it operates. Competition is generated from (i) medical
equipment manufacturers which sell medical equipment directly to health care
providers and which the Company believes generate the strongest competition;
(ii) general leasing and financing companies and financial institutions, such as
banks, which finance the acquisition of medical equipment by health care
providers; and (iii) national, regional and local medical equipment renting and
leasing companies and medical equipment distributors which rent medical
equipment to health care providers. The Company believes that the key factors
influencing the decision regarding the selection of a medical equipment rental
vendor include availability and quality of medical equipment, service and price.
The Company faces competitive pressure in all of its markets from existing
competitors and from the potential entry of new competitors. Although the
Company believes that it is able to demonstrate the cost-effectiveness of
renting medical equipment on a long term basis, the Company believes that many
health care providers will continue to purchase a substantial portion of their
medical equipment. See "Business-- Competition."
ABILITY TO IMPLEMENT ACQUISITION STRATEGY AND ABILITY TO MANAGE GROWTH
A key component of the Company's business strategy is the growth of the
Company's product and customer base through the acquisition of companies in
similar lines of business. The Company has consummated the CHI Acquisition and
has also executed a non-binding letter of intent with respect to another
potential acquisition. See "Business--Recent and Potential Acquisitions." In
addition, the Company believes that there currently exist ample opportunities
for other potential acquisitions. However, there can be no assurance that the
Company will consummate such other acquisition, or that it will be able to
successfully capitalize on any other opportunities. Moreover, such other
opportunities may not be available in the future.
As of March 31, 1998, on a Pro Forma Basis, MEDIQ/PRN would have had the
ability to borrow up to an additional $125.0 million under the New Credit
Facility. In order to capitalize on future acquisition opportunities, the
Company may need to obtain additional capital and obtain Federal and/or state
regulatory approvals. To raise additional capital, the Company may elect to
undertake additional debt financings. Additional borrowings under the New Credit
Facility, and the issuance of additional debt securities or other borrowings,
would result in additional leverage and may reduce working capital. Furthermore,
the issuance of additional debt securities or other borrowings will be
restricted by the terms of the Indentures and the New Credit Facility. There can
be no assurance that the Company will be able to obtain the necessary approvals
or such financing on terms acceptable to the Company, if at all, and the
inability to obtain such regulatory approvals or financing could have a material
adverse effect on the Company's ability to implement its acquisition strategy
and capitalize on profitable opportunities.
Any growth of the Company's business through internal expansion or
acquisitions will place demands on the Company's management, employees,
operations and physical and financial resources. To manage its growth, the
Company must continue to implement and improve its operational and financial
systems and
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to expand, train and manage its employee base, and any inability of the Company
to attract and retain the executive and managerial personnel required by its
expanding business could have a material adverse effect on the results of
operations and financial condition of the Company. If the Company's systems,
procedures or controls are not adequate to support the Company's operations,
Management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products and services.
The CHI Acquisition and any additional acquisitions will involve a number of
additional risks, including diversion of Management's attention from other
business concerns, the possible loss of key employees of the CH Medical Business
and other acquired businesses and the potential difficulties in integrating the
operations of the CH Medical Business and other acquired businesses with those
of the Company. The Company has not previously operated a manufacturer of
Support Surfaces or other medical equipment and there can be no assurance that
the Company will be able to successfully operate the CH Medical Business. In
light of the foregoing, no assurance can be given as to the effect of the CHI
Acquisition and other acquired businesses on the Company's business or results
of operations. See "Business--Recent and Potential Acquisitions."
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of Management, some of whom would be difficult to replace. The
loss of the services of certain members of senior Management could have a
material adverse effect on the Company. Although Messrs. Carroll and Kaplan and
certain other members of senior Management are stockholders of Holdings and have
employment contracts with the Company, there can be no assurance that the
services of such personnel will continue to be available to the Company. See
"Management" and "Ownership of Capital Stock."
DEPENDENCE ON SALES REPRESENTATIVES AND SERVICE SPECIALISTS
The Company believes that to be successful it must continue to hire, train
and retain highly qualified sales representatives and service specialists. The
Company's sales growth has been supported by hiring and developing new sales
representatives and adding, through acquisitions, established sales
representatives whose existing customers generally have become customers of the
Company. Due to the relationships developed between the Company's sales
representatives and its customers, upon the departure of a sales representative,
the Company faces the risk of losing the representative's customers, especially
if the representative were to represent one of the Company's competitors. In
addition, there has been, and the Company expects that there will continue to
be, intense competition in its industry for divisional managers and experienced
sales representatives. There can be no assurance that the Company will be able
to retain or attract qualified personnel in the future. Failure by the Company
to attract or retain such personnel could have a material adverse effect on the
Company's business, financial condition or results of operations.
REGULATION OF THE HEALTH CARE INDUSTRY
The Company focuses its business on providing services to health care
institutions, particularly hospitals. The health care industry is subject to
extensive government regulation, licensure and prescribed operating procedures.
The continued acceptance of the Company's services and products by its customers
will depend, to a very significant degree, upon whether such services and
products will be in compliance with applicable regulations or will assist health
care institutions in complying with such regulations. While the Company closely
monitors such regulations and designs its services and products accordingly, a
substantial change in the level of regulation or the substance of particular
regulations could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Government
Regulation."
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UNCERTAINTY OF HEALTH CARE REFORM; REIMBURSEMENT OF HEALTH CARE COSTS
There are widespread efforts to control health care costs in the United
States and abroad. As an example, The Balanced Budget Act of 1997 (the "BBA")
significantly reduces Federal spending on Medicare and Medicaid over the next
five years by reducing annual payment updates to acute care hospitals, changing
payment systems for both skilled nursing facilities and home health care
services from cost-based to prospective payment systems, eliminating annual
payment updates for durable medical equipment ("DME"), and allowing states
greater flexibility in controlling Medicaid costs at the state level. The
Company cannot reliably predict the timing of or the exact effect which these or
similar initiatives could have on the pricing and profitability of, or demand
for, the Company's products. However, certain provisions of the BBA, such as the
changes in the manner Medicare Part A reimburses skilled nursing facilities, may
change the manner in which the Company's customers make renting and purchasing
decisions and could have a material adverse effect on the Company. The Company
also believes it is likely that efforts by governmental and private payors to
contain costs through managed care and other efforts and to reform health
systems will continue in the future. There can be no assurance that current or
future initiatives will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's products are rented and sold principally to health care
providers who receive reimbursement for the products and services they provide
from various public and private third-party payors, including Medicare, Medicaid
and private insurance programs. Since consummation of the CHI Acquisition, the
Company also acts as a DME supplier under Federal law and, as such, furnishes
products directly to customers and bills third-party payors. As a result, the
demand for the Company's products in any specific care setting is dependent in
part on the reimbursement policies of the various payors in that setting. In
order to be reimbursed, the products generally must be found to be reasonable
and necessary for the treatment of medical conditions and must otherwise fall
within the payor's list of covered services. In light of increased controls on
Medicare spending, there can be no assurance of the outcome of future coverage
or payment decisions for any of the Company's products by governmental or
private payors. If providers, suppliers and other users of the Company's
products and services are unable to obtain sufficient reimbursement for the
provision of the Company's products, a material adverse impact on the Company's
business, financial condition or results of operations will likely result.
CONSOLIDATION OF PURCHASING ENTITIES
Many health care providers have merged or consolidated with other members of
their industry in an effort to reduce costs or achieve operating synergies.
Accordingly, because larger purchasers tend to have more leverage in negotiating
prices and because this consolidation often results in the renegotiation of
contracts and in the granting of price concessions, this trend could have a
material adverse effect on the Company's business, financial condition or
results of operations.
FRAUD AND ABUSE LAWS
The Company and its customers are subject to various Federal and state laws
pertaining to health care fraud and abuse, including prohibitions on the
submission of false claims and the payment or acceptance of kickbacks or other
remuneration in return for the purchase or rental of Company products. The
United States Department of Justice and the Office of the Inspector General of
the United States Department of Health and Human Services have launched an
enforcement initiative which specifically targets the long-term care, home
health and DME industries. Sanctions for violating these laws include criminal
penalties and civil sanctions, including fines and penalties, and possible
exclusion from Medicare, Medicaid and other Federal health care programs. There
can be no assurance that the Company's practices (including its practices with
respect to the CH Medical Business) the past practices of the CH Medical
Business or the practices of the Company's customers will not be challenged
under Federal and state fraud and abuse laws in the future or that such a
challenge would not have a material adverse effect on the business, financial
condition or results of operations of the Company.
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PRODUCT LIABILITY
The manufacture and marketing of medical products entails an inherent risk
of product liability claims. Although the Company has not experienced any
significant losses due to product liability claims and currently maintains
umbrella liability insurance coverage, there can be no assurance that the amount
or scope of the coverage maintained by the Company will be adequate to protect
it in the event a significant product liability claim is successfully asserted
against the Company.
CONTROLLING STOCKHOLDERS
The BRS Entities and the Co-Investors collectively own approximately 82.9%
of the outstanding shares of Common Stock of Holdings, which owns 100% of the
outstanding capital stock of MEDIQ/PRN. By virtue of such ownership, the BRS
Entities and the Co-Investors control Holdings and MEDIQ/PRN, and have the power
to elect a majority of directors, appoint new management and approve any action
requiring the approval of the holders of any class of capital stock of Holdings
and MEDIQ/PRN, including the adoption of most amendments to the Certificate of
Incorporation of Holdings and/or MEDIQ/PRN, the approval of mergers or sales of
substantially all of Holdings' and/or MEDIQ/PRN's assets and the creation of new
classes or series of capital stock of Holdings and/or MEDIQ/PRN. The directors
elected by the BRS Entities and the Co-Investors have the authority to make
decisions affecting the capital structure of Holdings and MEDIQ/PRN, including
the issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends. See "Ownership of Capital Stock."
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if, at the
time it issued the Securities issued by it, either MEDIQ/ PRN or Holdings (a)
incurred such indebtedness with intent to hinder, delay or defraud creditors, or
(b)(i) received less than reasonably equivalent value or fair consideration
therefor and (ii)(A) was insolvent at the time of the incurrence, (B) was
rendered insolvent by reason of such incurrence (and the application of the
proceeds thereof), (C) was engaged or was about to engage in a business or
transaction for which the assets remaining with it constituted unreasonably
small capital to carry on its business or (D) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they mature,
then, in each such case, a court of competent jurisdiction could avoid, in whole
or in part, the New Notes or the New Debentures, as the case may be, and order
that all or part of any payments on such New Notes or New Debentures be returned
to the Issuer thereof or to a fund for the benefit of creditors or, in the
alternative, such court could subordinate the New Notes or the New Debentures to
existing and future indebtedness of MEDIQ/PRN or Holdings, respectively.
A portion of the proceeds of the borrowing under the New Credit Facility and
the Note Offering was used by MEDIQ/PRN to advance to Holdings amounts necessary
to finance, in part, the cash portion of the Merger Consideration. See "The
Transactions" and "Use of Proceeds." In addition, Holdings will rely on
dividends, loans and other advances from MEDIQ/PRN as a source of payment on the
New Debentures. Dividend payments, however, are generally considered to have
been made for less than a reasonably equivalent value as the payor receives no
value in return. As a result, such dividend payments may be attacked by an
unpaid creditor of MEDIQ/PRN or a representative of such creditors pursuant to
the same fraudulent transfer theory set forth above. If such an attack were
successful, MEDIQ/PRN could be prevented from paying dividends to Holdings, or
Holdings could be obliged to repay dividends received if such dividends were
successfully avoided as fraudulent transfers. In such case, the ability of
Holdings to make payments on the Debentures would be materially impaired.
Upstream guarantees themselves, such as the Subsidiary Guaranties, may be
avoided as fraudulent transfers pursuant to the same fraudulent transfer theory
set forth above. However, each Subsidiary Guaranty is limited in amount to the
maximum amount that can be guaranteed under applicable fraudulent transfer laws.
Accordingly, a Subsidiary Guarantor's obligation under its Subsidiary Guaranty
may be limited or reduced to zero. In determining whether a Subsidiary Guarantor
received reasonably
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equivalent value, courts generally will consider the benefits the Subsidiary
Guarantor derives from the Company's financing, management and position and
reputation in the marketplace.
The measure of insolvency for purposes of all of the foregoing varies based
upon the law of the jurisdiction applied. Generally, however, an entity would be
considered insolvent if the sum of its debts (including contingent liabilities)
is greater than all of its property at a fair valuation, or if the present fair
saleable value of its assets is less than the amount that will be required to
pay its probable liabilities on its existing debts (including contingent
liabilities), as they become absolute and matured. In addition, an entity may be
presumed insolvent under some fraudulent transfer laws if it is not generally
paying its debts as they become due. Although on a Pro Forma Basis the Company
had a negative net worth, the Company believes, based upon valuations and
forecasts, that the Company was at the time of consummation of the Transactions,
and will continue to be at all times that payments on the Securities are made,
solvent, will have sufficient capital to carry on its business and will continue
to be able to pay its debts as they mature. Similarly, the Company believes
that, based on such information, MEDIQ/PRN and each of its subsidiaries was at
the time of the consummation of the Transactions, and will continue to be at the
times it is projected to pay dividends to its corporate parent, solvent, will
have sufficient capital to carry on its business and will continue to be able to
pay its debts as they mature. Accordingly, the Company believes that in a
bankruptcy case or a lawsuit by creditors of the Company, none of the Securities
should be held to have been issued, nor payments on the Securities held to have
been made, in violation of applicable Federal bankruptcy law or state fraudulent
transfer laws, and that in a suit by the creditors of MEDIQ/PRN and its
subsidiaries, none of the dividends made by such entities should be held to have
been made in violation of applicable Federal bankruptcy law or state fraudulent
transfer laws. There can be no assurance, however, as to what standard a court
would apply to determine whether Holdings, MEDIQ/PRN and the subsidiaries of
MEDIQ/PRN were "insolvent" as of the date the Securities were issued; or that,
regardless of the method of valuation, a court would not determine that
Holdings, MEDIQ/PRN or the subsidiaries of MEDIQ/ PRN were insolvent on such
other relevant dates. Nor can there be any assurance that a court would not
determine, regardless of whether the Company was solvent on the date the
Securities were issued, that the payments constituted fraudulent transfers on
another of the grounds set forth above. The Issuers obtained a "solvency
opinion" regarding Holdings and MEDIQ/PRN from an independent third party in
connection with the Transactions, which opinion was subject to certain
assumptions, qualifications, limitations and defined terms as set forth therein.
Notwithstanding the "solvency opinion," there can be no assurance that a court
passing on such questions would agree with such opinion.
In rendering their opinions in connection with the Offerings, counsel for
the Company and counsel for the Initial Purchasers will not express any opinions
as to the applicability of Federal or state fraudulent conveyance laws.
ABSENCE OF PUBLIC MARKET FOR THE SECURITIES
The Old Securities currently are eligible for trading in The PORTAL Market.
The Company does not intend to apply for listing or quotation of the New
Securities on any securities exchange or stock market. The Initial Purchasers
have advised the Issuers that they intend to make a market in the New
Securities, subject to the limits imposed by the Securities Act and the Exchange
Act and subject to any limits imposed during the pendency of any registration
statement or shelf registration statement filed under the Securities Act;
however, the Initial Purchasers are not obligated to do so, and may discontinue
such market-making at any time without notice. Therefore, no assurance can be
given as to the liquidity of any trading market for the New Securities or that
an active market for the New Securities will develop. Future trading prices of
the New Securities will depend on many factors, including, among other things,
prevailing interest rates, the operating results of the Company and the market
for similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Securities
will not be subject to similar disruptions. Any such disruptions could have an
adverse effect on the New Securities.
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THE TRANSACTIONS
Concurrently with the consummation of the Offerings, the Company consummated
each of the other Transactions.
THE MERGER, THE REORGANIZATION AND THE REFINANCING
Pursuant to the terms of the Merger Agreement, at the effective time of the
Merger (the "Effective Time") MQ was merged with and into Holdings with Holdings
continuing as the Surviving Corporation. Prior to or simultaneously with the
consummation of the Merger, (i) Holdings effected the Reorganization by
contributing certain of its assets and liabilities (including the capital stock
of all the subsidiaries of Holdings other than MEDIQ/PRN) to MEDIQ/PRN on terms
and conditions reasonably acceptable to MQ, (ii) MEDIQ/PRN entered into the New
Credit Facility, which provides for up to $200.0 million of Term Loans, up to
$50.0 million of Revolving Loans and up to $75.0 million of Acquisition Loans
and (iii) all indebtedness of the Company except approximately $10.1 million of
the Exchangeable Debentures and $2.3 million of its capital leases was repaid.
The Merger Consideration was approximately $390.7 million, which amount
included the issuance of approximately $20.0 million of Series A Preferred
Stock. In addition, in connection with the Merger (i) the Rotko Entities
converted a portion of their preferred equity in Holdings into $14.5 million of
common and preferred equity of the Surviving Corporation pursuant to the Rotko
Rollover, (ii) the Management Stockholders purchased $4.2 million of common and
preferred equity of MQ pursuant to the Management Investment and (iii) the BRS
Entities and the Co-Investors purchased $109.5 million of common and preferred
equity pursuant to the Equity Contribution. See "--The Rotko Rollover," "--The
Management Investment" and "--The Equity Contribution."
THE ROTKO ROLLOVER
In connection with the transactions contemplated by the Merger Agreement, MQ
and the Rotko Entities entered into an agreement dated January 14, 1998 (the
"Rollover Agreement") pursuant to which the Rotko Entities agreed to convert
1,000,000 shares (the "Rolled Shares") of Series A preferred stock, par value
$.50 per share, of Holdings ("Holdings Preferred Stock") into certain securities
specified therein instead of receiving Merger Consideration of $13.75 cash and
0.075 of a share of Series A Preferred Stock per Rolled Share. MQ required that
the Rotko Entities enter into the Rollover Agreement in order to reduce the
amount required to finance the Transactions and to facilitate the treatment of
the Merger for accounting purposes as a recapitalization of the Company. Under
the Merger Agreement, at the Effective Time, the Rolled Shares were converted in
the Merger into 1,340,219 shares of Series B Preferred Stock and 109,781 shares
of Common Stock equal to approximately 11% (assuming an initial investment of
$10.0 million of Common Stock by the stockholders of the Surviving Corporation)
of the shares of Common Stock of the Surviving Corporation outstanding
immediately after the Effective Time (such Series B Preferred Stock and Common
Stock, together the "Converted Shares"). See "--Conversion of MQ Stock and
Holdings Shares in the Merger."
The Rotko Entities consist of (i) a trust established on November 18, 1983
by the late Bernard B. Rotko, the Company's founder, for the benefit of certain
members of his family (the "Rotko 1983 Trust"), (ii) Michael J. Rotko, the
current Chairman of the Board of Directors of Holdings and MEDIQ/PRN and a
trustee of the Rotko 1983 Trust, (iii) Bessie G. Rotko, the spouse of Bernard B.
Rotko and a trustee of the Rotko 1983 Trust and (iv) Judith M. Shipon, the
daughter of Bernard B. Rotko and a trustee of the Rotko 1983 Trust.
THE MANAGEMENT INVESTMENT
The Management Stockholders purchased $4.2 million of common and preferred
equity of MQ pursuant to the Management Investment. At the Effective Time, the
securities of MQ purchased by the Management Stockholders were converted into
approximately $0.6 million of Common Stock, $2.0 million of Series A Preferred
Stock, $0.6 million of Series B Preferred Stock and $1.0 million of Series C
Preferred Stock. See "--Conversion of MQ Stock and Holdings Shares in the
Merger."
31
<PAGE>
THE EQUITY CONTRIBUTION
The BRS Entities and the Co-Investors purchased $109.5 million of common and
preferred equity of MQ pursuant to the Equity Contribution. At the Effective
Time, the securities of MQ purchased by the BRS Entities and the Co-Investors
were converted into approximately $8.3 million of Common Stock, $56.2 million of
Series A Preferred Stock, $16.0 million of Series B Preferred Stock and $29.0
million of Series C Preferred Stock. See "--Conversion of MQ Stock and Holdings
Shares in the Merger."
CONVERSION OF MQ STOCK AND HOLDINGS SHARES IN THE MERGER
As a result of the Merger, each share of capital stock of MQ issued and
outstanding immediately prior to the Effective Time (including the shares of
capital stock issued by MQ to the Management Stockholders pursuant to the
Management Investment and the shares of capital stock issued by MQ to the BRS
Entities and the Co-Investors pursuant to the Equity Contribution) was converted
into and represented the same number of shares of the same class and series of
capital stock of the Surviving Corporation.
As a result of the Merger, each share of Holdings Preferred Stock and each
share of common stock, par value $1.00 per share, of Holdings ("Holdings Common
Stock" and, together with the Holdings Preferred Stock, the "Holdings Shares")
issued and outstanding immediately prior to the Effective Time was converted
into the right to receive $13.75 in cash, without interest, and 0.075 of a share
of Series A Preferred Stock of the Surviving Corporation; provided that (i) the
Rolled Shares were converted into and represented the Converted Shares, (ii)
each Holdings Share that was issued and outstanding immediately prior to the
Effective Time and owned by MQ or Holdings or any direct or indirect subsidiary
of MQ or Holdings was cancelled and no payment of any consideration was made
with respect thereto and (iii) any Holdings Shares held by a holder who had
timely demanded and perfected his demand for appraisal of his Holdings Shares
(such shares being "Dissenting Shares") in accordance with Section 262 of the
Delaware General Corporation Law (the "DGCL") and as of the Effective Time had
neither effectively withdrawn nor lost his right to such appraisal was entitled
to only such rights as are granted by the DGCL.
Following consummation of the Merger, the BRS Entities and the Co-Investors
held approximately 82.9% of the Common Stock, 71.9% of the Series A Preferred
Stock, 53.4% of the Series B Preferred Stock and 96.5% of the Series C Preferred
Stock; the Management Stockholders held approximately 6.1% of the Common Stock,
2.6% of the Series A Preferred Stock, 1.9% of the Series B Preferred Stock and
3.5% of the Series C Preferred Stock; the Rotko Entities held approximately 11%
of the Common Stock, 8.1% of the Series A Preferred Stock and 44.7% of the
Series B Preferred Stock; and the stockholders of Holdings prior to the Merger
(other than the Rotko Entities) held approximately 17.4% of the Series A
Preferred Stock. See "Ownership of Capital Stock."
32
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offers.
Approximately $613.2 million of funds were used to consummate the Merger and the
CHI Acquisition, effect the Refinancing, provide for working capital and pay
related fees and expenses. Such funds were provided by (i) $200.0 million of
Term Loans under the New Credit Facility, (ii) $190.0 million of gross proceeds
from the Note Offering, (iii) $75.0 million of gross proceeds from the Unit
Offering, (iv) $109.5 million of gross proceeds from the Equity Contribution and
(v) $38.7 million of gross proceeds from the Equity Rollover. See "The
Transactions" and "Description of Certain Indebtedness."
33
<PAGE>
MEDIQ/PRN CAPITALIZATION
The following table sets forth, as of March 31, 1998, the historical and pro
forma consolidated capitalization of MEDIQ/PRN after giving effect to the
Transactions and the CHI Acquisition. The information set forth below should be
read in conjunction with "Pro Forma Condensed Consolidated Financial
Statements,""Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 3,846 $ 7,162
----------- -----------
----------- -----------
Long-term debt, including current portion:
Existing Credit Facility (as defined)................................................. 131,527 --
New Credit Facility................................................................... -- 200,000
Capital lease obligations............................................................. 2,318 2,318
Notes................................................................................. -- 190,000
----------- -----------
Total long-term debt.............................................................. 133,845 392,318
Stockholders' equity (deficit)(a)....................................................... 64,420 (128,187)
----------- -----------
Total capitalization............................................................ $ 198,265 $ 240,431
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) The historical stockholders' equity of MEDIQ/PRN includes $10 of common
stock, $86,457 of capital in excess of par, $58,830 of retained earnings and
$(80,877) of advances to affiliates. The pro forma stockholders' deficit of
MEDIQ/PRN includes $10 of common stock, $86,457 of capital in excess of par,
$50,780 of retained earnings and $(265,434) of advances to affiliates.
34
<PAGE>
HOLDINGS CAPITALIZATION
The following table sets forth, as of March 31, 1998, the historical and pro
forma consolidated capitalization of Holdings after giving effect to the
Transactions and the CHI Acquisition. The information set forth below should be
read in conjunction with "Pro Forma Condensed Consolidated Financial
Statements,""Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 3,925 $ 7,241
---------- -----------
---------- -----------
Long-term debt, including current portion:
Existing Credit Facility............................................................... 131,527 --
New Credit Facility.................................................................... -- 200,000
Capital lease obligations.............................................................. 2,318 2,318
Notes.................................................................................. -- 190,000
Debentures............................................................................. -- 74,257
Exchangeable Debentures(a)............................................................. 10,055 10,055
---------- -----------
Total long-term debt............................................................... 143,900 476,630
Mandatorily redeemable preferred stock:
Series A Preferred Stock(b)............................................................ -- 78,235
Series C Preferred Stock............................................................... -- 30,000
---------- -----------
Total mandatorily redeemable preferred stock....................................... -- 108,235
Stockholders' equity (deficit)(c)........................................................ 53,496 (316,115)
---------- -----------
Total capitalization............................................................. $ 197,396 $ 268,750
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(a) Approximately $500,000 in principal amount of the Exchangeable Debentures is
currently outstanding. See "Description of Certain
Indebtedness--Exchangeable Debentures."
(b) Assumes that no stockholders of the Company exercised dissenters' rights in
connection with the Merger.
(c) The historical stockholders' equity of Holdings includes $3,322 of Holdings
Preferred Stock, $20,068 of Holdings Common Stock, $27,102 of capital in
excess of par, $7,250 of retained earnings and $(4,246) of treasury stock.
The pro forma stockholders' deficit of Holdings includes $30 of Series B
Preferred Stock, $10 of Common Stock, $40,703 of capital in excess of par
and $(356,858) of retained earnings. Capital in excess of par includes $0.7
million ascribed to the Warrants issued together with the Old Debentures as
Units. No assurance can be given that the value allocated to the Warrants is
indicative of the price at which the Warrants may actually trade.
35
<PAGE>
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, SpectraCair and CH Medical.
The SpectraCair Acquisition was consummated on September 1, 1997, 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 consummated the CHI Acquisition
transaction simultaneously with the Transactions on May 29, 1998.
The pro forma condensed consolidated statements of operations for the year
ended September 30, 1997 and for 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. 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.
The Pro Forma Financial Statements include certain cost savings related to
the CHI Acquisition which the Company expects to realize in connection with such
acquisition. The Pro Forma Financial Statements do not reflect certain other
cost savings related to the SpectraCair Acquisition and the CHI Acquisition or
the cost of achieving such other cost savings. See "Business--Recent and
Potential Acquisitions."
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 Financial Statements should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto of Holdings,
MEDIQ/PRN and CH Medical included elsewhere in this Prospectus.
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.
36
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MEDIQ/PRN CONSOLIDATED
PRO FORMA HOLDINGS
PRO FORMA PRO FORMA FOR HOLDINGS PRO FORMA
HISTORICAL ADJUSTMENTS FOR ADJUSTMENTS FOR SPECTRACAIR PRO FORMA/ FOR SPECTRACAIR
------------------------- THE SPECTRACAIR THE AND THE CONSOLIDATING AND THE
MEDIQ/PRN SPECTRACAIR ACQUISITION TRANSACTIONS TRANSACTIONS ADJUSTMENTS(E) TRANSACTIONS
------------ ----------- --------------- --------------- ------------ -------------- ---------------
Revenues:
Rental............... $ 124,316 $ 9,647 $ -- $ -- $ 133,963 $ -- $ 133,963
Sale of parts,
disposables and
equipment.......... 19,922 142 -- -- 20,064 -- 20,064
Other................ 11,915 -- (1,475)(A) -- 10,440 (193) 10,247
------------ ----------- ------- --------------- ------------ -------------- ---------------
156,153 9,789 (1,475) -- 164,467 (193) 164,274
Costs and Expenses:
Cost of sales........ 16,334 112 -- -- 16,446 -- 16,446
Operating............ 46,138 2,638 (1,475)(A) -- 47,301 -- 47,301
Selling.............. 13,353 2,804 -- -- 16,157 -- 16,157
General and
administrative..... 18,049 1,545 -- 1,000(C) 20,594 2,223 22,817
Management fees--
MEDIQ.............. 3,341 -- -- -- 3,341 (3,341) --
Depreciation and
amortization....... 30,333 2,313 -- -- 32,646 26 32,672
------------ ----------- ------- --------------- ------------ -------------- ---------------
Operating Income....... 28,605 377 -- (1,000) 27,982 899 28,881
Other (charges)
Credits:
Interest expense..... (16,912) (499) -- (19,067)(D) (36,478) (11,244) (47,722)
Interest income...... 985 -- -- -- 985 1,084 2,069
Other--net........... 6,989 -- 61(A) -- 7,050 (16,562) (9,512)
------------ ----------- ------- --------------- ------------ -------------- ---------------
Income from
Continuing
Operations before
Income Taxes....... 19,667 (122) 61 (20,067) (461) (25,823) (26,284)
Income Taxes......... 7,438 -- (24)(B) (8,027)(B) (613) (5,924) (6,537)
------------ ----------- ------- --------------- ------------ -------------- ---------------
Income (Loss) from
Continuing
Operations......... $ 12,229 $ (122) $ 85 $ (12,040) $ 152 $ (19,899) $ (19,747)
------------ ----------- ------- --------------- ------------ -------------- ---------------
------------ ----------- ------- --------------- ------------ -------------- ---------------
<CAPTION>
<S> <C> <C>
CONSOLIDATED
HOLDINGS
PRO FORMA
PRO FORMA FOR
ADJUSTMENTS SPECTRACAIR,
FOR THE THE
CHI TRANSACTIONS
ACQUISITION(F) AND CHI
----------- ---------------
Revenues:
Rental............... $ 22,154 $ 156,117
Sale of parts,
disposables and
equipment.......... 4,556 24,620
Other................ -- 10,247
----------- ---------------
26,710 190,984
Costs and Expenses:
Cost of sales........ 1,355 17,801
Operating............ 8,268 55,569
Selling.............. 3,233 19,390
General and
administrative..... 6,208 29,025
Management fees--
MEDIQ.............. -- --
Depreciation and
amortization....... 3,588 36,260
----------- ---------------
Operating Income....... 4,058 32,939
Other (charges)
Credits:
Interest expense..... (4,297) (52,019)
Interest income...... -- 2,069
Other--net........... 193 (9,319)
----------- ---------------
Income from
Continuing
Operations before
Income Taxes....... (46) (26,330)
Income Taxes......... (18) (6,555)
----------- ---------------
Income (Loss) from
Continuing
Operations......... $ (28) $ (19,775)
----------- ---------------
----------- ---------------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
37
<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 PRO FORMA
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) -- (7,750)(D) (18,239) (5,459)
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) (8,250) 10,818 (17,327)
Income Taxes................ 7,309 -- 65(B) (3,300)(B) 4,074 (2,357)
------------- ------ ------ ------------- ------------- ---------------
Income (Loss) from
Continuing Operations..... $ 11,595 $ 327 $ (228) $ (4,950) $ 6,744 $ (14,970)
------------- ------ ------ ------------- ------------- ---------------
------------- ------ ------ ------------- ------------- ---------------
<CAPTION>
CONSOLIDATED CONSOLIDATED
HOLDINGS HOLDINGS
PRO FORMA FOR PRO FORMA PRO FORMA
SPECTRACAIR ADJUSTMENTS FOR SPECTRACAIR,
AND THE FOR THE CHI THE TRANSACTIONS
TRANSACTIONS ACQUISITION(F) AND CHI
--------------- ------------- -----------------
<S> <C> <C> <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.......... (23,698) (2,148) (25,846)
Interest income........... 1,066 4 1,070
Other--net................ (726) 382 (344)
------- ------------- -------
Income (Loss) from
Continuing Operations
before Income Taxes....... (6,509) (442) (6,951)
Income Taxes................ 1,717 (177) 1,540
------- ------------- -------
Income (Loss) from
Continuing Operations..... $ (8,226) $ (265) $ (8,491)
------- ------------- -------
------- ------------- -------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
38
<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) (11,431)(D) (18,170) (6,129) (24,299)
Interest income................................ 475 -- 475 -- 475
Other--net..................................... 4 -- 4 -- 4
------------- ------------- ------------- ------- -------------
Income (Loss) from Continuing Operations before
Income Taxes................................... 8,867 (11,931) (3,064) (5,850) (8,914)
Income Taxes..................................... 3,962 (4,772)(B) (810) (2,327) (3,137)
------------- ------------- ------------- ------- -------------
Income (Loss) from Continuing Operations......... $ 4,905 $ (7,159) $ (2,254) $ (3,523) $ (5,777)
------------- ------------- ------------- ------- -------------
------------- ------------- ------------- ------- -------------
<CAPTION>
CONSOLIDATED
PRO FORMA HOLDINGS
ADJUSTMENTS PRO FORMA FOR
FOR THE CHI THE 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) (26,447)
Interest income................................ 10 485
Other--net..................................... 189 193
--------------- -------
Income (Loss) from Continuing Operations before
Income Taxes................................... (148) (9,062)
Income Taxes..................................... (59) (3,196)
--------------- -------
Income (Loss) from Continuing Operations......... $ (89) $ (5,866)
--------------- -------
--------------- -------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations
39
<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, 1997 and 1998, 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................................... 12,891 6,445 6,437
Notes.......................................... 20,900 10,450 10,450
Amortization of financing fees/debt issue costs
over the period of the related financing..... 1,594 797 797
Existing borrowings to carry forward (capital
leases)...................................... 438 219 158
------------- -------- -------
$ 36,478 $ 18,239 $ 18,170
Historical interest costs:
MEDIQ/PRN.................................... (16,912) (10,194) (6,739)
SpectraCair.................................. (499) (295) --
------------- -------- -------
$ 19,067 $ 7,750 $ 11,431
------------- -------- -------
------------- -------- -------
</TABLE>
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), $150.0 million was assumed to be utilized
to consummate the Transactions and an additional $50.0 million of Term Loans
was assumed to be utilized to acquire the CH Medical Business (see footnote
F). LIBOR is based on the Company's average LIBOR rate for fiscal 1997 of
5.84%. The Notes bear interest at 11.0%. 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:
<TABLE>
<CAPTION>
ANNUAL INTEREST LOSS FROM CONTINUING
EXPENSE OPERATIONS
----------------- -----------------------
<S> <C> <C>
New Credit Facility........................................ $ 188 $ 113
</TABLE>
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:
<TABLE>
<CAPTION>
SEMI-ANNUAL
INTEREST LOSS FROM CONTINUING
EXPENSE OPERATIONS
----------------- -----------------------
<S> <C> <C>
New Credit Facility.......................................... $ 94 $ 56
</TABLE>
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.
(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
40
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
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 amortization.... 26 -- -- 26
----------- ------------- ------ -------------
Operating Income................... 795 -- 104 899
Other (charges) Credits:
Interest expense................. (2,195) (9,049)(i) -- (11,244)
Interest income.................. 1,084 -- -- 1,084
Other-net........................ (16,562) -- -- (16,562)
----------- ------------- ------ -------------
Loss from Continuing Operations
before Income Taxes.............. (16,878) (9,049) 104 (25,823)
Income Taxes....................... (1,981) (3,620)(ii) (323)(iii) (5,924)
----------- ------------- ------ -------------
Income (Loss) from Continuing
Operations....................... $ (14,897) $ (5,429) $ 427 $ (19,899)
----------- ------------- ------ -------------
----------- ------------- ------ -------------
</TABLE>
<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) (3,731)(i) -- (5,459)
Interest income.................. 547 -- -- 547
Other-net........................ (11,217) -- -- (11,217)
----------- ------------- ------ -------------
Loss from Continuing Operations
before Income Taxes.............. (13,596) (3,731) -- (17,327)
Income Taxes....................... (865) (1,492)(ii) -- (2,357)
----------- ------------- ------ -------------
Income (Loss) from Continuing
Operations....................... $ (12,731) $ (2,239) $ -- $ (14,970)
----------- ------------- ------ -------------
----------- ------------- ------ -------------
</TABLE>
<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)
</TABLE>
41
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C>
Management fees--MEDIQ........... (279) -- -- (279)
----------- ------------- ------ -------------
Operating Income................... 279 -- -- 279
Other (Charges) Credits:
Interest expense................. (496) (5,633)(i) -- (6,129)
----------- ------------- ------ -------------
Loss from Continuing Operations
before Income Taxes.............. (217) (5,633) -- (5,850)
Income Taxes....................... (74) (2,253)(ii) -- (2,327)
----------- ------------- ------ -------------
Income (Loss) from Continuing
Operations....................... $ (143) $ (3,380) $ -- $ (3,523)
----------- ------------- ------ -------------
----------- ------------- ------ -------------
</TABLE>
-------------------------------------
(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.................................. $ 10,135 $ 4,905 $ 5,575
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
------------- ------ ------
11,244 5,459 6,129
Holding's historical interest costs......... (2,195) (1,728) (496)
------------- ------ ------
$ 9,049 $ 3,731 $ 5,633
------------- ------ ------
------------- ------ ------
</TABLE>
The Debentures were issued with detachable stock purchase
warrants. In accordance with generally accepted accounting
principles, the cash proceeds from the Debentures will be
allocated to the Debentures and the Warrants based on their
relative fair value. Accordingly, the Debentures are assumed
to bear interest at an effective rate of 13.2%. 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.
42
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(F) The following unaudited pro forma statement of operations has 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 statement of
operations is 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 statement 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
---------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
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)( ii) (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)( ii) (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>
43
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<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)( ii) (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>
-------------------------------------
(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>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 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%.
44
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------------------------------------
PRO FORMA MEDIQ/PRN HOLDINGS
ADJUSTMENTS PRO FORMA PRO FORMA/
HISTORICAL FOR THE FOR THE CONSOLIDATING
MEDIQ/PRN TRANSACTIONS TRANSACTIONS ADJUSTMENTS(H)
------------ --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Cash.................................................. $ 3,846 $ 3,316(A) $ 7,162 $ 79
Accounts receivable, net.............................. 46,385 -- 46,385 --
Inventories........................................... 15,428 -- 15,428 --
Deferred income taxes................................. 3,728 -- 3,728 569
Other current assets.................................. 1,197 2,636(F) 3,833 --
------------ --------------- -------- ------
Total current assets.............................. 70,584 5,952 76,536 648
Property, plant and equipment, net.................... 113,703 -- 113,703 --
Goodwill.............................................. 55,558 -- 55,558 --
Other assets.......................................... 13,408 7,183(B) 20,591 3,779
------------ --------------- -------- ------
Total assets...................................... $ 253,253 $ 13,135 $ 266,388 $ 4,427
------------ --------------- -------- ------
------------ --------------- -------- ------
<CAPTION>
CONSOLIDATED
CONSOLIDATED HOLDINGS
HOLDINGS PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS FOR FOR THE
FOR THE THE CHI TRANSACTIONS
TRANSACTIONS ACQUISITION(I) AND CHI
------------ --------------- ------------
<S> <C> <C> <C>
ASSETS
Cash.................................................. $ 7,241 $ -- $ 7,241
Accounts receivable, net.............................. 46,385 7,757 54,142
Inventories........................................... 15,428 5,024 20,452
Deferred income taxes................................. 4,297 -- 4,297
Other current assets.................................. 3,833 -- 3,833
------------ ------- ------------
Total current assets.............................. 77,184 12,781 89,965
Property, plant and equipment, net.................... 113,703 4,345 118,048
Goodwill.............................................. 55,558 30,069 85,627
Other assets.......................................... 24,370 6,205 30,575
------------ ------- ------------
Total assets...................................... $ 270,815 $ 53,400 $ 324,215
------------ ------- ------------
------------ ------- ------------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheets
45
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA MEDIQ/PRN HOLDINGS
ADJUSTMENTS PRO FORMA PRO FORMA/
HISTORICAL FOR THE FOR THE CONSOLIDATING
MEDIQ/PRN TRANSACTIONS TRANSACTIONS ADJUSTMENTS(H)
------------ ------------ ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................. $ 10,667 $ -- $ 10,667 $ --
Accrued expenses............................................. 13,075 -- 13,075 2,169
Federal & state taxes payable................................ 837 -- 837 33
Other current liabilities.................................... 558 -- 558 --
Current portion of long-term debt............................ 6,534 (4,698)(C) 1,836 --
------------ ------------ ------------ --------------
Total current liabilities................................ 31,671 (4,698) 26,973 2,202
Existing senior debt......................................... 127,311 (126,829)(D) 482 --
New Credit Facility.......................................... -- 150,000(E) 150,000 --
Debentures................................................... -- -- -- 74,257
Notes........................................................ -- 190,000(E) 190,000 --
Exchangeable Debentures...................................... -- -- -- 10,055
Deferred income taxes and other liabilities.................. 29,851 (2,731)(F) 27,120 (2,394)
------------ ------------ ------------ --------------
Total liabilities........................................ 188,833 205,742 394,575 84,120
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 -- 10 --
Capital in excess of par value............................... 86,457 -- 86,457 (45,754)
Retained earnings............................................ 58,830 (8,050)(F) 50,780 (407,638)
Treasury stock............................................... -- -- -- --
Advances to affiliates....................................... (80,877) (184,557)(G) (265,434) 265,434
------------ ------------ ------------ --------------
Total stockholders' equity................................. 64,420 (192,607) (128,187) (187,928)
------------ ------------ ------------ --------------
Total Liabilities and Stockholders' Equity............... $ 253,253 $ 13,135 $ 266,388 $ 4,427
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
<CAPTION>
<S> <C> <C> <C>
CONSOLIDATED
CONSOLIDATED HOLDINGS
HOLDINGS PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS FOR FOR THE
FOR THE THE CHI TRANSACTIONS
TRANSACTIONS ACQUISITION(I) AND CHI
------------ --------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................. $ 10,667 $ -- $ 10,667
Accrued expenses............................................. 15,244 -- 15,244
Federal & state taxes payable................................ 870 -- 870
Other current liabilities.................................... 558 3,400 3,958
Current portion of long-term debt............................ 1,836 -- 1,836
------------ ------- ------------
Total current liabilities................................ 29,175 3,400 32,575
Existing senior debt......................................... 482 -- 482
New Credit Facility.......................................... 150,000 50,000 200,000
Debentures................................................... 74,257 -- 74,257
Notes........................................................ 190,000 -- 190,000
Exchangeable Debentures...................................... 10,055 -- 10,055
Deferred income taxes and other liabilities.................. 24,726 -- 24,726
------------ ------- ------------
Total liabilities........................................ 478,695 53,400 532,095
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
Capital in excess of par value............................... 40,703 -- 40,703
Retained earnings............................................ (356,858) -- (356,858)
Treasury stock............................................... -- -- --
Advances to affiliates....................................... -- -- --
------------ ------- ------------
Total stockholders' equity................................. (316,115) -- (316,115)
------------ ------- ------------
Total Liabilities and Stockholders' Equity............... $ 270,815 $ 53,400 $ 324,215
------------ ------- ------------
------------ ------- ------------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheets
46
<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................................................................... $ 150,000
Units................................................................................. 75,000
Notes................................................................................. 190,000
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........................................................... 17,500
Other fees and expenses............................................................... 18,600
Deferred compensation payments........................................................ 1,588
---------
559,919
---------
Working Capital..................................................................... $ 3,316
---------
---------
</TABLE>
(B) Reflects the increase in deferred financing fees/debt issue costs related to
the New Credit Facility and the Notes, as follows:
<TABLE>
<S> <C>
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...... 13,600
---------
$ 7,183
---------
---------
</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:
<TABLE>
<CAPTION>
GROSS TAX EFFECT NET
--------- ----------- ---------
<S> <C> <C> <C>
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
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
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.
47
<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
-------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA CONSOLIDATING PRO FORMA/
HOLDINGS ADJUSTMENTS ADJUSTMENTS(IX) CONSOLIDATING
----------- ----------- -------------- -------------
ASSETS
Cash.............................................. $ 79 $ -- $ -- $ 79
Deferred income taxes............................. -- -- 569 569
Other current assets..............................
----------- ----------- -------------- -------------
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........................................ -- 74,257 (ii -- 74,257
Exchangeable Debentures(viii)..................... 10,055 -- -- 10,055
Deferred income taxes and other liabilities....... (30,582) (1,588) ii) 29,776 (2,394)
----------- ----------- -------------- -------------
Total liabilities............................... (18,155) 72,669 29,606 84,120
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.................... 27,102 743 (ii (86,457) (45,754)
-- 29,970 (iv -- --
-- 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 (177,004) (170,529) (187,928)
----------- ----------- -------------- -------------
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 and the
issuance of the Warrants. In accordance with generally
accepted accounting principles, the cash proceeds from the
Units have been allocated to the Debentures and the
Warrants based on their relative fair value.
(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.
48
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(iv) Reflects the 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:
<TABLE>
<CAPTION>
BRS ENTITIES HOLDERS OF
AND THE CO- ROTKO MANAGEMENT HOLDINGS
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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
(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. See "Risk
Factors--Required Offer to Purchase Exchangeable
Debentures" and "Description of Certain
Indebtedness--Exchangeable Debentures."
(ix) Reflects the historical adjustments required to consolidate
Holdings and MEDIQ/PRN.
49
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
(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
----------------------------------------------------
<S> <C> <C> <C> <C>
ELIMINATION
OF ITEMS NOT ACQUISITION
HISTORICAL ACQUIRED(I) ADJUSTMENTS PRO FORMA
----------- ------------- ----------- -----------
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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
(iii) Reflects the indebtedness incurred to finance the CHI
Acquisition and related costs and expenses.
50
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of the Company for the five fiscal years ended September 30, 1997
and for the six months ended March 31, 1997 and 1998. The statement of
operations data for the three years ended September 30, 1997 and the balance
sheet data as of September 30, 1996 and 1997 was derived from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The statement of operations data for the two years ended September
30, 1993 and 1994 and the balance sheet data as of September 30, 1993, 1994 and
1995 was derived from audited consolidated financial statements of the Company.
The statement of operations data for the six months ended March 31, 1997 and
1998 and the balance sheet data as of March 31, 1998 was derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Prospectus which, in the opinion of Management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of the Company for such periods. The results of operations for
interim periods are not necessarily indicative of a full year's operations. The
other data presented below was prepared from Company prepared schedules. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------------- --------------------
1993 1994(A) 1995 1996 1997(B) 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $89,994 $81,498 $132,241 $136,066 $155,960 $78,049 $88,979
Non-recurring items...................... (2,200)
Operating income......................... 8,614 1,354 24,202 25,446 29,504 16,727 15,406
Interest expense......................... (21,043) (21,335) (29,241) (27,307) (19,107) (11,922) (7,235)
Other (charges) and credits(c)........... 1,918 7,381 1,381 (4,695) (7,504) 505 479
Income (Loss) from continuing operations
before income taxes.................... (10,511) (12,600) (3,658) (6,556) 2,893 5,310 8,650
Income (Loss) from continuing
operations............................. (5,145) (8,254) (3,346) (6,178) (2,241) (1,134) 4,762
OTHER DATA:
Rental revenues.......................... $ 72,829 $ 69,079 $ 117,043 $ 114,275 $ 124,316 $ 63,193 $ 69,993
Sales revenues........................... 882 1,729 7,036 11,696 19,922 9,459 13,979
Other revenues(d)........................ 16,283 10,690 8,162 10,095 11,722 5,397 5,007
EBITDA(e)................................ 27,565 22,480 54,363 55,603 59,863 31,458 32,355
Depreciation and amortization............ 18,951 21,126 30,161 30,157 30,359 14,731 16,586
Capital expenditures..................... 24,493 13,257 13,356 18,913 15,458 8,005 15,275
Ratio of earnings to fixed charges(f).... .54 .45 .88 .77 1.14 1.41 2.07
Branches and distributors (at end of
period)................................ 74 73 84 84 84 84 84
Equipment units (at end of period)....... 71,231 83,101 123,309 120,388 131,897 128,292 137,197
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
----------------------------------------------------- MARCH 31,
1993 1994(A) 1995 1996 1997(B) 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency)................ $ (4,501) $(24,569) $(20,249) $ (511) $ 29,732 $ 37,359
Property, plant and equipment, net.......... 117,748 149,051 132,823 122,706 113,589 113,703
Total assets................................ 308,827 377,795 334,169 308,423 257,522 253,780
Total debt.................................. 220,464 289,261 256,156 242,210 145,834 143,900
Stockholders' equity........................ 44,574 36,280 31,517 17,445 48,603 53,496
</TABLE>
- ------------------------
(a) On September 30, 1994, MEDIQ/PRN acquired the critical care, life support
and other movable medical rental equipment inventory of Kinetic Concepts,
Inc. The purchase price, which was primarily financed with long-term debt,
approximated $88.0 million, including transaction costs and the assumption
of certain capital lease obligations.
(b) On September 1, 1997, the Company consummated the SpectraCair Acquisition
for $1.9 million and the assumption of its former joint venture partner's
portion of the outstanding debt of $4.4 million. Accordingly, the results of
operations of SpectraCair for the one month ended September 30, 1997 are
included in the Company's operating results.
(c) Fiscal 1993 includes interest income of $1.1 million partially offset by a
$0.3 million net loss on the sale of assets. Fiscal 1994 includes a net gain
on the sale of assets of $5.8 million and interest income of $1.4 million.
Fiscal 1995 includes $1.5 million of interest income partially offset by a
$0.4 million net loss on the sale of assets. Fiscal 1996 includes a $6.0
million reserve on the note receivable from MHM, interest income of $1.5
million and a net gain on the sale of assets of $0.6 million. Fiscal 1997
includes an equity participation charge related to the repurchase of
MEDIQ/PRN warrants of $11.0 million, a gain on the sale of stock of $9.2
million, a reserve on amounts due from MHM of $5.5 million, the write-off of
deferred acquisition costs of $4.0 million, a gain on a note receivable of
$1.8 million and interest income of $2.1 million. The six months ended March
31, 1997 includes an equity participation charge related to the repurchase
of MEDIQ/PRN warrants of $11.0 million, a gain on the sale of stock of $9.2
million, a gain on a note receivable of $1.2 million and interest income of
$1.1 million. The six months ended March 31, 1998 includes interest income
of approximately $0.5 million.
(d) For fiscal year 1993, other revenues include revenues from subsidiaries sold
in fiscal 1994 of $5.1 million.
(e) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation, amortization and non-recurring merger costs. 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.
(f) In fiscal 1993 through 1996, earnings were inadequate to cover fixed charges
by $10.5 million, $12.6 million, $3.7 million and $6.6 million,
respectively.
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes, and the other financial information, included
elsewhere in this Prospectus.
GENERAL
During fiscal 1997, the Company completed its previously announced strategy
of focusing on MEDIQ/ PRN and divesting substantially all other operating
assets. This strategy resulted in the following divestitures:
(i) In October 1996, PCI Services, Inc. ("PCI") was acquired by Cardinal
Health, Inc. ("Cardinal"). In that transaction, the Company received
1,449,000 shares (adjusted for a stock split) of Cardinal stock in exchange
for its 46% ownership interest in PCI. In January 1997, the Company sold
these shares for $88.4 million.
(ii) In November 1996, the Company sold substantially all the assets of
MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray") for (a) $5.3 million in
cash, (b) shares of Integrated Health Services, Inc. ("IHS") common stock
with an initial value of $5.2 million, which were subsequently sold at an
amount which approximated carrying value and (c) the possibility of the
Company receiving additional cash consideration based upon the occurrence of
certain future events. In fiscal 1997, the Company received approximately
$1.1 million in additional cash consideration relating to the Mobile X-Ray
transaction.
(iii) In December 1996, the Company sold all of its shares of NutraMax
for $36.3 million, or $9.00 per share.
(iv) In May 1997, the Company sold the stock of Health Examinetics, Inc.
("Health Examinetics") for $1.7 million.
As part of the Company's strategy to focus on its core business, the Company
sought to acquire two companies in the medical rental equipment business. In
February 1997, the Company entered into an agreement to acquire Universal
Hospital Services, Inc. ("UHS"), a provider of medical rental equipment. UHS and
the Company mutually terminated the agreement in September 1997 due to Federal
Trade Commission ("FTC") antitrust concerns. See "--Results of Operations--Other
Charges/Credits." In September 1997, the Company consummated the SpectraCair
Acquisition for approximately $1.9 million and the assumption of Huntleigh's
portion of SpectraCair's then outstanding debt of $4.4 million.
Since September 30, 1994, the Company's revenues and operating income have
been driven principally by acquisitions in its core rental business and internal
growth in sales of Parts and Disposables and Outsourcing Services, and to a
lesser extent, its core rental business. During this period, the Company
increased revenues from $81.5 million in fiscal 1994 to $156.0 million in fiscal
1997. In addition, as a result of acquisitions and management initiatives, the
Company increased operating income and operating margins from $1.4 million and
$29.5 million and from 2% and 19%, respectively, during the same period. See
"Business--General."
During the last two fiscal years, operating margins have decreased slightly
as a result of the growth experienced by the Company in sales of Parts and
Disposables revenue share activities and Outsourcing Services. These activities
have lower operating margins and have experienced higher growth rates than the
Company's core rental business.
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. Demand is generally at its
lowest point during the Company's first quarter. During the past three
53
<PAGE>
fiscal years, first quarter sales have represented an average of approximately
23% of annual revenues and second quarter sales have represented an average of
approximately 28% of annual revenues.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1997
REVENUES FROM CONTINUING OPERATIONS. Revenues were $89.0 million for the
six months ended March 31, 1998, as compared to $78.0 million in the prior year
period, an increase of $11.0 million, or 14%. This revenue growth was
attributable to an 11% increase in rental revenue and a 48% increase in sales
partially offset by a 7% decrease in other revenue. The growth in rental revenue
was achieved primarily through revenue share arrangements, the most significant
of which commenced in January 1997, and revenues from the rental of therapeutic
support systems as a result of the SpectraCair Acquisition in September 1997,
partially offset by a 3% decrease in the core rental business primarily as a
result of a shift from rental to purchase by one of the Company's significant
home healthcare customers. Exclusive of revenues from such customer, revenues
from the rental business increased slightly. The increase in sales was
attributable to sales of disposable products as a result of increased volume to
existing customers, revenue share arrangements and sales of oxygen which the
Company initiated in the fourth quarter of fiscal 1997. The decrease in other
revenue was primarily attributable to the discontinuance of logistics services
provided to SpectraCair as a result of its acquisition in September 1997,
partially offset by increased revenues from asset management projects and
strategic alliances.
OPERATING INCOME. Operating income decreased $1.3 million, or 8%, to $15.4
million, for the six months ended March 31, 1998, as compared to $16.7 million
in the prior year period. The decrease in operating income was primarily
attributable to increased depreciation as a result of capital expenditures,
increased selling and operating expenses as the Company continues to invest in
sales and operational personnel to facilitate the growth of the SpectraCair
division, disposable sales and outsourcing activities, and non-recurring merger
costs. Operating margins decreased to 17% from 21% in the prior year period,
which was primarily attributable to revenue mix. The growth in sales of Parts
and Disposables and the Company's revenue share activities which have lower
margins than the Company's core rental business continued to increase while the
Company experienced a modest decline in its overall core rental business. The
Company's operating margins were also reduced by increased selling and operating
expenses.
INTEREST EXPENSE. Interest expense decreased 39% to $7.2 million for the
six months ended March 31, 1998 primarily as a result of the substantial
reduction of debt with the proceeds from the sales of discontinued operations in
the second quarter of fiscal 1997 and reduced interest rates as a result of
improved leverage in accordance with the terms of the Company's existing credit
facility.
TAX RATE. The Company's effective tax rates were disproportionate compared
to the statutory rate as a result of the nondeductibility of certain goodwill
amortization.
FISCAL 1997 COMPARED WITH FISCAL 1996
REVENUES FROM CONTINUING OPERATIONS. Revenues from continuing operations
were $156.0 million as compared to $136.1 million in the prior year, an increase
of $19.9 million, or 15%. The revenue growth was attributable to a 9% increase
in rental revenue, a 70% increase in sales, and a 16% increase in other revenue.
The growth in rental revenue was primarily attributable to new revenue share
arrangements, a sustained flu season, increased volume and the acquisition of
SpectraCair. The increase in sales was derived primarily from a significant
distribution contract which was in place during all of 1997 as compared to five
months in the comparable prior year as well as increases in sales of Parts and
Disposables as a result of additional volume attributable to an expanded
customer base, a wider variety of product offerings, a new revenue share
arrangement and the expansion of a distribution agreement to include additional
product lines. The increase in other revenue was achieved principally through
Outsourcing Services as a
54
<PAGE>
result of an expanded customer base. The Company expects to continue to
emphasize the sale of Parts and Disposables related to the types of Medical
Equipment it rents, as well as the nonrental services it has introduced, and
would anticipate that, if this strategy is successful, these activities would
significantly contribute to the Company's revenue growth.
The Company markets its products and services to a variety of health care
and related businesses, primarily hospitals, alternate care and home care
providers and nursing homes. In recent years, these industries have undergone
dramatic consolidation and change. Although the Company is seeking to emphasize
its ability to provide services to these health care institutions in response to
a perception that such institutions are "outsourcing" increasing amounts of
their operations, there can be no assurance that this strategy will be
successful.
OPERATING INCOME. Operating income increased $1.9 million or 7% to $29.5
million, as compared to $27.6 million, exclusive of a $2.2 million restructuring
charge, in the prior year. 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 $0.9 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 Parts and Disposables and revenues from Outsourcing Services,
higher variable costs associated with the sustained flu season and increased
volume. Operating margins remained consistent with the prior year as a result of
the Company's growth in revenue share activities and sales of Parts and
Disposables which provide a lower gross margin than the traditional rental of
equipment but do not require any capital investment.
INTEREST EXPENSE. Interest expense decreased 30% to $19.1 million from
$27.3 million in 1996 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 of the 11 1/8% Senior Secured Notes due
1999 that occurred on October 1, 1996.
OTHER CHARGES AND CREDITS. In October 1996, the Company incurred a
non-recurring charge of $11.0 million for the repurchase of warrants to purchase
10% of the capital stock of MEDIQ/PRN issued in connection with financing the
acquisition of Kinetic Concepts, Inc. in 1994.
In February 1997, the Company entered into an agreement with UHS to acquire
the outstanding shares of UHS for $17.50 per share. Including the assumption of
debt, the total purchase price would have been $138.0 million. The transaction
was structured as a cash merger and was anticipated to be funded with proceeds
from the Existing Credit Facility. In January 1997, the Existing Credit Facility
was amended to increase certain of its components by $50 million, subject to
approval of the proposed acquisition of UHS pursuant to the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and by UHS'
shareholders. In April 1997, the shareholders of UHS approved the acquisition
subject to Federal regulatory approval pursuant to the HSR Act. In July 1997,
the Company and UHS were informed by the FTC that it had authorized its staff to
take legal action to block the proposed transaction, and subsequently the FTC
filed a motion for a preliminary injunction to block the transaction. In
September 1997, facing the likelihood of a protracted administrative proceeding
before the FTC, the uncertainty of the outcome and the costs associated with
continuing to defend against the efforts of the FTC to prevent the merger, the
Company and UHS mutually terminated the proposed acquisition. Consequently, the
amendment to the Existing Credit Facility was also terminated. The Company
wrote-off $4.0 million ($2.4 million net of taxes, or $.09 per share) of
deferred acquisition and financing costs related to the acquisition.
In September 1997, the Company recorded additional reserves of $5.5 million
on amounts due from MHM, formerly a wholly owned subsidiary of the Company that
was spun-off to shareholders in August
55
<PAGE>
1993, as a result of its assessment of the net realizable value of these amounts
in light of continued deterioration in MHM's financial condition. See
"Business--Legal Proceedings."
TAX RATE. 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.
DISCONTINUED OPERATIONS. In November 1997, the Company sold to InnoServ
Technologies ("InnoServ") all of the 2,026,438 shares of InnoServ common stock
owned by it, together with a warrant to acquire additional shares of InnoServ
common stock. Under the terms of the agreement, no cash payment was made by
InnoServ. However, the parties agreed to terminate a non-compete covenant
relating to maintenance and repair services. In addition, in the event of a
change of control of InnoServ before September 30, 1998, the Company will be
entitled to certain payments from the acquiring party as if it had continued to
own the shares. At this time, the Company cannot determine whether a change of
control of InnoServ will occur and if a transaction does occur, the amount of
consideration it would receive. Accordingly, the Company has recorded a reserve
of $5.0 million before taxes ($1.3 million after taxes) as a component of Income
from Discontinued Operations in the Company's Consolidated Statements of
Operations.
On May 7, 1997, the Company sold the stock of Health Examinetics to the
management of Health Examinetics for approximately $1.7 million, consisting of
$0.1 million in cash and an interest-bearing 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 promissory 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 $1.0 million, or $0.04 per share in
addition to the estimated net loss on the disposal recorded in fiscal 1996. The
charge is reflected as a component of Income from Discontinued Operations in the
Company's Consolidated Statements of Operations.
On December 31, 1996, the Company sold to NutraMax all of the 4,037,258
shares of common stock, par value $.01 per share, of NutraMax ("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
"NutraMax Note") in the amount of $16.4 million. The NutraMax 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 NutraMax Note is
payable when shares of NutraMax Common Stock owned by the Company, which are
currently held in escrow in support of the Exchangeable Debentures, are
delivered to NutraMax upon release from escrow. The shares of NutraMax Common
Stock are to be released from escrow upon the purchase or redemption of
Exchangeable Debentures by the Company. In the event the Exchangeable Debentures
are exchanged into shares of NutraMax Common Stock, the NutraMax Note will be
reduced on a pro rata basis. The NutraMax Note does not bear a market rate of
interest for its full term. Accordingly, the Company discounted the NutraMax
Note to $13.6 million. The Company recognized an after-tax gain of $4.8 million,
or $0.18 per share, on the sale of the NutraMax Common Stock which is included
in Discontinued Operations in the Company's Consolidated Statements of
Operations. From January through September 1997, the Company repurchased $17.8
million of the Exchangeable 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 NutraMax Note of
$10.5 million and the realization of a $1.8 million pre-tax gain as a result of
the recognition of a portion of the discount on the NutraMax Note. This gain is
reflected in Other-net in the Company's Consolidated Statements of Operations.
At September 30, 1997, the balance of the NutraMax Note was $4.8 million, net of
a discount of $1.1 million. The Company used the cash proceeds received from
these transactions to reduce debt.
56
<PAGE>
On November 6, 1996, the Company sold substantially all the assets of Mobile
X-Ray to Symphony Diagnostics, Inc., a subsidiary of IHS, for $5.3 million in
cash and shares of IHS common stock with a value of $5.2 million. In 1997, the
Company received additional proceeds of $1.1 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 were used to
reduce debt.
On October 11, 1996, PCI was acquired by Cardinal. In that transaction, the
Company received 1,449,000 shares (adjusted for a stock split) of Cardinal stock
in exchange for its 46% ownership interest in PCI. The Company recognized an
after-tax gain of $32.6 million on this transaction as a component of Income
from Discontinued Operations in the Company's Consolidated Statements of
Operations. The Company sold its Cardinal shares in January 1997 for $88.4
million and used the proceeds to reduce debt.
Revenues and operating income from discontinued operations (excluding equity
investees) in 1997 were $6.6 million and $0.2 million, respectively, as compared
to revenues and operating income of $36.8 million and $4.3 million,
respectively, in the prior year.
EXTRAORDINARY ITEMS. As a result of the refinancing that occurred on
October 1, 1996 and the repurchases of the Company's 7.25% Convertible
Subordinated Debentures ("7.25% debentures") and Exchangeable Debentures, the
Company recognized an extraordinary charge of $13.4 million ($8.0 million, net
of taxes) resulting primarily from premiums incurred related 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.
FISCAL 1996 COMPARED WITH FISCAL 1995
REVENUES FROM CONTINUING OPERATIONS. Revenues from continuing operations
were $136.1 million, as compared to $132.2 million in the prior year, an
increase of $3.9 million, or 3%. The revenue growth was attributable to a 66%
increase in sales and a 24% increase in other revenue, partially offset by a 2%
decrease in rental revenue. The growth in sales and other revenue was partially
offset by lower Medical Equipment rentals as a result of the absence in fiscal
1996 of a sustained flu season, the non-renewal of a number of long-term rental
contracts as a result of customer purchases and a trend in the marketplace of
better utilization of equipment by customers partially offset by an increase in
the number of rental customers.
OPERATING INCOME. Operating income from continuing operations was $25.4
million, as compared to $24.2 million in 1995, an increase of $1.2 million, or
5%. The improvement in operating income was attributable to reductions in
corporate overhead of $4.1 million, as compared to fiscal 1995, as a result of
non-recurring expenses in fiscal 1995 associated with the activities of the
Special Committee of the Board of Directors of Holdings and the reduction in
corporate personnel in connection with the corporate restructuring plan adopted
in the first quarter of fiscal 1996. This reduction was partially offset by a
restructuring charge of $2.2 million for employee severance costs incurred in
connection with a plan approved by the Board of Directors to downsize corporate
functions and consolidate certain activities with the operations of MEDIQ/PRN.
INTEREST EXPENSE. Interest expense decreased 7%, to $27.3 million, from
$29.2 million in 1995. The decrease was primarily attributable to a net
reduction in indebtedness and was partially offset by an increase in the
interest rate of MEDIQ/PRN's $100 million Senior Secured Notes from 11 1/8% to
12 1/8% effective October 1, 1995.
INTEREST INCOME. Interest income of $1.5 million was consistent with the
prior year and was primarily derived from the Company's note receivable from
MHM.
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OTHER CHARGES AND CREDITS. Other charges and credits for 1996 included the
establishment of a reserve on the note receivable from MHM of $6.0 million as a
result of the Company's analysis of the financial condition of MHM and a charge
of $0.6 million related to the excess of the purchase price over the carrying
value of a warrant issued by MEDIQ/PRN in 1992 to a lender in connection with
the financing of an acquisition in 1992. The purchase price of the warrant was
$1.6 million. These charges were partially offset by gains on the sales of
operating assets of $0.6 million. Fiscal 1995 included a loss of $1.1 million
from the sale of the Company's equity interest in New West Eyeworks, Inc. in
April 1995 for $3.0 million, and income of $0.6 million representing a portion
of the contingent proceeds earned in 1995 from the prior year sale of the
Company's interest in a kidney stone treatment center.
PRE-TAX LOSS. The pre-tax loss from continuing operations before
extraordinary items was $6.6 million for 1996, as compared to a pre-tax loss of
$3.7 million in the prior year. The increase in pre-tax loss was attributable to
the reserve on the note receivable from MHM, the restructuring charge and the
charge related to the repurchase of the MEDIQ/PRN warrant partially offset by
net reductions in interest expense and corporate overhead. The pre-tax loss in
1995 included non-recurring expenses of $1.7 million related to the strategic
activities of the Board of Directors and a loss of $1.1 million on the sale of
the Company's equity interest in New West Eyeworks.
INCOME TAX BENEFIT. The income tax benefit related to continuing operations
was $0.4 million, as compared to a benefit of $0.3 million in the prior year.
The Company's effective tax rates were disproportionate compared to the
statutory rates as a result of goodwill amortization and the non-recognition for
state income tax purposes of certain operating losses.
DISCONTINUED OPERATIONS. Revenues from discontinued operations (excluding
equity investees) were $36.8 million in 1996, as compared to $78.4 million in
1995. The net loss from discontinued operations was $10.7 million in 1996, as
compared to $1.6 million in 1995, and consisted principally of revisions to the
estimates of sales proceeds for the disposal of the Company's investments in
discontinued operations, including reserves relating to certain investigations
as discussed in Note J to the Consolidated Financial Statements of the Company
for fiscal 1997.
In September 1996, the Company sold its ownership interest in HealthQuest
for $75,000, which approximated its carrying value.
In August 1995, the Company sold the assets of MEDIQ Imaging to NMC
Diagnostic Services, Inc., a division of W. R. Grace and Co., for approximately
$17.0 million in cash and the assumption of $9.7 million of debt.
In June 1995, the Company sold Medifac, Inc. ("Medifac") and certain related
assets to the management of Medifac for approximately $11.0 million in cash and
notes, and the assumption of $26.9 million of non-recourse debt.
EXTRAORDINARY GAIN. In connection with repayments of debt, the Company
realized an extraordinary gain of $1.7 million, or $1.1 million net of taxes, in
1996.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL. Cash provided by operating activities was $14.7 million in the
six months ended March 31, 1998, as compared to cash used in operations of $10.5
million in the prior year period. The increase was primarily attributable to
improved cash flows from operations and decreased working capital requirements.
Net cash used in investing activities was $12.6 million, and principally
consisted of capital expenditures for equipment. Net cash used in financing
activities primarily consisted of debt repayments of $12.9 million partially
offset by borrowings of $11.0 million.
The Company expects that its primary sources of liquidity for operating
activities will be generated through cash flows from MEDIQ/PRN. The Company
believes that sufficient funds will be available from
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operating cash flows and its Existing Credit Facility to meet the Company's
anticipated operating and capital requirements.
MEDIQ/PRN issued the Notes and entered into the New Credit Facility and
Holdings issued the Units to consummate the Merger and the CHI Acquisition,
effect the Refinancing, pay related fees and expenses and provide for working
capital requirements. Upon consummation of the Transactions, the Company had
substantial consolidated indebtedness. In addition, the Company expects to incur
additional indebtedness in connection with its post-Merger strategy of pursuing
strategic acquisitions and expanding through internal growth.
Following the consummation of the Transactions and the CHI Acquisition, the
Company had up to $50.0 million of availability for working capital under the
Revolving Credit Facility and $75.0 million of availability for future
acquisitions under the Acquisition Facility.
PRO FORMA. The Company's principal capital requirements are to fund working
capital needs, meet required debt payments, fund capital expenditures and
complete planned maintenance and expansion. Management anticipates that
MEDIQ/PRN's operating cash flow, together with available borrowings under the
New Credit Facility, will be sufficient to meet its working capital, capital
expenditure and debt service requirements on its debt obligations for the
foreseeable future. At March 31, 1998, on a Pro Forma Basis, the Company's total
debt and stockholder's deficit would have been $476.6 million and $316.1
million, respectively. MEDIQ/PRN would also have had an ability to borrow up to
$50.0 million of Revolving Loans as well as up to $75.0 million of Acquisition
Loans.
The New Credit Facility and the Indentures include significant operating and
financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and capital expenditures and pay dividends. Upon consummation
of the Transactions, the Company had substantial consolidated indebtedness. In
addition, the Company expects to incur additional indebtedness in connection
with its post-Merger strategy of pursuing strategic acquisitions and expanding
through internal growth. Any such high leverage may have important consequences
for the Company, including the following: (a) the Company's ability to obtain
additional financing for such acquisitions, working capital, capital
expenditures or other purposes may be impaired or any such financing may not be
on terms favorable to the Company; (b) interest expense may reduce the funds
that would otherwise be available to the Company for its operations and future
business opportunities; (c) a substantial decrease in net operating cash flows
or an increase in expenses of the Company could make it difficult for the
Company to meet its debt service requirements or pay dividends or force it to
modify its operations; (d) substantial leverage may place the Company at a
competitive disadvantage and may make it more vulnerable to a downturn in its
business or the economy generally; (e) certain of such indebtedness of the
Company will be at variable rates of interest, which would cause the Company to
be vulnerable to increases in interest rates; (f) certain of such indebtedness
will be secured by substantially all the assets of MEDIQ/PRN and its
subsidiaries, reducing its ability to obtain additional financing; and (g) the
Company may be hindered in its ability to adjust rapidly to changing market
conditions.
RECENT DEVELOPMENTS
ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which was adopted by the Company in
fiscal 1997 as required by the statement. The Company has elected to continue to
measure such compensation expense using the method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as
permitted by SFAS 123. (See Note O to the Company's Consolidated Financial
Statements).
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 adopted this standard during its quarter ended
December 31, 1997.
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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 the adoption of this standard will have on the Company's financial
statements.
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 the adoption of this
standard will have on the Company's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement, which provides for additional disclosure regarding pensions and other
post-retirement benefits, is effective for fiscal years beginning after December
15, 1997, although earlier application is permitted. At this time, the Company
has not determined the impact the adoption of this standard will have on the
Company's financial statements.
YEAR 2000. The Company's internal business information systems have been
analyzed for Year 2000 compliance and are Year 2000 compliant. The Company
utilizes third-party network equipment and software products, which may or may
not be Year 2000 complaint. While delays in the implementation of the Year 2000
solutions or failure of any critical technology components to operate properly
in the Year 2000 could adversely affect the Company's operations, at this time,
the Company believes that resolution of the Year 2000 issue will not require
material additional costs and will not have a material adverse effect on the
Company's results of operations.
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THE EXCHANGE OFFERS
PURPOSE AND EFFECT
The Old Securities were sold by the Issuers on May 29, 1998, in a private
placement. In connection with that placement, the Issuers entered into the
Registration Rights Agreement, which requires that the Issuers file a
registration statement under the Securities Act with respect to the New
Securities and, upon the effectiveness of that registration statement, offer to
the holders of the Old Securities the opportunity to exchange their Old
Securities for a like principal amount (or principal amount at maturity) of New
Securities, which will be issued without a restrictive legend and may be
reoffered and resold by the holder without registration under the Securities
Act. The Registration Rights Agreement further provides that the Issuers must
use their best efforts to cause the registration statement with respect to the
Exchange Offers to be declared effective on or before October 26, 1998. Except
as provided below, upon the completion of the Exchange Offers, the Issuers'
obligations with respect to the registration of the Old Securities and the New
Securities will terminate. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
Following the completion of the Exchange Offers (except as set forth in the
paragraph immediately below), holders of Old Securities not tendered will not
have any further registration rights and those Old Securities will continue to
be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Securities could be adversely affected upon completion of
the Exchange Offer.
In order to participate in an Exchange Offer, a holder must represent to the
relevant Issuer, among other things, that (i) the New Securities acquired
pursuant to such Exchange Offer are being obtained in the ordinary course of
business of the person receiving such New Securities, whether or not such person
is the holder of the Old Securities, (ii) neither the holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Securities within the meaning of the Securities Act,
(iii) neither the holder nor any such other person is an "affiliate," as defined
under Rule 405 promulgated under the Securities Act, of MEDIQ/PRN, Holdings or
any Subsidiary Guarantor, or if it is an affiliate, such holder or such other
person will comply with the registration and prospectus delivery requirements of
the Securities Act to the extent applicable, (iv) if such holder or other person
is not a broker-dealer, neither the holder nor any such other person is engaged
in or intends to engage in the distribution of such New Securities, and (v) if
such holder or other person is a broker-dealer, that it will receive New
Securities for its own account in exchange for Old Securities that were acquired
as a result of market-making activities or other trading activities and that it
will be required to acknowledge that it will deliver a prospectus in connection
with any resale of such New Securities.
Pursuant to the Registration Rights Agreement, each Issuer is required to
file a "shelf" registration statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of its Old Securities (and use its
reasonable best efforts to cause such shelf registration statement to be
declared effective by the Commission and keep it continuously effective,
supplemented and amended for prescribed periods) if (i) such Issuer is not
permitted to effect its Exchange Offer because of any change in law or in
applicable interpretations thereof by the staff of the Commission, (ii) such
Exchange Offer is not consummated within 180 days of the date of issuance of the
Old Securities, (iii) any Initial Purchaser so requests with respect to Old
Securities not eligible to be exchanged for New Securities in such Exchange
Offer and held by it following consummation of such Exchange Offer, or (iv) any
holder of Old Securities (other than an Exchanging Dealer) is not eligible to
participate in such Exchange Offer or, in the case of any holder of Old
Securities (other than an Exchanging Dealer) that participates in such Exchange
Offer, such holder does not receive freely tradable New Securities upon
consummation of such Exchange Offer. In the event that either Issuer is
obligated to file a "shelf" registration statement, it may be required to keep
such "shelf" registration statement effective for at least two years. Other than
as set forth in this paragraph, no holder will have the right to participate in
the "shelf" registration statement nor otherwise
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to require that an Issuer register such holder's Old Securities under the
Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third-parties unrelated to MEDIQ/PRN, Holdings or any of the
Subsidiary Guarantors, the Issuers believe that, with the exceptions set forth
below, New Securities issued pursuant to the Exchange Offers in exchange for Old
Securities may be offered for resale, sold and otherwise transferred by any
person receiving such New Securities, whether or not such person is the holder
(other than any such holder or such other person which is an "affiliate" of
MEDIQ/PRN, Holdings or any of the Subsidiary Guarantors within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that (i) the New
Securities are acquired in the ordinary course of business of that holder or
such other person, (ii) neither the holder nor such other person is engaging in
or intends to engage in a distribution of the New Securities, and (iii) neither
the holder nor such other person has an arrangement or understanding with any
person to participate in the distribution of the New Securities. Any holder who
tenders in an Exchange Offer for the purpose of participating in a distribution
of New Securities cannot rely on this interpretation by the Commission's staff
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. Each
broker-dealer that receives New Securities for its own account in exchange for
Old Securities, where the Old Securities were acquired by that broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Securities. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offers, holders of Old Securities
not tendered will not have any further registration rights (except in certain
circumstances as set forth above with respect to shelf registration (see "--
Purpose and Effect")) and those Old Securities will continue to be subject to
the existing restrictions on transfer. Accordingly, the liquidity of the market
for a holder's Old Securities could be adversely affected upon completion of the
Exchange Offers if the holder does not participate in the Exchange Offers.
TERMS OF THE NOTE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Notes Letter of Transmittal (which together constitute the Note
Exchange Offer), MEDIQ/PRN will accept for exchange Old Notes properly tendered
prior to the Expiration Date and not withdrawn as permitted below. As used
herein, the term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998; provided, however, that if MEDIQ/PRN has extended the period of
time for which the Note Exchange Offer is open, the term "Expiration Date" shall
mean the latest time and date to which the Note Exchange Offer is extended.
The form and terms of the New Notes will be substantially the same as the
form and terms of the Old Notes except that (i) interest on the New Notes will
accrue from the date of issuance of the Old Notes and (ii) the New Notes are
being registered under the Securities Act and will not bear legends restricting
their transfer. The New Notes will evidence the same debt as the Old Notes and
will be issued pursuant to, and entitled to the benefits of, the Note Indenture.
As of the date of this Prospectus, Old Notes representing $190,000,000
aggregate principal amount are outstanding. This Prospectus, together with the
Note Letter of Transmittal, is being sent to all holders of the Old Notes known
to MEDIQ/PRN. MEDIQ/PRN's obligation to accept Old Notes for exchange pursuant
to the Note Exchange Offer is subject to certain conditions as set forth under "
- ---Certain Conditions to the Exchange Offer" below.
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MEDIQ/PRN shall be deemed to have accepted validly tendered Old Notes when,
as and if MEDIQ/ PRN has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes from MEDIQ/PRN.
MEDIQ/PRN expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Note Exchange Offer is open, and
thereby delay acceptance for any exchange of any Old Notes, by giving notice of
such extension to the Exchange Agent and the holders thereof. During any such
extension, all Old Notes previously tendered will remain subject to the Note
Exchange Offer and may be accepted for exchange by MEDIQ/PRN. Any Old Notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Note Exchange Offer.
MEDIQ/PRN reserves the right, in its sole discretion, (i) to delay accepting
any Old Notes, (ii) to extend the Note Exchange Offer, or (iii) if any
conditions set forth below under " --Certain Conditions to the Exchange Offers"
shall not have been satisfied, to terminate the Note Exchange Offer by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders. If the Note Exchange Offer is amended in a manner determined
by MEDIQ/PRN to constitute a material change, MEDIQ/PRN will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders, and MEDIQ/PRN will extend the Note Exchange Offer for a
period of five to 10 business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the Note
Exchange Offer would otherwise expire during such five to 10 business day
period.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware Corporation Law in connection with the Note Exchange Offer.
MEDIQ/PRN intends to conduct the Note Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
TERMS OF THE DEBENTURE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Debenture Letter of Transmittal (which together constitute the
Debenture Exchange Offer), Holdings will accept for exchange Old Debentures
properly tendered prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City
time, on , 1998; provided, however, that if Holdings has extended the
period of time for which the Debenture Exchange Offer is open, the term
"Expiration Date" shall mean the latest time and date to which the Debenture
Exchange Offer is extended.
As of the date of this Prospectus, Old Debentures representing $140,885,000
aggregate principal amount at maturity were outstanding. This Prospectus,
together with the Debenture Letter of Transmittal, is being sent to all holders
of Debentures known to Holdings. Holdings' obligation to accept Old Debentures
for exchange pursuant to the Debenture Exchange Offer is subject to certain
conditions as set forth under "-- Certain Conditions to the Exchange Offers"
below.
Holdings shall be deemed to have accepted validly tendered Old Debentures
when, as and if Holdings has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Debentures for the purposes of receiving the New Debentures from
Holdings.
Holdings expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Debenture Exchange Offer is open, and
thereby delay acceptance for any exchange of any Old Debentures, by giving
notice of such extension to the Exchange Agent and the holders thereof. During
any such extension, all Old Debentures previously tendered will remain subject
to the Debenture
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Exchange Offer and may be accepted for exchange by Holdings. Any Old Debentures
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Debenture Exchange Offer.
Holdings reserves the right, in its sole discretion, (i) to delay accepting
any Old Debentures, (ii) to extend the Debenture Exchange Offer, or (iii) if any
conditions set forth below under " -- Certain Conditions to the Exchange Offers"
shall not have been satisfied, to terminate the Debenture Exchange Offer by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders. If the Debenture Exchange Offer is amended in
a manner determined by Holdings to constitute a material change, Holdings will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and Holdings will extend the Debenture
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Debenture Exchange Offer would otherwise expire during such five
to 10 business day period.
Holders of Old Debentures do not have any appraisal or dissenters' rights
under the Delaware Corporation Law in connection with the Debenture Exchange
Offer. Holdings intends to conduct the Debenture Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the Commission thereunder.
PROCEDURES FOR TENDERING
Only a registered holder of Old Securities may tender the Old Securities in
an Exchange Offer. Except as set forth under " -- Book Entry Transfer," to
tender in an Exchange Offer a holder must complete, sign and date the Letter of
Transmittal applicable to such Exchange Offer, or a copy thereof, have the
signatures thereon guaranteed if required by such Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or copy to the Exchange
Agent prior to the Expiration Date for such Exchange Offer. In addition, either
(i) certificates for such Old Securities must be received by the Exchange Agent
along with the Letter of Transmittal applicable to such Exchange Offer, or (ii)
a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Securities, if that procedure is available, into the account of the
Exchange Agent for such Exchange Offer at the Depository (the "Book-Entry
Transfer Facility") pursuant to the procedure for book- entry transfer described
below, must be received by such Exchange Agent prior to the Expiration Date, or
(iii) the Holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, a Letter of Transmittal and other required
documents must be received by the Exchange Agent at its address set forth under
" -- Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date will
constitute an agreement between that holder and the applicable Issuer in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal applicable to such Issuer's Exchange Offer.
THE METHOD OF DELIVERY OF OLD SECURITIES, A LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO AN EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD SECURITIES SHOULD BE SENT TO
THE ISSUERS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
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Any beneficial owner whose Old Securities are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing a Letter of Transmittal and delivering the owner's Old
Securities, either make appropriate arrangements to register ownership of the
Old Securities in the beneficial owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
maybe, must be guaranteed by an Eligible Institution (as defined below) unless
Old Securities tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled ['Special Registration Instructions'] or
"Special Delivery Instructions" on such Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Old Securities listed therein, the Old Securities must be endorsed
or accompanied by a properly completed bond power, signed by the registered
holder as that registered holder's name appears on the Old Securities.
If a Letter of Transmittal or any Old Securities or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations, or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
relevant Issuer of their authority to so act must be submitted with such Letter
of Transmittal unless waived by the relevant Issuer.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Old Securities.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Securities will be
determined by the Issuers in their sole discretion, which determination will be
final and binding. Each Issuer reserves the absolute right to reject any and all
Old Securities not properly tendered or any Old Securities the acceptance of
which would, in the opinion of counsel for such Issuer, be unlawful. Each Issuer
also reserves the right to waive any defects, irregularities, or conditions of
tender as to particular Old Securities. An Issuer's interpretation of the terms
and conditions of its Exchange Offer (including the instructions in a Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Securities must be
cured within such time as the Issuer of such Old Securities shall determine.
Although each Issuer intends to notify holders of defects or irregularities with
respect to tenders of Old Securities, neither the Issuers, the Exchange Agent,
nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Securities will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Old
Securities received by an Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by such Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal accompanying such Old Securities, as soon
as practicable following the Expiration Date.
In addition, each Issuer reserves the right in its sole discretion to
purchase or make offers for any Old Securities that remain outstanding after the
Expiration Date or, as set forth under " -- Conditions to the Exchange Offers,"
to terminate its Exchange Offer and, to the extent permitted by applicable law,
purchase Old Securities in the open market, in privately negotiated
transactions, or otherwise. The terms of any such purchases or offers could
differ from the terms of such Issuer's Exchange Offer.
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By tendering, each holder will represent to the relevant Issuer that, among
other things, (i) the New Securities acquired pursuant to such Exchange Offer
are being obtained in the ordinary course of business of the person receiving
such New Securities, whether or not such person is the holder of the Old
Securities, (ii) neither the holder nor any such other person has an arrangement
or understanding with any person to participate in the distribution of such New
Securities within the meaning of the Securities Act, (iii) the holder or such
other person acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Securities acquired by such person and
cannot rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) the holder or such other person understands that a
secondary resale transaction described in clause (iii) above and any resales of
New Securities obtained by such holder or other person in exchange for Old
Securities acquired by such holder or other person directly from the Issuers
should be covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission, and (v) neither the holder nor any such other
person is an "affiliate," as defined under Rule 405 promulgated under the
Securities Act, of MEDIQ/PRN, Holdings or any Subsidiary Guarantor. An Issuer
shall be deemed to have accepted properly tendered Old Securities when, as and
if such Issuer has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders for the purpose
of receiving the New Securities from the Issuers.
In all cases, issuance of New Securities for Old Securities that are
accepted for exchange pursuant to an Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Securities or
a timely Book-Entry Confirmation of such Old Securities into Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or, with respect to the Depositary and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the Letter of Transmittal for such
Exchange Offer) and all other required documents. If any tendered Old Securities
are not accepted for any reason set forth in the terms and conditions of the
Exchange Offer for such Old Securities or if Old Securities are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Securities will be returned without expense to the tendering
Holder thereof (or, in the case of Old Securities tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
non-exchanged Old Securities will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer for such Old Securities.
BOOK-ENTRY TRANSFER
The Exchange Agent will make requests to establish accounts with respect to
the Old Securities at the Book-Entry Transfer Facility for purposes of the
Exchange Offers within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Securities being tendered
by causing the Book-Entry Transfer Facility to transfer such Old Securities into
the Exchange Agent's account for such Old Securities at the Book-Entry Transfer
Facility in accordance with such Book- Entry Transfer Facility's procedures for
transfer. However, although delivery of Old Securities may be effected through
book-entry transfer at the Book-Entry Transfer Facility, a Letter of Transmittal
or copy thereof, with any required signature guarantees and any other required
documents, must, in any case other than as set forth in the following paragraph,
be transmitted to and received by the Exchange Agent at its address set forth
under " -- Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
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DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept an Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in place of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Securities through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the participant acknowledgment of its receipt of and agreement to be
bound by the Letter of Transmittal for such Old Securities.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Old Securities desires to tender such Old
Securities and the Old Securities are not immediately available, or time will
not permit such holder's Old Securities or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the Issuer
of the Old Securities tendered (by telegram, telex, facsimile transmission, mail
or hand delivery), setting forth the name and address of the holder of such Old
Securities and the amount of Old Securities tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Securities, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the applicable Letter of Transmittal will be
deposited by the Eligible Institution with the appropriate Exchange Agent, and
(iii) the certificates for all physically tendered Old Securities, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and all
other documents required by the applicable Letter of Transmittal, are received
by the Exchange Agent within three NYSE trading days after the date of execution
of the Notice of Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Securities may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
For a withdrawal of a tender of Old Securities to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth in this prospectus prior
to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Securities to be withdrawn (the "Depositor"), (ii) identify the Old Securities
to be withdrawn (including the certificate number or numbers and principal
amount of such Old Securities), (iii) be signed by the holder in the same manner
as the original signature on the Letter of Transmittal by which such Old
Securities were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee of such Old
Securities register the transfer of such Old Securities into the name of the
person withdrawing the tender, and (iv) specify the name in which any such Old
Securities are to be registered, if different from that of the holder who
tendered such Old Securities. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Issuer of the Old Securities subject to such notice, whose determination
shall be final and binding on all parties. Any Old Securities so withdrawn will
be deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer relating to such Old Securities. Any Old Securities which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer relating to such Old Security. Properly withdrawn Old Securities
may be retendered by following one of the procedures under " -- Procedures for
Tendering" at any time on or prior to the Expiration Date.
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CONDITIONS TO THE EXCHANGE OFFERS
Notwithstanding any other provision of the Exchange Offers, an Issuer shall
not be required to accept for exchange, or to issue New Securities in exchange
for, any Old Securities and may terminate or amend such Issuer's Exchange Offer
if at any time before the acceptance of such Old Securities for exchange or the
exchange of the New Securities for such Old Securities, such Issuer determines
that its Exchange Offer violates applicable law, any applicable interpretation
of the staff of the Commission or any order of any governmental agency or court
of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Issuers and may be
asserted by the Issuers regardless of the circumstances giving rise to any such
condition or may be waived by the Issuers in whole or in part at any time and
from time to time in their sole discretion. The failure by an Issuer at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, an Issuer will not accept for exchange any Old Securities
tendered, and no New Securities will be issued in exchange for any such Old
Securities, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the indenture relating to such Issuer's Old
Securities under the Trust Indenture Act of 1939, as amended (the "TIA"). In any
such event each Issuer is required to use every reasonable effort to obtain the
withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. The United States Trust Company of New York has been appointed as the
Exchange Agent. Questions, requests for assistance and requests for additional
copies of the Prospectus or the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
To: THE UNITED STATES TRUST COMPANY OF NEW YORK,
<TABLE>
<S> <C> <C>
By Overnight Courier Or By By Hand Up to 4:30 PM: By Registered Or
Hand After 4:30 PM on the Certified Mail:
Expiration Date Only:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
770 Broadway, 13th Floor 111 Broadway Lower Level P.O. Box 844, Coooper Station
New York, New York 10003 New York, New York 10006 New York, New York 10276-0844
Attn: Corporate Trust Attn: Corporate Trust Attn: Corporate Trust
Services Services Services
Telephone: (800) 548-6565 Telephone: (800) 548-6565
Facsimile: (212) 780-0592 Facsimile: (212) 780-0592
</TABLE>
FEES AND EXPENSES
The Issuers will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offers. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Issuers.
The estimated cash expenses to be incurred in connection with the Exchange
Offers will be paid by the Issuers and are estimated in the aggregate to be
$ , which includes fees and expenses of the Trustee for the Old
Securities, accounting, legal, printing, and related fees and expenses.
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TRANSFER TAXES
Holders who tender their Old Securities for exchange will not be obligated
to pay any transfer taxes in connection therewith except that holders who
instruct an Issuer to register New Securities in the name of, or request that
Old Securities not tendered or not accepted in an Exchange Offer be returned to,
a person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE EXCHANGE OFFERS
The following discussion summarizes certain United States Federal income tax
consequences of the Exchange Offers to a holder of Old Securities that is an
individual citizen or resident of the United States or a United States
corporation that purchased Old Securities pursuant to their original issue (a
"U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended to
the date hereof (the "Code"), existing and proposed Treasury regulations, and
judicial and administrative determinations, all of which are subject to change
at any time, possibly on a retroactive basis. The following relates only to the
Old Securities, and the New Securities received therefor, that are held as
"capital assets" within the meaning of Section 1221 of the Code by U.S. Holders.
It does not discuss state, local, or foreign tax consequences, nor does it
discuss tax consequences to subsequent purchasers (persons who did not purchase
the Old Securities pursuant to their original issue), or to categories of
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks, and dealers in stocks and securities.
Tax consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service with respect to the
Federal income tax consequences of the Exchange Offers.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD
SECURITIES FOR NEW SECURITIES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX
ADVISOR CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX
LAWS TO ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD
SECURITIES FOR NEW SECURITIES.
THE EXCHANGE OFFER
The exchange of Old Securities pursuant to the Exchange Offer should be
treated as a continuation of the corresponding Old Securities because the terms
of the New Securities are not materially different from the terms of the Old
Securities. Accordingly (i) such exchange should not constitute a taxable event
to a U.S. Holder, (ii) no gain or loss should be realized by a U.S. Holder upon
receipt of a New Security, (iii) the holding period of the New Security should
include the holding period of the Old Security exchanged therefor and (iv) the
adjusted tax basis of the New Security be the same as the adjusted tax basis of
the Security exchanged therefor immediately before the exchange. For further
discussion of the Federal income tax consequences of holding the New Securities,
see "Certain Federal Income Tax Considerations."
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BUSINESS
GENERAL
The Company operates the largest critical care, life support and other
movable medical equipment rental business in the United States. Through its
national distribution network, the Company serves more than 5,000 hospitals,
alternate care and home care providers, nursing homes and other health care
providers nationwide. The Company rents over 650 different types of Medical
Equipment, including adult and infant ventilators, adult, infant, neonatal and
fetal monitors, infusion and suction pumps, incubators, infant warmers, pulse
oximeters, sequential compression devices and oxygen concentrators.
Approximately 70% of the Company's rental revenues are generated from over 70
contracts with national health care providers and group purchasing
organizations, including some of the largest hospital chains in the United
States. In addition, the Company rents Support Surfaces. On a Pro Forma Basis,
the Company generated $197.4 million of revenue and $71.1 million of Adjusted
EBITDA during the LTM Period.
In addition to its core rental business, the Company sells a variety of
Parts and Disposables to its customers primarily for use with the types of
Medical Equipment it rents. In addition, the Company provides several
outsourcing services to health care providers. The Company's Outsourcing
Services and sales of Parts and Disposables are natural complements to the
Company's core rental business, as they enable the Company to generate
incremental revenues within an existing customer relationship and leverage the
Company's extensive distribution network and broad customer base.
The Company believes that rentals of Medical Equipment and Support Surfaces
and outsourcing of non-core functions of hospitals and other health care
providers have benefited from certain industry trends. In recent years,
hospitals have faced increasing pressure to reduce operating costs and capital
expenditures, while continuing to offer state-of-the-art health care. Equipment
rental programs can be more cost effective for health care providers than the
purchase or lease of movable medical equipment because they enable health care
providers to incur the cost for equipment only when demand for such equipment
exists, thus increasing the providers' equipment utilization rates and
decreasing their overall cost structure. Additionally, by shifting the
management of activities such as asset management and repair and maintenance to
third parties, hospitals and other health care providers can reduce operating
costs, increase efficiency and/or minimize technological obsolescence of
equipment.
In fiscal 1997, rentals of Medical Equipment and Support Surfaces accounted
for approximately 80% of the Company's revenues, sales of Parts and Disposables
and equipment accounted for approximately 13% of the Company's revenues and the
provision of Outsourcing Services and other revenues accounted for approximately
7% of the Company's revenues.
RENTALS. In its rental business, the Company rents, on a Pro Forma Basis,
its approximately 148,000 unit Medical Equipment and Support Surfaces inventory
to customers through 92 branch locations in major metropolitan areas nationwide.
Such locations operate 24 hours a day, 365 days a year, with deliveries of
patient-ready equipment typically made to customers within two hours of a
request. The Company's customers receive a full range of rental and related
services, including equipment delivery, inspection, maintenance, repair and
documentation. In September 1997, the Company consummated the SpectraCair
Acquisition in order to broaden its equipment rental product lines to include
rentals of Support Surfaces. In addition, on May 29, 1998 the Company purchased
certain assets and rights related to the CH Medical Business which the Company
anticipates will increase its Support Surface rental business. See "--Recent and
Potential Acquisitions." On a Pro Forma Basis, the Company's rental activities
generated $157.7 million or 79.9% of total revenue during the LTM Period.
In addition to standard rentals, the Company has entered into several
revenue-share arrangements with OEMs pursuant to which the Company rents Medical
Equipment and sells disposable products produced by the OEMs to the Company's
customers. Because the OEMs own the equipment, such
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arrangements permit the Company to generate additional revenues without any
additional capital investment. In fiscal 1997, the Company began to focus its
efforts on increasing revenue sharing revenues as it believes there are
significant growth opportunities in this area. On a Pro Forma Basis, revenue
sharing rental revenues generated $10.9 million or 6.9% of the Company's total
rental revenue during the LTM Period.
PARTS AND DISPOSABLES. The Company sells a variety of Parts and Disposables
to its customers, primarily for use with the types of Medical Equipment it
rents. The sales of such Parts and Disposables are a natural complement to the
Company's Medical Equipment rental business. The Company distributes products to
its customers in order to enable them to fill smaller turnaround needs more
quickly and to smaller health care providers which do not meet the minimum order
requirements of the major medical supply distributors. The Company currently
supplies 4,000 disposable products, primarily through a contracted, centralized
distribution center located in Salt Lake City, Utah and through a Company
operated facility in Pennsauken, New Jersey. The Company also sells repair parts
to its clients for the repair of their owned equipment. On a Pro Forma Basis,
the Company's sales of Parts and Disposables and Equipment generated $27.3
million or 13.8% of total revenue during the LTM Period.
OUTSOURCING. To address the needs of hospitals and other health care
providers to better manage their assets and increase profits, the Company also
offers its customers the following Outsourcing Services, none of which require
substantial capital investment by the Company: (i) CAMP programs, which analyze
the critical care equipment activity of a customer and provides a variety of
logistics and outsourcing services designed to manage, track and service the
customer's movable medical equipment; (ii) a biomedical repair service which
provides safety inspections, preventive maintenance and repairs for most
critical care equipment through a team of more than 170 experienced biomedical
technicians; (iii) a logistics and distribution service to assist equipment
manufacturers in reducing their transportation costs through utilization of the
Company's nationwide branch office network; (iv) a medical gas supply program
designed to complement the Company's respiratory equipment rentals and provide
"one-stop" service to health care providers in a fragmented market; and (v) a
health care consulting and management service designed to assist the Company's
customers in the management of their businesses. On a Pro Forma Basis, the
Company's Outsourcing Services and other revenues generated $12.4 million or
6.3% of total revenue during the LTM Period.
Holdings and MEDIQ/PRN were incorporated under the laws of the State of
Delaware in 1977 and 1992, respectively. The principal executive offices of the
Company are located at One Mediq Plaza, Pennsauken, New Jersey 08110 and its
telephone number is (609) 662-3200.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths contribute to
its position as a leader in renting Medical Equipment in the United States and
serve as a foundation for the Company's growth strategy:
- LEADING MARKET POSITION. The Company is the largest critical care, life
support and other movable medical equipment rental company in the United
States. The Company's Medical Equipment rental revenues during the LTM
Period were approximately twice as large as those reported by its nearest
rental competitor. The Company has achieved and maintained a market
leadership position by making strategic acquisitions, investing in a
national distribution network and providing high-quality customer service
and competitive pricing. The Company believes that its leading market
position provides it with significant advantages in competing with other
rental companies.
- LARGEST DISTRIBUTION NETWORK AND BROADEST PRODUCT LINE. The Company has
invested significant amounts to establish a national distribution network
and the broadest product line in its industry. On a Pro Forma Basis, the
Company's national distribution network has the most expansive geographic
coverage in its industry with 92 office locations in 40 states and the
Company's product
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line consist of approximately 148,000 units of Medical Equipment and
Support Surfaces rental inventory. Accordingly, the Company can provide
Medical Equipment and Support Surfaces directly to its customers on a
rapid and efficient basis, with 84% of the Company's customers located
within approximately two hours of a Company office location. Moreover,
because the Company has substantially completed its domestic branch
network, including its gross investment in rental inventory of $234.6
million as of March 31, 1998, the Company can focus its capital
expenditures on pursuing its growth strategy and purchasing Medical
Equipment and Support Surfaces for which customer demand is already
identified. The Company believes that it is uniquely positioned to
leverage its installed base of rental equipment and distribution network
to increase revenue sharing rentals, sales of Parts and Disposables and
the provision of Outsourcing Services to its existing customers.
- SOLID CUSTOMER BASE. During fiscal 1997, approximately 70% of the
Company's Medical Equipment rental revenues were from national accounts
and group purchasing organizations. Substantially all of the Company's
national accounts have been doing business with the Company for several
years. The Company believes that such national health care providers will
increasingly require services on a national level, which the Company
expects will increase its sales to national accounts and group purchasing
organizations.
- ADVANCED INFORMATION SYSTEMS. The Company's sophisticated information
system gives it the ability to track the location of each unit of
equipment, as well as the maintenance history and scheduled maintenance
requirements related to such unit. Accordingly, when a customer requests a
certain piece of equipment, the Company can immediately determine whether
or not such equipment is available at the local office which typically
services such customer. In addition, if the requested equipment is
unavailable at the local office, the Company's information system
automatically determines what potential substitutes are locally available
as well as the approximate time of delivery for the next closest piece of
requested equipment. The Company believes that its advanced information
system makes it well positioned to service the needs of the increasingly
larger and more complex health care providers and provides it with a
competitive advantage in servicing the needs of national accounts and
rapidly growing group purchasing organizations.
- DISCIPLINED APPROACH TO CAPITAL SPENDING. The Company generally makes new
Medical Equipment and Support Surfaces purchases only after customer
demand is identified. As such, new equipment purchases generally have
specifically identifiable cash flows associated with them. Prior to
approving any new equipment purchase, the Company requires that the new
equipment meets certain minimum financial criteria, such as return on
investment, and certain operating criteria, such as expected utilization
rates and maintenance costs. The Company estimates that its cost recovery
period for most new equipment purchases is between 12 and 18 months.
Additionally, the Company's Outsourcing Services and revenue sharing
businesses do not require substantial capital investment.
- STABLE BASE OF CASH FLOW. The Company's rental business has historically
provided it with a stable base of cash flows. Moreover, the Company
believes that its core rental business does not have significant exposure
to economic downturns, because cost pressures during such downturns may
lead to increased rentals and fewer purchases of medical equipment by
customers.
- STRONG AND COMMITTED MANAGEMENT TEAM. The Company is led by a seven person
senior management team with over 180 years combined experience in the
health care industry. In connection with the Transactions, Management
reinvested approximately $4.2 million in common and preferred equity of
Holdings.
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GROWTH STRATEGY
In order to take full advantage of its market leadership and national
distribution network, the Company has introduced new services for its customers
and is pursuing strategic acquisition candidates. The following are the primary
elements of the Company's growth strategy:
- GROW CORE RENTAL BUSINESS. The Company expects that certain regulatory and
industry trends will cause an increase in overall demand for equipment
rentals. The Company believes that it will be able to take advantage of
these industry trends and grow its core rental revenues by (i)
capitalizing on its national customer base, which the Company believes is
the largest in the Medical Equipment rental industry, (ii) focusing on
sub-acute and long term health care providers which are facing substantial
pressure to reduce operating costs, (iii) identifying incremental rental
opportunities through its CAMP programs as it increases the number of
hospitals under CAMP contracts, (iv) increasing revenue sharing
opportunities with rental equipment manufacturers and (v) continuing to
market and grow Support Surfaces as a clinically efficient lower cost
alternative to specialty beds.
- LEVERAGE INFRASTRUCTURE TO INCREASE REVENUES IN NON-CAPITAL INTENSIVE
BUSINESSES. Because the Company's national distribution network has the
most expansive geographic coverage and broadest product line in its
industry, the Company believes that it can increase revenues in certain
non-capital intensive businesses by leveraging its infrastructure. In
particular, the Company expects to expand its marketing of Outsourcing
Services, revenue sharing activities and sales of Parts and Disposables to
its existing rental customer base. Moreover, the Company plans to utilize
its established distribution channels to develop these businesses without
incurring significant incremental costs. The Company believes that
leveraging its infrastructure to develop these businesses will produce an
increased return on assets, as these businesses require relatively low
levels of capital investment.
- FOCUS ON DEVELOPING ASSET MANAGEMENT PROGRAMS. The Company believes that
its CAMP programs will continue to grow as a result of an increase in
outsourcing trends related to equipment management and equipment related
services as well as an increase in competitive pressure facing health care
providers. Certain health care providers that have adopted CAMP have been
able to achieve cost savings through a reduction of biomedical and other
hospital staff, a decrease in equipment maintenance expenses and an
increase in asset utilization rates. Additionally, they have been able to
increase equipment utilization and capture increased patient charges as a
result of the superior information gathering capability of CAMP. Hospitals
under CAMP contracts increased from three as of December 31, 1996 to 15 as
of March 31, 1998.
- ENTER INTO STRATEGIC PARTNERSHIPS. The Company has and will continue to
seek new strategic partnerships to increase revenues. In biomedical
repair, the Company plans to increase revenues by partnering with
equipment manufacturers to provide biomedical repair services for their
equipment. In December 1997, the Company entered into an agreement with
Siemens, a leading provider of medical equipment, to jointly provide
biomedical repair services to hospitals and other health care providers.
The Company believes that strategic partnerships such as the Siemens
relationship will provide continued growth opportunities. In 1997, the
Company entered into a contract with NuTech to be the exclusive rental
source of circulatory foot pumps manufactured by NuTech and the exclusive
distributor of related disposables. The Company also entered into a
contract with Siemens to be the exclusive distributor of certain Siemens
accessories and parts in 1996. Principally as result of these efforts,
sales related to strategic partnerships increased in fiscal 1997 to $17.4
million from $2.6 million in fiscal 1996.
- PURSUE STRATEGIC ACQUISITIONS. The Company has historically acquired
complementary Medical Equipment and Support Surfaces rental companies and
integrated them effectively into its existing operations. Upon acquiring
such businesses, the Company has typically been able to realize cost
savings by eliminating corporate overhead, rationalizing branch locations
and reducing personnel.
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Since September 30, 1994, acquisitions in its core rental business coupled
with internal growth have resulted in an increase in the Company's
revenues from $81.5 million in fiscal 1994 to $170.1 million on a Pro
Forma Basis (but not including the CHI Acquisition) during the LTM Period.
The Company has been able to successfully complete and integrate these
acquisitions by adhering to an acquisition strategy which primarily
focuses on acquisitions that (i) present a relatively low level of
integration risk, (ii) allow the Company to effectively leverage its
national distribution network, (iii) are complementary to the Company's
lines of business and (iv) have identifiable synergies. The Company
intends to continue to pursue acquisitions that it believes are consistent
with this acquisition strategy as well as its overall growth strategy. In
addition to the recently completed CHI Acquisition, the Company has
entered into a non-binding letter of intent with respect to another
potential acquisition.
RECENT AND POTENTIAL ACQUISITIONS
In January 1995, the Company and a subsidiary of Huntleigh entered into a
50/50 joint venture and formed SpectraCair, a provider of Support Surfaces on a
rental basis to acute care, long-term care and home care providers nationwide.
In January 1996, SpectraCair acquired the low air loss specialty mattress
overlay business of Bio Clinic Corporation (a subsidiary of Sunrise Medical,
Inc.) for $6.7 million, and, in September 1997, SpectraCair was merged with and
into MEDIQ/PRN following the SpectraCair Acquisition.
The SpectraCair Acquisition has created several opportunities to bolster
SpectraCair's competitive presence. The Company's national agreements provide a
wider group of customers with access to SpectraCair's product lines.
Additionally, the enhanced operational support provided by the Company and the
availability of the Company's complementary product lineup are generating
synergistic opportunities for SpectraCair. The Company expects to achieve
annualized cost savings of approximately $0.4 million as a result of the
elimination of duplicative costs for functional areas and the reduction of
certain expenses as a result of expected synergies resulting from the
SpectraCair Acquisition. In addition, SpectraCair recognized a charge on its
statement of operations for the eleven months ended August 31, 1997 of $0.6
million related to the revenue generated in fiscal 1996 from its acquisition of
the rental assets of Bio Clinic Corporation. The Pro Forma Financial Statements
included elsewhere in this Prospectus give effect to the SpectraCair Acquisition
but do not reflect the elimination of the above noted items. However, there can
be no assurance that the Company will be able to generate the expected cost
savings.
On May 29, 1998, MEDIQ/PRN purchased certain assets and rights related to
the CH Medical Business (including, but not limited to, inventory, rental
equipment and other tangible property, intellectual property rights, certain
contract rights, customer lists, customer files, supplier information and other
key records) for a purchase price of approximately $50.0 million in cash,
including related costs and expenses, and the assumption of certain obligations
related to the CH Medical Business. Management expects the CHI Acquisition to
improve the Company's competitive position in the acute health care sector. For
the year ended August 31, 1997 and the six months ended February 28, 1997 and
1998, the CH Medical Business generated $26.7 million, $12.3 million and $12.9
million, respectively, of revenue.
Management expects the CHI Acquisition to generate certain synergies and
result in a lower cost structure for the combined entity. The Pro Forma
Financial Statements included elsewhere in this Prospectus give effect to the
CHI Acquisition, and annualized cost savings on a LTM basis of approximately
$4.5 million related to the closing of duplicate facilities and the elimination
of personnel are reflected therein. Management also anticipates additional cost
savings of approximately $1.8 million per year to result from the CHI
Acquisition, in such areas as insurance, advertising and telephone costs,
travel, meals and entertainment expenses and taxes other than income taxes
although such additional cost savings are not reflected in the Pro Forma
Financial Statements. There can be no assurance that the Company will be able to
generate the expected cost savings. See "Risk Factors--Ability to Implement
Acquisition Strategy and Ability to Manage Growth."
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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
30 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 to be acquired under the CHI Purchase Agreement include only those
related to the manufacture, sale and rental of beds and other support surfaces
and do not include the Sellers' other fabrication businesses.
The Company believes that consummation of the SpectraCair Acquisition and
the CHI Acquisition will (i) generate financial leverage, (ii) strengthen the
Company's market leadership position, (iii) enable existing customers to reduce
their costs by consolidating vendors, (iv) enhance the quality and selection of
products offered by the Company, (v) expand the presence of the Company's
national accounts and (vi) enhance the operations of the Company by providing
additional dedicated and experienced employees. The Company is continually
reviewing other acquisition opportunities.
INDUSTRY OVERVIEW
The United States health care system includes approximately 5,200 acute care
community hospitals and a variety of other health care providers such as nursing
homes, surgicenters, sub-acute care facilities, specialty clinics and home
health care providers. These hospitals and other health care providers normally
spend substantial sums on obtaining capital equipment, including movable medical
equipment. Hospitals have a number of options in obtaining this equipment,
including purchase, lease and rental. Historically, hospitals have favored the
purchase option in meeting a substantial portion of their movable medical
equipment needs. However, the Company believes that a variety of trends favor
rental as an alternative to purchase or lease, including the substantial cost
containment pressures under which hospitals and other health care providers
currently operate. See "Risk Factors--Regulation of the Health Care Industry."
The cost containment pressures on hospitals and other health care providers
have increased greatly during the past decade as a result of Federal regulations
that have significantly affected the extent of reimbursement under Medicare's
prospective payment system. Changes to the Medicare program adopted in 1991,
which are being phased in over a 10-year period, call for medical equipment cost
reimbursement at rates established by the Health Care Financing Administration
that may or may not reflect the hospitals' actual equipment costs. The Company
believes that the current reform effort will focus on cost containment in health
care and may reduce levels of reimbursement by Medicare as well as other
third-party payors and that other third-party payors of medical expenses have
followed or will follow the Federal government in limiting reimbursement for
medical equipment costs through measures including preferred provider
arrangements, discounted fee arrangements and "capitated" (fixed patient care
reimbursement) managed care arrangements. Moreover, the Company believes that
various current legislative proposals will continue the momentum toward health
care related consolidations, acceleration of managed care and the formation of
integrated delivery systems and that the cost containment pressures on health
care providers will continue to intensify. See "Risk Factors--Uncertainty of
Health Care Reform; Reimbursement of Health Care Costs."
The Company believes that as a result of these cost containment pressures,
hospitals and other health care providers will increasingly seek to reduce their
capital expenditures, including expenditures on movable medical equipment.
Because the Medicare system is, to an increasing extent, reimbursing health care
providers at fixed rates unrelated to actual capital costs, hospitals and other
health care providers have an incentive to manage their capital costs more
efficiently. Providers may better manage their capital costs by replacing fixed
capital costs with variable operating costs. In the case of movable medical
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equipment, these fixed costs include equipment acquisition costs and the
substantial costs associated with servicings necessary to maintain the
equipment. Consequently, many entities may elect to rent equipment, rather than
incur the substantial capital related costs associated with owning or leasing
equipment for which they may not be reimbursed during non-use periods.
MEDICAL EQUIPMENT AND SUPPORT SURFACES RENTALS
The Company operates the largest Medical Equipment rental business in the
United States, serving more than 5,000 hospitals, alternate care and home care
providers, nursing homes and other health care providers nationwide. The Company
offers the broadest selection of Medical Equipment for rent in the country, and
Management believes it is better positioned than any of its rental competitors
to be a "single-source" supplier of Medical Equipment to its customers. The
Company offers its customers a wide selection of rental programs including (i)
daily, weekly or monthly rentals with fixed rate terms, (ii) longer-term rentals
with pricing related to the length of the rental term and (iii) "usage" rentals
on a per use, per hour or per day basis.
NATIONAL SCOPE. The Company rents its inventory to customers through 84
office locations in major metropolitan areas nationwide. This extensive
geographic presence enables the Company to service national chains as well as
local and regional facilities. The Company locations operate 24 hours a day, 365
days a year, with deliveries of patient-ready equipment typically made to
customers within two hours of a request. The Company's customers receive a full
range of rental and related support services, including equipment delivery,
inspection, maintenance, repair and documentation, from the Company's staff of
more than 170 experienced biomedical technicians and more than 254 customer
service representatives.
CONVENIENT SERVICE. Medical Equipment inventories are maintained at each of
the Company's locations. The Company utilizes a centralized order entry and
dispatching system which processes approximately 40,000 deliveries and pickups
per month. Most orders nationwide are received by telephone at the Company's
Pennsauken, New Jersey headquarters, and scheduling and routing of equipment
delivery is made from such office. Upon return, equipment is inspected, cleaned
and tested at the branch location before being designated as available for
rental. If major service or repair is necessary, the equipment is shipped to one
of the Company's two repair facilities in Pennsauken, New Jersey and Santa Fe
Springs, California. The Company's state-of-the-art information and inventory
systems have the capacity to handle 250,000 pieces of inventory and track other
essential activities, including training, repair and maintenance, delivery and
pickup, pre-delivery inspections, major inspections and call backs.
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DIVERSE PRODUCT OFFERING. The Company's approximately 137,000 unit
inventory includes equipment used in respiratory care, emergency, neonatal
intensive care, medical and surgical intensive care, central supply and sterile
processing and distribution, biomedical engineering, surgery, labor and
delivery, and anesthesia/recovery. The Company rents over 650 types of equipment
and offers the most complete selection of Medical Equipment for rent in the
country. The following is a list of principal types of Medical Equipment
available to the Company's customers:
<TABLE>
<S> <C>
Adult, Infant and Portable Oxygen Concentrators
Ventilators
Compressors/Nebulizers/Pulmonary Aids Defibrillators
Continuous Passive Motion Machines Cold Therapy Units
Cribs and Bassinets Scales
Heat Therapy Units Hypo/Hyperthermia Units
Incubators/Isolettes Infant Warmers
Monitors Pediatric Aerosol Tents
Nasal CPAP and BiPap Units Pressure Reduction Units
Phototherapy and Bilirubin Lamps Pulse Oximeters
Sequential and Uniform Compression Infusion Pumps
Devices Telemetry Units
Suction Units
</TABLE>
In addition to the above, the Company also provides Support Surfaces on a
rental basis to acute care, long-term care and home care providers nationwide
through the SpectraCair division of MEDIQ/PRN. SpectraCair purchases and
supplies, on a rental basis, Support Surfaces that are installed on top of
standard hospital beds. SpectraCair's products are utilized in the treatment of
bedridden patients where specially designed Support Surfaces are employed to
treat problems such as skin ulcers. Presently, most health care providers rent
specialized beds to treat these problems, and rental of such beds can cost up to
$150 per day. SpectraCair's products match the clinical efficacy of the
specialized beds for prices generally ranging from $10 to $35 per day.
SpectraCair has recently expanded its product line to include additional
specialized products such as Support Surfaces designed for obese patients
(bariatrics), specialized seating products and passive restraint Support
Surfaces. As hospitals continue to face margin pressure and more revenues become
capitated and fee-for-service based, Management believes SpectraCair can provide
a lower cost, clinically equivalent alternative. In addition, the Company
recently entered into the CHI Purchase Agreement to purchase specified assets
and rights of CH Medical related to the manufacture, sale and rental of
specialty patient beds and Support Surfaces, which acquisition the Company
anticipates will increase its rental business.
OEM PARTNERSHIPS. In addition to standard Medical Equipment rentals, the
Company has entered into several revenue share arrangements with OEMs pursuant
to which the Company rents Medical Equipment and sells disposable products
produced by the OEMs to the Company's customers and pays the OEMs a fee based
upon a percentage of the amount billed to the customer. Under such arrangements,
because the OEMs own the equipment, the Company is able to generate additional
revenues without any additional capital investment in new equipment.
SALES OF PARTS AND DISPOSABLES
The Company sells a variety of Parts and Disposables to its customers
primarily for use with the types of Medical Equipment it rents. The sales of
such Parts and Disposables are a natural complement to the Company's Medical
Equipment rental business. The Company distributes products to its existing
rental customers in order to enable them to fill smaller turnaround needs more
quickly and to smaller health care providers which do not meet the minimum order
requirements of the major medical supply distributors. The Company currently
supplies 4,000 disposable products primarily through a contracted, centralized
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distribution center located in Salt Lake City, Utah and through a Company
operated facility in Pennsauken, New Jersey. The Company maintains a base level
of disposable products inventory at each of its branch offices in order to
provide immediate delivery of certain products on an emergency basis. The
Company also sells repair parts to its clients for the repair of their owned
equipment. This enables the Company to generate incremental revenues within an
existing customer relationship. To support the growth of its Parts and
Disposables business, the Company has an extensive sales and marketing operation
incorporating telephone sales, direct mail and trade publication advertising.
The Company is the exclusive distributor of accessories and supplies
manufactured by the Electromedical Division of Siemens for its respiratory care,
catherization lab and monitoring systems. In fiscal 1997, the Company generated
$8.2 million of revenues through this arrangement with Siemens. The Company
believes that this relationship with Siemens offers significant growth
opportunities for the Company. The Company is also the exclusive rental source
of circulating foot pumps manufactured by NuTech and the exclusive distributor
of related disposables. In fiscal 1997, the Company generated $7.9 million of
revenues through its arrangements with NuTech.
OUTSOURCING SERVICES
To enable hospitals and other health care providers to better manage their
assets and increase profits, the Company began to offer its customers
Outsourcing Services in fiscal 1996. Each of the Company's Outsourcing Services
leverages off of the Company's extensive distribution network and broad customer
base. These services include: (i) CAMP, which analyzes the critical care
equipment activity of a customer and provides a variety of consulting services
designed to manage, track and service the customer's movable medical equipment,
(ii) a biomedical repair service which provides safety inspections, preventive
maintenance and repairs for most critical care equipment through a team of more
than 170 experienced biomedical technicians, (iii) a logistics and distribution
service to assist equipment manufacturers in reducing their transportation costs
through utilization of the Company's nationwide branch office network, (iv) a
medical gas supply program designed to complement the Company's respiratory
equipment rentals and (v) a health care consulting and management service
designed to assist the Company's customers in the management of their
businesses. As a result, the Company generated revenues from Outsourcing
Services of $7.8 million in fiscal 1996 and $9.7 million in fiscal 1997. The
Company believes that its Outsourcing Services businesses offer significant
growth opportunities.
ASSET MANAGEMENT. The Company's CAMP programs enable clients to contract
with the Company to supply all elements of their critical care equipment
management needs. CAMP includes a variety of consulting services for patient
care equipment, including providing on-site personnel, equipment processing,
maintenance, patient billing, documentation and tracking services. CAMP
contracts are typically three to five years in duration.
While most acute care facilities can benefit from more efficient equipment
management, the typical CAMP profile hospital is 200 beds or more and often part
of an integrated health network. Several hospitals, with inventories linked
through a network, can gain even more dramatic cost savings and efficiencies
when the Company provides logistic services to move owned equipment between
facilities. The growth in the number of these integrated health networks further
increases the market for CAMP.
While some competitors' asset management programs focus on the purchase and
rent back to clients of hospital-owned equipment, CAMP focuses on increasing the
utilization of hospital-owned assets. Under CAMP, the Company's asset management
team and the client determine benchmarks and goals to be met. The Company
thereafter conducts quarterly business reviews to assess progress and provide
the client with detailed documentation regarding equipment utilization trends,
thereby greatly aiding in capital budget planning. CAMP clients benefit through
the reduction of central supply and biomedical staff (some of whom may be
employed by the Company in its outsourcing programs), lower equipment
maintenance expenses, the reduction of capital expenditures related to
equipment, increased equipment utilization and
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markedly increased captured patient charges. Even with a highly capitated payer
mix, a portion of this revenue is recovered by the client for other uses.
Additionally, CAMP provides hospital clients with clear cost data which can
assist in negotiations with managed care contracts.
The Company also offers its CAMP Plus logistics program that provides
similar management services for multi-site health care networks to manage,
service and transport movable patient care equipment. A proprietary bar-code
based asset management system provides customers optimum utilization of owned
equipment. This system provides information used to track equipment, capture
lost patient charges, control inventory and equipment migration, reduce the need
for supplemental rentals and manage overall capital planning. The Company also
has programs pursuant to which it acquires all or some of the customer's
equipment and rents the equipment back to the customer, eliminating the
customer's burdens of ownership, underutilization and seasonal usage.
The Company currently operates 13 asset management programs covering 15
hospitals, compared to only three at the end of fiscal 1996. The programs
represent substantial incremental profit for the Company with little or no
capital costs.
BIOMEDICAL REPAIR SERVICES. The Company performs safety inspections,
preventative maintenance and repairs for most brands and models of Medical
Equipment owned by the Company, client health care organizations and other third
parties through a team of more than 170 experienced biomedical technicians.
Service and repairs can be performed on-site. Pick-up and delivery is also
available for servicing at any of the Company's branch locations or two major
service centers. In December 1997, the Company entered into a new agreement with
the Siemens Medical Systems division of Siemens to jointly provide biomedical
repair services to hospitals and other health care providers. Siemens has
operated in the biomedical repair market since 1952. Through this contractual
arrangement with Siemens, Siemens and the Company will offer customers "one stop
shopping" with Siemens providing high technology radiology services and the
Company providing all other biomedical repair services. This arrangement with
Siemens is expected to assist health care providers to reduce the large numbers
of service agreements they enter into each year and the costs associated with
managing these contracts.
OTHER SERVICES. The Company offers a logistics and distribution service to
hospitals and equipment manufacturers to reduce their transportation costs
through utilization of the Company's national branch office network.
The Company also offers a medical gas administrative management service to
health care providers to enable such providers to centralize the purchasing
function for bulk liquid oxygen, portable and semi-portable oxygen containers,
and high pressure gas cylinders for a variety of medical gas products. Health
care facilities traditionally purchase medical gases from a large number of
local suppliers. The market is fragmented, and historically there has been a
lack of price stability. Health care providers have been unable to purchase
these gases on a cost effective basis, and often end up paying different prices
for the same product in different locations. This program offers competitive
pricing and price standardization for many locations, elimination of multiple
local vendor contracts, reduction in the time it takes to process supplier
invoices and improved purchasing efficiencies with a single-source contract.
MEDIQ Management Services, a subsidiary of MEDIQ/PRN, provides consulting
services to the acute care hospital industry and provides management services to
several diagnostic imaging centers. The division primarily works with clients in
the mid-Atlantic states providing consulting services ranging from logistics to
corporate planning. MEDIQ Management Services also serves as an internal
consultant for the Company, as Management seeks to integrate the Company's
product offerings, extract synergies from complementary businesses and leverage
the utilization of the Company's already established infrastructure.
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QUALITY ASSURANCE
Quality control/quality assurance and risk management procedures are
conducted for all of the Company's Medical Equipment and Support Surfaces by
trained biomedical technicians to ensure compliance with safety, testing and
performance standards at all branch offices. All Medical Equipment and Support
Surfaces are serviced and tested prior to delivery to customers in accordance
with the Company's Safety and Performance Inspection Program, which is primarily
derived from the Emergency Care Research Institute's programs. Most types of
Medical Equipment and Support Surfaces rented by the Company require routine
servicing at scheduled intervals based upon hours of usage or passage of time,
including complete testing and inspection of all components that may need to be
replaced or refurbished. Routine servicing is conducted by the Company's trained
personnel at all of its branch locations. Major repairs are performed by its
biomedical equipment technicians at the Company's Pennsauken, New Jersey or
Santa Fe Springs, California maintenance facilities.
SALES AND MARKETING
The Company markets its Medical Equipment rental programs and Outsourcing
Services primarily through its field sales force, which consisted of 68
promotional sales representatives as of March 31, 1998. SpectraCair's sales and
marketing efforts are conducted through a separate 27 person sales force and are
augmented by the efforts of the Company's field sales force. In its marketing
efforts, the Company primarily targets key operational and administrative
decision makers, such as materials managers, department heads and directors of
purchasing, nursing and central supply, as well as administrators, chief
executive officers and chief financial officers. The Company also promotes its
programs and services to hospital and health care provider groups and
associations. The Company develops and provides its field sales force with a
variety of materials designed to support its promotional efforts. The Company
also uses direct mail advertising to supplement this activity, as well as
specifically targeted trade journal advertising.
A corporate accounts team negotiates and sells national contract agreements
to group purchasing organizations ("GPOs") for acute care hospitals, alternate
care and home care providers, nursing homes and other health care providers.
This same team also sells to the corporate headquarters of proprietary national
and regional hospital chains ("National Providers"). In addition, the Company's
sales force is also active in selling individual members of these organizations
on the benefits of each individual contract. For those health care providers who
are not members of a National Provider or a GPO, individual rental agreements
are negotiated by the Company's field sales organization.
From time to time, the Company has developed specific marketing programs
intended to address current market demands. The most significant of such
programs includes the Company's CAMP programs, which present hospitals with a
total management approach to equipment needs. See "--Outsourcing Services--Asset
Management."
CUSTOMERS
The Company's customer base is composed of National Providers, GPOs and
acute and non-acute care facilities and organizations. In total, the Company
services more than 5,000 hospitals, alternate care and home care providers,
nursing homes and other health care providers. The Company's top ten national
accounts and GPO's generated approximately 60% of its total rental revenues in
fiscal 1997, with no single
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account representing more than 10% of total revenues. The following chart
illustrates the Company's rental revenue breakdown by business classification.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Acute facilities............................................................. $ 78,999 $ 76,118 $ 83,846
Home health care providers................................................... 20,160 18,655 17,631
Sub-acute facilities......................................................... 9,006 9,779 10,783
Other........................................................................ 8,878 9,723 12,056
---------- ---------- ----------
Total.................................................................... $ 117,043 $ 114,275 $ 124,316
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
National Provider contracts generally require that the individual hospitals
associated with or owned by the National Providers fill their rental needs with
the Company, although the level of compliance by local providers varies among
the contracts. The Company also contracts with GPOs, which provide their members
the opportunity to purchase or rent products at reduced prices. The GPOs do not
require members to purchase or rent with any particular supplier that the GPO
has contracted with and many health care providers are members of more than one
GPO. However, under most GPO contracts, prices that the Company offers to the
GPO participants decline as the aggregate rentals by such GPO increase. The
Company's contracts with National Providers and GPOs are generally three to five
years in duration.
As the health care market continues to consolidate, the Company expects that
its focus on marketing to National Providers and GPOs and its nationwide
distribution network will give it a competitive advantage in obtaining and
retaining new business from consolidated health care organizations. In addition,
the Company is selling new national account agreements to increase participation
and capture business in markets other than the acute care hospital market. These
market segments include long term care, sub-acute care home health care and home
infusion therapy.
SUPPLIERS
The Company acquires substantially all of its Medical Equipment and Parts
and Disposables from approximately 100 suppliers. The Company has entered into
long-term agreements with three vendors to purchase approximately $31.0 million
of products over the next two fiscal years. The Company is not dependent upon
any single supplier and believes that alternative purchasing sources of Medical
Equipment are available to the Company should they be needed.
EMPLOYEES
As of March 31, 1998 the Company had approximately 981 employees, 367 of
which are salaried, 614 of which are hourly and 95 of which are members of the
Company's sales force, including the SpectraCair sales force. The Company
believes that its relations with employees are satisfactory. None of the
Company's employees are subject to a collective bargaining agreement.
PROPERTIES
The Company's principal facility, containing 116,400 square feet, is owned
by MEDIQ/PRN and located in Pennsauken, New Jersey, where the Company's
corporate offices and a portion of its operating activities are located. Major
repairs of Medical Equipment and Support Surfaces are also performed at this
facility as well as at a 18,700 square foot leased maintenance facility located
in Santa Fe Springs, California. The Company rents its Medical Equipment and
Support Services to its customers through 84 office locations in major
metropolitan areas nationwide. Seventy-one of such sites contain office and
warehouse space and are leased by the Company. The remaining 13 office locations
are operated by
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independent distributors. None of the leases are with parties affiliated with
the Company. The Company believes that the properties owned and leased by it are
adequate for its operations.
COMPETITION
The movable medical equipment rental industry is highly competitive and the
Company, which operates throughout the United States, encounters competition in
all locations in which it operates. Competition is generated from (i) medical
equipment manufacturers which sell medical equipment directly to health care
providers and which the Company believes generate the strongest competition; and
(ii) general leasing and financing companies and financial institutions, such as
banks, which finance the acquisition of medical equipment by health care
providers, as well as other entities discussed below.
The Company's principal competitor in the rental business is UHS. The
Company believes that its national scope and national account relationships
provide it with competitive advantages over UHS. Other competition comes from
regional and local medical equipment renting and leasing companies and medical
equipment distributors which rent medical equipment to health care providers.
Management believes that key factors influencing the decision regarding the
selection of a medical equipment rental vendor include availability and quality
of medical equipment, service and price. The Company faces competitive pressure
in all of its markets from existing competitors and from the potential entry by
new competitors. See "Risk Factors--Competition."
GOVERNMENTAL REGULATION
The Company's businesses are subject to Federal, state and local laws, rules
and regulations relating to the operation of such businesses.
The Company's customers are subject to documentation and safety reporting
standards with respect to the medical equipment they use, including standards
established by the following organizations and laws: the Joint Commission on
Accreditation of Healthcare Organizations, the Association for Advancement of
Medical Instrumentation, and the Safe Medical Devices Act of 1990. Some states
and municipalities also have similar standards and laws. The Company's CAMP
programs help customers meet their documentation and reporting needs under such
standards and laws. As a provider of such services, the Company may be subject
to liability for violating, directly or indirectly, such standards and laws.
Manufacturers and certain providers of the Company's Medical Equipment and
Support Surfaces are subject to regulation by agencies and organizations such as
the Food and Drug Administration ("FDA"), Underwriters Laboratories, the
National Fire Protection Association and the Canadian Standards Association. The
FDA regulates companies which manufacture, prepare, propagate, compound or
process medical devices. Device manufacturers must comply with registration and
labeling regulations, submit premarket notifications or obtain premarketing
approvals, comply with medical device reporting, tracking and post-market
surveillance regulations and with device good manufacturing practices ("GMPs"),
and are subject to FDA inspection. The GMP regulations specify the minimum
standards for the manufacture, packing, storage and installation of medical
devices, and impose certain record keeping requirements. The FDA currently does
not regulate as device manufacturers the Company or organizations which provide
similar services as the Company. However, any company which services, repairs or
reconditions medical devices could be subject to regulatory action by the FDA if
its activities cause the devices to become adulterated or mislabeled. In
addition, no assurance can be given that in the future the FDA will not regulate
as device manufacturers companies such as the Company, which acquire ownership
of devices, recondition or rebuild such devices and rent them to customers or
which service, repair or recondition devices owned by others. The Company is
unable to predict the cost of compliance if any such regulations were to be
adopted. The foregoing laws and regulations that are directly applicable to
manufacturers of medical equipment became applicable to the Company upon
consummation of the CHI Acquisition.
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Federal law and regulations generally prohibit the offer, payment,
solicitation or receipt of any form of remuneration in return for referring or
arranging for the referral of a person for the furnishing or arranging for the
furnishing of items or services reimbursable under the Medicare or Medicaid
programs, or in return for the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service reimbursable
under Medicare or Medicaid. In addition, Federal law and regulations also
generally prohibit physicians from referring patients to entities with which the
physicians have financial relationships, including ownership interests and
compensation arrangements. Various exceptions are contained in Federal laws and
regulations. Many states have similar anti-kickback and anti-referral laws and
regulations, and similar laws barring or restricting referrals. Non-compliance
with Federal and state anti-kickback and anti-referral laws and regulation can
result in criminal and civil penalties and exclusion from participation in
Medicare and Medicaid programs.
The Company enters into various contractual and other arrangements with
health care providers and other persons who are subject to the laws and
regulations referred to above, and who are possibly in a position to refer or
arrange for the referral of business to the Company. In addition, as a health
care provider reimbursed under the Medicare and Medicaid programs, CH Medical is
subject to the foregoing anti-kickback and anti-referral laws and regulations.
The Company believes that its operations comply in all material respects with
all applicable anti-kickback, anti-referral and similar laws and regulations. A
determination that the Company's business practices or the business practices of
CH Medical violate or have violated one or more of these laws or regulations
could have a material adverse effect on the Company's revenues.
The Company's business may be significantly affected by, and the success of
its growth strategies depends on, the availability and nature of reimbursements
to hospitals and other health care providers for their medical equipment costs
under Federal programs such as Medicare, and by other third-party payors. Under
this system of reimbursement, Medicare-related equipment costs are reimbursed in
a single, fixed-rate, per-discharge reimbursement. As a result of the
prospective payment system, the manner in which hospitals incur equipment costs
(whether through purchase, lease or rental) does not impact the extent of
hospitals' reimbursement. Because the Medicare system, to an increasing extent,
reimburses health care providers at fixed rates unrelated to actual equipment
costs, hospitals have an incentive to manage their capital related costs more
efficiently and effectively. The Company believes that hospitals will continue
to benefit from cost-containment and cost-efficiency measures, such as
converting existing fixed equipment costs to variable costs through rental and
equipment management programs. In addition, the CH Medical Business may be
significantly affected by, and the success of the Company's growth strategies
with respect to the CH Medical Business depends on, the availability and nature
of reimbursement under Medicare and Medicaid programs and by third-party payors.
Changes to reimbursement methodologies or amounts may have a material adverse
effect on the CH Medical Business and the business of the Company.
In addition, the Company is subject to Federal, state and local laws, rules
and regulations relating to the protection of the environment, including laws,
rules and regulations governing the use, management and disposal of hazardous
and non-hazardous substances. As the owner and operator of real property, the
Company could become subject to liability under certain environmental laws for
the cleanup of contaminated properties relating to current or historical
operations. The Company is not aware of any such threatened or pending cleanup
liabilities, however, and believes that it is in material compliance with all
applicable environmental laws.
LEGAL PROCEEDINGS
In February 1997, Holdings was sued in the Superior Court of New Jersey by
its former wholly owned subsidiary, MHM. The suit challenged the validity of a
note receivable in the original principal amount of $11.5 million (the "MHM
Note") that Holdings and MHM entered into in connection with the spin-off of MHM
to Holdings' shareholders in August 1993. In addition, beginning in February
1997, MHM stopped making the required monthly installments on the MHM Note and,
therefore, Holdings gave notice to
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<PAGE>
MHM of its default on the MHM Note and declared all sums outstanding under the
MHM Note to be immediately due and payable. In September 1997, as a result of
continued deterioration in MHM's financial condition, the Company recorded a
reserve for the remaining balance of the MHM Note, which had been partially
reserved in 1996, and accrued interest on the MHM Note. In October 1997,
Holdings filed a motion for summary judgment against MHM. In November 1997, the
Court granted summary judgment in favor of the Company and against MHM on all
counts. Specifically, the Court ruled that the MHM Note was valid and
enforceable. The Court also rejected MHM's request for a stay pending appeal. On
April 17, 1998, the Court entered a Final Damages Order in favor of the Company
in the approximate amount of $11.8 million.
On January 15, 1998, Crandon Capital Partners, a stockholder of Holdings,
sued the Company and each of Holdings' directors in Delaware Chancery Court,
alleging breaches of fiduciary duties in connection with the approval of the
Merger by the directors of Holdings and the related transactions. The complaint
purports to be a class action complaint and plaintiff seeks to recover
compensatory damages. Based on information currently available to it, Holdings
believes that this claim is without merit and that the resolution thereof will
not have material adverse effect on the operations or financial condition of the
Company.
Other than with respect to the foregoing matters, the Company is not a party
to any material pending legal proceedings except ordinary litigation incidental
to the conduct of its businesses and the ownership of its properties.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS AND MEDIQ/PRN
The following table sets forth certain information with respect to the
directors and executive officers of Holdings and MEDIQ/PRN. Directors of
Holdings and MEDIQ/PRN hold their offices for a term of one year or until their
successors are elected and qualified; executive officers of Holdings and MEDIQ/
PRN serve at the discretion of the Boards of Directors of Holdings and
MEDIQ/PRN, as the case may be. For information concerning certain arrangements
with respect to the election of directors, see "Ownership of Capital
Stock--Rotko Holders Agreement" and "--Co-Investors Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Thomas E. Carroll................... 54 President, Chief Executive Officer and Director of Holdings and
MEDIQ/PRN
Jay M. Kaplan....................... 49 Senior Vice President - Finance and Chief Financial Officer of
Holdings and Senior Vice President and Chief Financial Officer of
MEDIQ/PRN
Alan S. Einhorn..................... Vice President - Legal Affairs, Secretary and Director of MEDIQ/PRN
Michael J. Rotko.................... 59 Director of Holdings
Bruce C. Bruckmann.................. 44 Director of Holdings
Stephen C. Sherrill................. 44 Director of Holdings
Robert T. Thompson.................. 43 Director of Holdings
L. John Wilkerson................... 54 Director of Holdings
</TABLE>
THOMAS E. CARROLL has served as President and Chief Executive Officer of
Holdings and MEDIQ/ PRN since 1995. He served as President and Chief Operating
Officer of MEDIQ/PRN from 1994 to 1995 and as Executive Vice President and Chief
Operating Officer of MEDIQ/PRN from 1990 to 1994.
JAY M. KAPLAN has served as the Senior Vice President - Finance and Chief
Financial Officer of Holdings since 1997 and has served as the Senior Vice
President and Chief Financial Officer of MEDIQ/ PRN since 1992.
ALAN S. EINHORN has served as Vice President - Legal Affairs and Secretary
of MEDIQ/PRN since and has served as a director of MEDIQ/PRN since
.
MICHAEL J. ROTKO has been a director of Holdings since 1965 and was Chairman
of the Board of Holdings prior to the Merger. Since 1997, Mr. Rotko has served
as Special Counsel to the U.S. Senate Investigation of the Persian Gulf War
Syndrome. Mr. Rotko was a partner at Drinker Biddle & Reath LLP, a law firm,
from 1993 to 1997. Prior to joining Drinker Biddle & Reath LLP, Mr. Rotko was
the U.S. Attorney, Eastern District of Pennsylvania.
BRUCE C. BRUCKMANN is a Managing Director of Bruckmann, Rosser, Sherrill &
Co., Inc. (the "Sponsor"). He was an officer of Citicorp Venture Capital Ltd.
("CVC") from 1983 through 1994. Prior to joining CVC, Mr. Bruckmann was an
associate at the New York law firm of Patterson, Belknap, Webb & Tyler. Mr.
Bruckmann is a director of Mohawk Industries, Inc., AmeriSource Health
Corporation, Chromcraft Revington Corporation, Cort Furniture Rental Corp.,
Jitney-Jungle Stores of America, Inc., Town Sports International, Inc., Anvil
Knitwear, Inc. and California Pizza Kitchen, Inc.
STEPHEN C. SHERRILL is a Managing Director of the Sponsor. He was an officer
of CVC from 1983 through 1994. Previously, he was an associate at the New York
law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Sherrill is a director
of Galey & Lord, Inc., Jitney-Jungle Stores of America, Inc., Windy Hill Pet
Food Holdings, Inc., Restaurant Associates Corp., B&G Foods, Inc. and HealthPlus
Corporation.
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<PAGE>
ROBERT T. THOMPSON is a Managing Director of Ferrer Freeman Thompson & Co.
LLC, the general partner of Health Care Capital Partners, L.P., and Health Care
Executive Partners, L.P. From 1988 to 1995, Mr. Thompson was Managing Director
and Equity Group Leader of GE Capital Corporation. Prior to joining GE Capital,
Mr. Thompson was a consultant with Bain & Company from 1983 to 1988. Mr.
Thompson is currently a director of Vista Hospice Care and La Petite Academy.
L. JOHN WILKERSON has been a General Partner in Galen Associates, a risk
capital partnership since 1990 ("Galen Associates"). Since 1980, Mr. Wilkerson
has also held various positions with The Wilkerson Group, a dedicated health
care products consulting practice, including his current position as a
consultant to the Wilkerson Group. Mr. Wilkerson serves as a director of British
Biotechnology PLC, Gensia-Sicor Inc. and Stericycle, Inc. Mr. Wilkerson holds a
Ph.D from Cornell University.
MEMBERS OF SENIOR MANAGEMENT
The following table sets forth certain information with respect to the
persons who are, along with the executive officers listed above, members of
senior management of MEDIQ/PRN and, where indicated, its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --------- --------------------------------------------------------------------
<S> <C> <C>
John Morgan......................... 39 Senior Vice President, Rental Sales
Ted Buchter......................... 43 Senior Vice President, SpectraCair
Jorge Gonzalez...................... 49 Senior Vice President, Corporate Operations, Alternate Sales,
Business Development and Corporate Accounts
Jo Surpin........................... 44 President, MEDIQ Management Services, and Vice President-Marketing
Katherine Hill...................... 46 Senior Vice President, Asset Management
</TABLE>
DIRECTOR COMPENSATION AND ARRANGEMENTS
Each non-employee director of Holdings will be paid an annual retainer of
$12,000 plus fees of $1,000 for each board meeting attended and $500 for each
committee meeting attended. Directors who are employees of Holdings or MEDIQ/PRN
will not receive additional compensation as directors.
Holdings has a Compensation Committee of the Board of Directors which is
responsible for reviewing annual salaries and bonuses paid to senior management
and administering Holdings' stock option programs. Holdings also has an Audit
Committee which reviews external and internal auditing matters and recommends
the selection of the Company's independent auditors for approval by the Board of
Directors. The membership of such committee following the consummation of the
Transactions has not yet been determined.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued for fiscal
1997, 1996 and 1995 to the Chief Executive Officer of Holdings and MEDIQ/PRN and
to the other executive officers of Holdings and MEDIQ/PRN whose total annual
salary and bonus exceeded $100,000 for services rendered to
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<PAGE>
Holdings and its subsidiaries, including MEDIQ/PRN, during fiscal 1997 (each
such person being referred to as a "Named Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -----------------
COMPENSATION (1) COMMON STOCK
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ STOCK OPTIONS (#)
- ----------------------------------------------------------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Thomas E. Carroll................................................ 1997 350,000 192,000 50,000
President and Chief Executive Officer of Holdings 1996 297,000 135,000 250,000
and MEDIQ/PRN 1995 265,000 206,000 --
Michael F. Sandler............................................... 1997 250,000 88,000 --
Senior Vice President - Finance, Treasurer and 1996 250,000 100,000 --
Chief Financial Officer of Holdings(2) 1995 250,000 100,000 --
Jay M. Kaplan....................................................
Senior Vice President - Finance and Chief Financial Officer of 1997 187,500 94,000 25,000
Holdings and Senior Vice President and Chief Financial Officer 1996 177,000 70,000 85,000
of MEDIQ/PRN 1995 165,000 74,000 --
</TABLE>
- ------------------------
(1) Excludes information concerning the value of perquisites and other personal
benefits which, in the aggregate, do not exceed the lesser of $50,000 or 10%
of the total salary and bonus reported for the Named Executive Officer.
(2) Mr. Sandler served as Senior Vice President - Finance, Treasurer and Chief
Financial Officer of Holdings from 1988 until September 1997, when he
resigned as an officer of Holdings.
The following table summarizes grants of options to purchase Holdings Shares
under the Company's stock option plans or similar arrangements ("Options") and
stock appreciation rights ("SARs") made during fiscal 1997 to the Named
Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- -------------------------------------------- ------------- --------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Carroll........................... 50,000 9.04% 8.06 6/23/07 254,000 642,000
Michael F. Sandler.......................... -- -- -- -- -- --
Jay M. Kaplan............................... 25,000 4.52% 8.06 6/23/07 127,000 321,000
</TABLE>
The following table summarizes the value of Options and SARs held by the
Named Executive Officers based on the cash portion of the Merger Consideration.
<TABLE>
<CAPTION>
CASH CONSIDERATION
OPTIONS OPTIONS TO BE RECEIVED IN
NAME (VESTED) (UNVESTED) THE MERGER
- ----------------------------------------------------------------------- --------- ----------- ------------------
<S> <C> <C> <C>
Thomas E. Carroll...................................................... 178,000 130,000 $ 2,719,000
Michael F. Sandler..................................................... 165,000 -- 1,755,000
Jay M. Kaplan.......................................................... 52,000 71,000 1,063,000
</TABLE>
Upon the consummation of the Transactions, each Option to acquire Holdings
Shares outstanding immediately prior to the Effective Time automatically became
immediately exercisable and each holder of an Option had the right to receive
from the Company in respect of each Holdings Share underlying the Option (less
applicable withholding taxes) (i) a cash payment in an aggregate amount equal to
the
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<PAGE>
difference between the cash portion of the Merger Consideration of $13.75, less
the exercise price per Holdings Share applicable to such Option as stated in the
applicable stock option agreement or other agreement, plus (ii) 0.075 of a share
of Series A Preferred Stock. On May 5, 1998, Messrs. Carroll, Sandler and Kaplan
held 308,000, 165,000 and 123,000 Options, respectively.
EMPLOYMENT AGREEMENTS
In April 1995, Holdings and MEDIQ/PRN entered into a two-year employment
agreement with Mr. Carroll under which he agreed to serve as President and Chief
Operating Officer of Holdings and MEDIQ/ PRN. Mr. Carroll was subsequently
appointed as President and Chief Executive Officer of Holdings and MEDIQ/PRN. In
November 1997, the term of Mr. Carroll's employment agreement was extended to
November 13, 1999. Pursuant to this agreement, Mr. Carroll received a one-time
special payment of $100,000 on April 28, 1995. He is also entitled to receive an
annual salary of $374,500 and an incentive bonus of up to 60% of his base salary
based on the achievement of performance criteria approved by the Compensation
Committee. This agreement also provides that Mr. Carroll will receive a one-time
"success bonus" if a "Strategic Transaction" (as defined therein) occurs before
June 30, 1998. The Merger constituted a "Strategic Transaction;" accordingly,
the Company paid a bonus to Mr. Carroll of approximately $4.6 million upon
consummation of the Transactions. Upon receipt of such "success bonus," Mr.
Carroll forfeited any stock appreciation right compensation previously granted
to him pursuant to his employment agreement. Under his employment agreement, Mr.
Carroll is entitled to receive an additional payment from the Company to
compensate him for liabilities, if any, imposed under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor
provision thereto.
In June 1995, the Company entered into a two-year employment agreement with
Mr. Sandler (which replaced a prior agreement entered into in 1988). The
agreement was amended in 1997 (the "Amended Agreement") to effectuate Mr.
Sandler's resignation, as of September 30, 1997, as an officer of the Company
and as an officer and/or director of any of the Company's subsidiaries. Mr.
Sandler is entitled to continue as an employee of the Company until September
30, 1998, and has agreed to provide certain services during such period upon
request. The Amended Agreement provides for a minimum annual salary of $250,000
and an incentive bonus based on the achievement of performance criteria approved
by the Compensation Committee of Holdings' Board of Directors. The Amended
Agreement extends the period during which Mr. Sandler is entitled to a one-time
"special bonus" payable upon the occurrence of an "Event of Sale" (as therein
defined) until September 30, 1998. The Merger constituted an "Event of Sale;"
accordingly, the Company paid Mr. Sandler a "special bonus" equal to
approximately $1.3 million upon consummation of the Transactions.
In June 1995, the Company entered into an eighteen-month employment
agreement with Mr. Kaplan providing for a minimum salary of $165,000 and an
incentive bonus based on the achievement of performance criteria approved by the
Compensation Committee. This agreement automatically renews from year to year
unless and until either party gives prior notice of an election to terminate at
the end of the then-current term. Mr. Kaplan currently receives an annual salary
of $200,000. Under the terms of his employment agreement, Mr. Kaplan is entitled
to receive a one-time cash bonus upon the occurrence of a "Sale Event" (as
defined therein). The Merger constituted a "Sale Event;" accordingly, the
Company paid Mr. Kaplan a bonus in the amount of approximately $460,000 upon
consummation of the Transactions.
These employment agreements also include other provisions relating to
benefits, confidentiality and other provisions customary in agreements of this
nature. In addition, Mr. Carroll has agreed not to compete with the business of
the Company for two years following the termination of his employment under
certain circumstances.
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<PAGE>
PENSION PLAN
The Company maintains a noncontributory defined benefit plan (the "Pension
Plan") covering all eligible employees of the Company. The Pension Plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employees aged 21 or older who have completed twelve months of service
during which they worked a minimum of 1,000 hours and are not covered by a
collective bargaining agreement are eligible to participate. Employees earn a
year of service for vesting purposes in each calendar year in which they
complete at least 1,000 hours of employment. Employees become fully vested in
the Pension Plan after five years of service with the Company. Benefits are
based upon the participant's annual compensation (including bonuses and similar
special pay), as more fully defined in the Pension Plan, over the number of
years of participation up to a maximum of 35 years. As of September 30, 1997,
Messrs. Carroll, Sandler and Kaplan had nine, nine and 24 years of services
credited, respectively, under the Pension Plan.
401(K) PLAN
The Company maintains a Profit Sharing Plan and Trust (the "401(k) Plan")
for the benefit of its employees who have satisfied the plan's eligibility
requirements. Employees aged 21 or older who have completed twelve months of
service during which they worked a minimum of 1,000 hours are eligible to
participate. Participants are permitted to make pre-tax salary reduction
contributions up to the amount permitted under applicable tax law. The Company
makes a matching contribution equal to 50% of each participant's salary
reduction contribution, up to a maximum of 3% of the participant's compensation.
The Company's matching contribution is made in cash to be used to purchase
shares of the Holdings Common Stock for the account of the participants. The
Company's contributions vest immediately. Shares of Holdings Common Stock held
under the 401(k) Plan were surrendered in connection with the Merger and
exchanged for cash and shares of Series A Preferred Stock.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
MEDIQ/PRN is a wholly-owned subsidiary of Holdings. The following table sets
forth certain information with respect to the beneficial ownership of the Common
Stock and the Series A Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock (collectively, "Preferred Stock") of Holdings
immediately following consummation of the Transactions.
<TABLE>
<CAPTION>
NUMBER AND PERCENT OF SHARES
-------------------------------------------------------------
<S> <C> <C> <C> <C>
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
NAME OF BENEFICIAL OWNER STOCK(1) STOCK STOCK STOCK
- ------------------------------------------------ ------------- -------------- -------------- --------------
Bruckmann, Rosser, Sherrill & Co., L.P.(2)...... 497,531/49.7% 3,374,739/43.1% 961,418/32.0% 1,737,731/57.9%
Two Greenwich Plaza
Suite 100
Greenwich, CT 06830
Health Care Capital Partners, L.P. and /19.9% /17.3% /12.9% /23.2%
Health Care Executive Partners, L.P.(3)....... 199,013 1,349,896 384,567 695,092
c/o Ferrer Freeman Thompson & Co. LLC
The Mill
70 Glenville Street
Greenwich, CT 06831
Entities affiliated with Galen Partners III, 132,675/13.3% 899,930/11.5% 256,378/ 8.5% 463,395/15.4%
L.P.(4).......................................
610 Fifth Avenue
Rockefeller Center
New York, New York 10020
The Management Stockholders(5).................. 61,000/ 6.1% 201,549/ 2.6% 57,419/ 1.9% 103,782/ 3.5%
The Rotko Entities.............................. 109,781/11.0% 632,360/ 8.1% 1,340,218/44.7% --
</TABLE>
- ------------------------
(1) Certain persons to be designated by Holdings and BRS are expected to be
offered an opportunity to purchase shares of Common Stock. In addition,
Holdings expects to grant options to acquire Common Stock to certain
employees. The shares of Common Stock issuable in connection with such
purchases and upon the exercise of such options would equal, in the
aggregate, up to an additional 11.1% of the Common Stock on a fully-diluted
basis. The table does not include any such shares. See "Certain
Relationships and Related Transactions--Additional Purchases of Common
Stock."
(2) Includes shares held by certain other entities affiliated with BRS. BRS
disclaims beneficial ownership of such shares. BRS is a limited partnership,
the sole general partner of which is BRS Partners, Limited Partnership ("BRS
Partners") and the manager of which is the Sponsor. The sole general partner
of BRS Partners is BRSE Associates, Inc. ("BRSE Associates"). Bruce C.
Bruckmann, Harold O. Rosser II, Stephen C. Sherrill and Stephen F. Edwards
are the only stockholders of the Sponsor and BRSE Associates and may be
deemed to share beneficial ownership of the shares shown as beneficially
owned by BRS. Such individuals disclaim beneficial ownership of any such
shares.
(3) Health Care Capital Partners, L.P. ("HCCP") and Health Care Executive
Partners, L.P. (together with HCCP, the "FFT Entities") are limited
partnerships for which Ferrer Freeman Thompson & Co. LLC ("FFT") is the
general partner. Carlos A. Ferrer, David A. Freeman and Robert T. Thompson
are the only members of FFT and may be deemed to share beneficial ownership
of the shares shown as beneficially owned by the FFT Entities. Such
individuals disclaim beneficial ownership of any such shares.
(4) Such shares of Common Stock and Preferred Stock will be held as follows by
Galen Partners III, L.P., Galen Partners International III, L.P. and Galen
Employee Fund III, L.P. (the "Galen Entities"): (i) 90.81398% will be held
by Galen Partners III, L.P., (ii) 8.78845% will be held by Galen Partners
International III, L.P., and (iii) .39757% will be held by Galen Employee
Fund III, L.P. L. John Wilkerson is a general partner of the general partner
of each of Galen Partners III, L.P. and Galen Partners International III,
L.P. Mr. Wilkerson disclaims beneficial ownership of the shares held by
Galen Partners III, L.P. and Galen Partners International III, L.P., except
to the extent of his proportionate partnership interest therein.
(5) Does not include shares of Series A Preferred Stock which may have been
received by Management Stockholders as Merger Consideration.
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<PAGE>
ROTKO HOLDERS AGREEMENT
Upon consummation of the Transactions, MQ, Holdings, the BRS Entities and
the Rotko Entities entered into a Securities Rollover and Holders Agreement (the
"Rotko Holders Agreement") which contains certain agreements among such
stockholders with respect to the capital stock and corporate governance of
Holdings. The following is a summary of the material terms of the Rotko Holders
Agreement.
Pursuant to the Rotko Holders Agreement, the Rotko 1983 Trust has the right
to designate one member of the Board of Directors of Holdings for so long as the
Rotko Entities collectively own at least 5% of the Common Stock and the BRS
Entities have the right to appoint such number of persons as they may determine.
The Rotko 1983 Trust has advised the Company that it will initially designate
Michael J. Rotko to serve as a director of Holdings.
The Rotko Holders Agreement contains provisions which, with certain
exceptions, restrict the Rotko Entities from transferring any equity securities
of Holdings except pursuant to the terms of the Rotko Holders Agreement. With
respect to proposed dispositions by the BRS Entities of more than 10% of their
shares of Common Stock or Series B Preferred Stock, subject to certain
exceptions, the Rotko Entities have the right to require the proposed transferee
to purchase, on the same terms and conditions as given to the BRS Entities, a
pro rata portion of like securities held by the Rotko Entities. Subject to
certain exceptions, if Holdings proposes to issue and sell any of its shares of
Common Stock or any shares convertible into Common Stock to the BRS Entities or
any Co-Investors, Holdings must first offer to each of the Rotko Entities who
holds in excess of 1% of the Holdings' Common Stock and is an "accredited
investor" (as defined in the Securities Act) to purchase pro rata portions of
the securities to be sold in such a transaction on the same terms and conditions
of the proposed issuance. If holders of a majority of shares of Common Stock or
holders of a majority of the then outstanding shares of any class or series of
the Preferred Stock propose to sell their shares or approve the sale of Holdings
(whether by merger, consolidation, sale of all or substantially all of its
assets or the sale of all of its outstanding capital stock), the Rotko Entities
will agree to sell and will be permitted to sell all of their shares of Common
Stock or Preferred Stock, as the case may be, on the same terms and conditions
as such holders holding a majority of shares of Common Stock or Preferred Stock.
The Rotko Holders Agreement provides that, subject to certain exceptions, if
Holdings shall redeem shares of Series A Preferred Stock or Series C Preferred
Stock, the BRS Entities or the Co-Investors or a third party designated by BRS
will offer to purchase from the Rotko Entities a percentage of the Series B
Preferred Stock held by them equal to the aggregate liquidation preference of
the Series A Preferred Stock or Series C Preferred Stock so redeemed (not
including any redemption of Series A Preferred Stock issued as Merger
Consideration) divided by the sum of the aggregate liquidation preference of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock then outstanding plus the original cost of the shares of Common
Stock then outstanding. The Rotko Entities have the right to participate, or
"piggyback," in certain registrations of Series A Preferred Stock and Series B
Preferred Stock by Holdings.
MANAGEMENT INVESTMENT AGREEMENT
Upon consummation of the Transactions, the Management Stockholders entered
into a Securities Purchase and Holders Agreement (the "Management Investment
Agreement") which contains (i) substantial restrictions on each Management
Stockholder's ability to transfer his securities, (ii) certain rights of
Holdings to repurchase securities held by each Management Stockholder upon
termination of his or her employment (other than by reason of retirement) with
the Company within a specified period of time after the consummation of the
Transactions at formula prices which will depend in part upon the circumstances
of the termination, (iii) provisions obligating the Management Stockholders to
consent to any sale of the Company to an unaffiliated person (whether by merger,
consolidation, reorganization, sale of all or substantially all of its assets or
sale of a majority of the outstanding capital stock) approved by holders of a
majority of Common Stock and (iv) the right to participate in certain sales of
Common Stock by the BRS
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<PAGE>
Entities. The Management Stockholders have also been granted certain incidental
registration rights to have shares of Common Stock registered.
CO-INVESTORS AGREEMENT
Upon consummation of the Transactions, MQ, Holdings, the BRS Entities and
the Co-Investors entered into a Securities Purchase and Holders Agreement (the
"Co-Investors Agreement") which contains certain agreements among such investors
with respect to the capital stock and corporate governance of Holdings. The
following is a summary of the material terms of the Co-Investors Agreement.
Pursuant to the Co-Investors Agreement, each of the parties thereto will
ensure that the Board of Directors of Holdings is composed at all times of at
least six persons with the exact number to be designated as follows: (a) one
person designated by the Rotko 1983 Trust, to the extent so permitted by the
Rotko Holders Agreement; (b) one person designated by each of HCCP and Galen
Associates for so long as they (and their respective affiliates) each own at
least 10% of the Common Stock; (c) one person designated by the Chief Executive
Officer of Holdings; and (d) such number of persons as the BRS Entities may
determine.
The Co-Investors Agreement contains provisions which, with certain
exceptions, restrict the Co-Investors from transferring any equity securities of
Holdings except pursuant to the terms of the Co-Investors Agreement. With
respect to proposed dispositions by the Co-Investors of more than 10% of their
shares of Common Stock or any series of Preferred Stock, as the case may be,
subject to certain exceptions, each of the Co-Investors and any persons who have
similar rights pursuant to the Rotko Holders Agreement or the Management
Investment Agreement will be offered the opportunity to participate in such
transactions on a pro rata basis and on identical terms. Subject to certain
exceptions, if Holdings proposes to issue and sell any of its shares of Common
Stock or any shares convertible into Common Stock to the BRS Entities or any
affiliate of BRS, Holdings must first offer to each of the other stockholders
who holds in excess of 5% of Holdings' Common Stock and is an "accredited
investor" (as defined in the Securities Act) to purchase pro rata portions of
the securities to be sold in such a transaction on the same terms and conditions
of the proposed issuance. If the sale of Holdings (whether by merger,
consolidation, sale of all or substantially all of its assets or sale of all of
its outstanding capital stock) is approved by certain designated stockholders
set forth in the Co-Investors Agreement or, in certain instances, by the holders
of a majority of shares of Common Stock or holders of a majority of the then
outstanding shares of any class or series of Preferred Stock, each Co-Investor
will agree to sell and will be permitted to sell all of such Co-Investor's
shares of Common Stock or Preferred Stock, as the case may be, on the same terms
and conditions as approved by the approving stockholders. The Co-Investors
Agreement provides that, subject to certain exceptions, if Holdings shall redeem
shares of Series A Preferred Stock or Series C Preferred Stock, such that the
parties to the Rotko Holders Agreement are entitled to their "Series B Purchase
Option" (as defined in the Rotko Holders Agreement), each Co-Investor agrees
that if required by the BRS Entities, it shall purchase its pro rata portion of
the shares which are subject to the Series B Purchase Option. The Co-Investors
have the right to participate, or "piggyback," in certain registrations of
Series A Preferred Stock and Series B Preferred Stock by Holdings.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Holdings is authorized to issue up to 30,000,000 shares of Common Stock. The
holders of Common Stock are entitled to one vote per share on all matters
submitted for action by the stockholders. There is no provision for cumulative
voting with respect to the election of directors. Accordingly, subject to the
provisions of the Rotko Holders Agreement and the Co-Investors Agreement, the
holders of more than 50% of the shares of Common Stock are able to elect all of
the directors. In such event, the holders of the remaining shares of Common
Stock will not be able to elect any directors.
Subject to the rights of any holders of outstanding preferred stock of
Holdings, all shares of Common Stock are entitled to share in such dividends as
the Board of Directors of Holdings may from time to time declare from sources
legally available therefor. Subject to the rights of any holders of outstanding
preferred stock of Holdings, upon liquidation or dissolution of Holdings,
whether voluntary or involuntary, all shares of Common Stock are entitled to
share equally in the assets available for distribution to stockholders after
payment of all prior obligations of Holdings.
WARRANTS
Each Warrant, when exercised, entitles the holder thereof to purchase .6474
shares of Common Stock from Holdings, as the Surviving Corporation of the
Merger, at a price (the "Exercise Price") of $0.01 per share. The Exercise Price
and the number of shares of Common Stock issuable upon exercise of a Warrant are
both subject to adjustment in certain cases. The Warrants initially entitle the
holders thereof to acquire, in the aggregate, 91,209 shares of Common Stock.
The Warrants may be exercised at any time after the first anniversary of the
Issue Date; PROVIDED, HOWEVER, that holders of Warrants will be able to exercise
their Warrants only if a shelf registration statement relating to the Common
Stock underlying the Warrants is effective or the exercise of such Warrants is
exempt from the registration requirements of the Securities Act, and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
holders reside. Unless earlier exercised, the Warrants will expire on June 1,
2009 (the "Expiration Date"). Holdings will give notice of expiration not less
than 90 nor more than 120 days prior to the Expiration Date to the registered
holders of the then outstanding Warrants. If Holdings fails to give such notice,
the Warrants will nevertheless expire and become void on the Expiration Date.
At Holdings' option, fractional shares of Common Stock may not be issued
upon exercise of the Warrants. If any fraction of a share of Common Stock would,
except for the foregoing provision, be issuable upon the exercise of any such
Warrants (or specified portion thereof), Holdings will pay an amount in cash
equal to the current market value per share of Common Stock, as determined on
the day immediately preceding the date the Warrant is presented for exercise,
multiplied by such fraction, computed to the nearest whole cent.
Certificates for Warrants have been and will be issued in fully registered
form only. No service charge will be made for registration of transfer or
exchange upon surrender of any Warrant certificate at the office maintained for
that purpose by United States Trust Company of New York, as Warrant Agent.
Holdings may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Warrant certificates.
The holders of unexercised Warrants are not entitled, by virtue of being
such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of Holdings in respect of
any stockholders meeting for the election of directors of Holdings or any other
purpose, or to exercise any other rights whatsoever as stockholders of Holdings.
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In the event a bankruptcy, reorganization or similar proceeding is commenced
by or against Holdings, a bankruptcy court may hold that unexercised Warrants
are executory contracts which may be subject to rejection by Holdings with
approval of the bankruptcy court. As a result, holders of the Warrants may, even
if sufficient funds are available, not be entitled to receive any consideration
or may receive an amount less than they would be entitled to if they had
exercised their Warrants prior to the commencement of any such bankruptcy,
reorganization or similar proceeding.
SERIES A PREFERRED STOCK
Holdings is authorized to issue up to 10,000,000 shares of Series A
Preferred Stock.
RANK. The Series A Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution of Holdings, ranks senior to
the Common Stock, the Series B Preferred Stock, the Series C Preferred Stock,
and each other class of capital stock or class or series of preferred stock
issued by Holdings the terms of which specifically provide that such class or
series will rank junior to the Series A Preferred Stock as to dividend
distributions or distributions upon the liquidation, winding up and dissolution
of Holdings (collectively referred to as "Series A Junior Securities"). Although
the Series A Preferred Stock, with respect to dividend rights and rights on
liquidation, ranks senior to Series A Junior Securities issued by Holdings, it
is junior in right of payment to all existing and future indebtedness and
obligations of Holdings.
DIVIDENDS. Each holder of Series A Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of Series A Preferred Stock at
a rate equal to $1.30 per share per annum. All dividends are cumulative, whether
or not earned or declared, accrue on a daily basis from the date of issuance of
Series A Preferred Stock and are payable semi-annually in arrears. Dividends
with respect to the Series A Preferred Stock can only be paid by Holdings to the
extent funds are legally available therefor under the DGCL. The New Credit
Facility and the Indentures do, and any future credit agreements or indentures
to which MEDIQ/PRN or Holdings becomes a party may, restrict the ability of
Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series A
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued and unpaid thereon, including
additional dividends accrued on such unpaid dividends ("Additional Dividends"),
to the date of final distribution (the "Series A Liquidation Preference") and no
more, before any distribution is made on any Series A Junior Securities. After
payment in full in accordance with the preceding sentence, the holders of the
Series A Preferred Stock shall not be entitled to any further participation in
any distribution in the event of liquidation, dissolution or winding up of the
affairs of Holdings with respect to the shares of Series A Preferred Stock.
OPTIONAL REDEMPTION. Holdings may, at its option, redeem at any time or
from time to time, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Series A Preferred Stock, at the
redemption prices set forth below, plus an amount equal to full cumulative
dividends (whether or not earned or declared) accrued and unpaid thereon,
including Additional Dividends, to the redemption date. The redemption prices
for optional redemptions are as follows:
<TABLE>
<CAPTION>
REDEMPTION PRICE
REDEMPTION DATE PER SHARE
- ---------------------------------------------------------------------------- -----------------
<S> <C>
On or before December 31, 1999.............................................. $ 11.00
On or after January 1, 2000
but before January 1, 2002................................................ $ 10.50
On or after January 1, 2002................................................. $ 10.00
</TABLE>
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MANDATORY REDEMPTION. All outstanding shares of the Series A Preferred
Stock will be redeemed from funds legally available therefor on December 31,
2011, at a price per share equal to the Series A Liquidation Preference on
December 31, 2011.
VOTING RIGHTS. The holders of Series A Preferred Stock are not entitled or
permitted to vote on any matter required or permitted to be voted upon by the
stockholders of Holdings, except as otherwise required by Delaware law;
provided, that, without the written consent of the holders of a majority of the
outstanding shares of Series A Preferred Stock or the vote of the holders of a
majority of the outstanding shares of Series A Preferred Stock at a meeting of
the holders of Series A Preferred Stock called for such purpose, Holdings will
not (a) create, authorize or issue any other class or series of stock entitled
to a preference prior to Series A Preferred Stock upon any dividend or
distribution or any liquidation, distribution of assets, dissolution or winding
up of Holdings or (b) amend, alter or repeal any provision of Holdings'
Certificate of Incorporation so as to materially adversely affect the relative
rights and preferences of the Series A Preferred Stock. In any case in which the
holders will be entitled to vote, each holder of Series A Preferred Stock will
be entitled to one vote for each share of Series A Preferred Stock held unless
otherwise required by applicable law. Without limiting the generality of the
foregoing, in no event are holders of Series A Preferred Stock entitled to vote
(individually or as a class) on any merger or consolidation involving Holdings,
any sale of all or substantially all of the assets of Holdings or any similar
transaction. The BRS Entities own a majority of the outstanding shares of Series
A Preferred Stock.
NO RIGHT OF CONVERSION OR EXCHANGE. The holders of Series A Preferred Stock
do not have any rights to convert such shares into or exchange such shares for
shares of any other class or classes or of any other series of any class or
classes of capital stock of Holdings.
NO PREEMPTIVE RIGHTS. No holder of Series A Preferred Stock possesses any
preemptive rights to subscribe or acquire any unissued shares of capital stock
of Holdings (whether now or hereafter authorized) or securities of Holdings
convertible into or carrying a right to subscribe to or acquire shares of
capital stock of Holdings.
SERIES B PREFERRED STOCK
Holdings is authorized to issue up to 5,000,000 shares of Series B Preferred
Stock.
RANK. The Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution of Holdings, ranks junior to
the Series A Preferred Stock and senior to the Series C Preferred Stock.
Although the Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, ranks senior to Series C Preferred Stock issued by
Holdings, it is junior in right of payment to all existing and future
indebtedness and obligations of Holdings.
DIVIDENDS. Each holder of Series B Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of Series B Preferred Stock at
a rate equal to $1.325 per share per annum. All dividends are cumulative and
compounding, whether or not earned or declared, accrue on a daily basis from the
date of issuance of Series B Preferred Stock and are payable semi-annually in
arrears. Dividends with respect to the Series B Preferred Stock can only be paid
by Holdings to the extent funds are legally available therefor under the DGCL.
The New Credit Facility and the Indentures do, and any future credit agreements
or indentures to which MEDIQ/PRN or Holdings becomes a party may, restrict the
ability of Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series B
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued
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and unpaid thereon, including additional dividends, to the date of final
distribution, after distributions are made on the Series A Preferred Stock and
before any distribution is made on any Series C Preferred Stock. After payment
in full in accordance with the preceding sentence, the holders of the Series B
Preferred Stock shall not be entitled to any further participation in any
distribution in the event of liquidation, dissolution or winding up of the
affairs of Holdings with respect to the shares of Series B Preferred Stock.
NO MANDATORY REDEMPTION. Holdings is not required to mandatorily redeem the
shares of Series B Preferred Stock.
VOTING RIGHTS. The holders of Series B Preferred Stock are not entitled or
permitted to vote on any matter required or permitted to be voted upon by the
stockholders of Holdings, except as otherwise required by Delaware law.
NO RIGHT OF CONVERSION OR EXCHANGE. The holders of Series B Preferred Stock
do not have any rights to convert such shares into or exchange such shares for
shares of any other class or classes or of any other series of any class or
classes of capital stock of Holdings.
NO PREEMPTIVE RIGHTS. No holder of Series B Preferred Stock possesses any
preemptive rights to subscribe or acquire any unissued shares of capital stock
of Holdings (whether now or hereafter authorized) or securities of Holdings
convertible into or carrying a right to subscribe to or acquire shares of
capital stock of Holdings, provided that the holders of the Series B Preferred
Stock have the rights provided for in the Rotko Holders Agreement (as defined).
SERIES C PREFERRED STOCK
Holdings is authorized to issue up to 5,000,000 shares of Series C Preferred
Stock.
RANK. The Series C Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution of Holdings, ranks junior to
the Series A Preferred Stock and the Series B Preferred Stock. The Series C
Preferred Stock is also junior in right of payment to all existing and future
indebtedness and obligations of Holdings.
DIVIDENDS. Each holder of Series C Preferred Stock is entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, cash dividends on each share of Series C Preferred Stock at
a rate equal to $1.35 per share per annum. All dividends are cumulative and
compounding, whether or not earned or declared, accrue on a daily basis from the
date of issuance of Series C Preferred Stock and are payable semi-annually in
arrears. Dividends with respect to the Series C Preferred Stock can only be paid
by Holdings to the extent funds are legally available therefor under the DGCL.
The New Credit Facility and the Indentures do, and any future credit agreements
or indentures to which MEDIQ/PRN or Holdings becomes a party may, restrict the
ability of Holdings to pay cash dividends.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of Holdings, the holders of all shares of Series C
Preferred Stock then outstanding will be entitled to be paid out of the assets
of Holdings available for distribution to its stockholders an amount in cash
equal to $10.00 per share, plus an amount equal to full cumulative dividends
(whether or not earned or declared) accrued and unpaid thereon, including
additional dividends, to the date of final distribution, after distributions are
made on the Series A Preferred Stock and the Series B Preferred Stock (the
"Series C Liquidation Preference"). After payment in full in accordance with the
preceding sentence, the holders of the Series C Preferred Stock shall not be
entitled to any further participation in any distribution in the event of
liquidation, dissolution or winding up of the affairs of Holdings with respect
to the shares of Series C Preferred Stock.
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NO RIGHT OF CONVERSION OR EXCHANGE. The holders of Series C Preferred Stock
do not have any rights to convert such shares into or exchange such shares for
shares of any other class or classes or of any other series of any class or
classes of capital stock of Holdings.
NO PREEMPTIVE RIGHTS. No holder of Series C Preferred Stock possesses any
preemptive rights to subscribe or acquire any unissued shares of capital stock
of Holdings (whether now or hereafter authorized) or securities of Holdings
convertible into or carrying a right to subscribe to or acquire shares of
capital stock of Holdings.
OPTIONAL REDEMPTION. Holdings may, at its option, redeem at any time or
from time to time, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Series C Preferred Stock, at $10.00 in
cash per share, plus an amount equal to full cumulative dividends (whether or
not earned or declared) accrued and unpaid thereon to the redemption date.
MANDATORY REDEMPTION. All outstanding shares of the Series C Preferred
Stock will be redeemed from funds legally available therefor on December 31,
2012 at a price per share equal to the Series C Liquidation Preference on
December 31, 2012.
VOTING RIGHTS. The holders of Series C Preferred Stock are not entitled or
permitted to vote on any matter required or permitted to be voted upon by the
stockholders of Holdings, except as otherwise required by Delaware law.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AND TRANSACTIONS WITH NON-CONTINUING OFFICERS AND DIRECTORS
H. Scott Miller and Michael F. Sandler, both directors of Holdings who
resigned their positions upon consummation of the Transactions, served as
directors of MHM until they resigned from such positions in January 1997. MHM is
indebted to Holdings under the MHM Note. As of January 27, 1998, the outstanding
principal amount of the MHM Note (plus accrued interest) was $10,477,776. The
MHM Note bears interest at a rate of prime plus 1.5%. In addition, MHM is
indebted to Holdings for approximately an additional $390,000 that is not
represented by the MHM Note. MHM made payments to Holdings with respect to
principal and interest payments as well as professional fees totaling $601,000
in 1997. The Rotko 1983 Trust and certain other trusts established by Bernard B.
Rotko of which Bessie G. Rotko is the income beneficiary together own 907,000
shares of the common stock of MHM. Certain other trusts established by Bernard
B. Rotko for the benefit of certain grandchildren hold approximately 15,000
shares of the common stock of MHM.
In February 1997, Holdings was sued in the Superior Court of New Jersey by
MHM. The suit challenged the validity of the MHM Note. In addition, beginning in
February 1997, MHM stopped making the required monthly installments on the MHM
Note and, therefore, Holdings gave notice to MHM of its default on the MHM Note
and declared all sums outstanding under the MHM Note to be immediately due and
payable. In September 1997, as a result of continued deterioration of MHM's
financial condition, the Company recorded a reserve for the remaining balance of
the MHM Note, which had been partially reserved in 1996, and accrued interest on
the MHM Note. In October 1997, Holdings filed a motion for summary judgment
against MHM. In November 1997, the Court granted summary judgment in favor of
the Company against MHM on all counts. Specifically, the Court ruled that the
MHM Note was valid and enforceable. The Court also rejected MHM's request for a
stay pending appeal. On April 17, 1998, the Court entered a Final Damage Order
in favor of the Company in the approximate amount of $11.8 million. See
"Business--Legal Proceedings."
Mr. Sandler served as a director of NutraMax until he resigned from such
position in December 1996. In December 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
the NutraMax Note in the amount of $16.4 million. As of September 30, 1997, the
outstanding balance of the NutraMax Note was $5.9 million. In addition, the
Company received payments from NutraMax of $7,000 in 1997 for professional
service fees. See "Management's Discussions and Analysis of Financial Condition
and Results of Operations--Results of Operations."
Sheldon M. Bonovitz and H. Scott Miller, both directors of Holdings who
resigned their positions upon consummation of the Transactions, served as
directors of PCI until they resigned from such positions in October 1996. In
fiscal 1997, in connection with the acquisition of PCI by Cardinal, the
Company's interest in PCI was converted into shares of common stock of Cardinal
with a market value of approximately $79.2 million based on the closing price on
October 11, 1996. The Company sold its Cardinal shares in January 1997 for
approximately $88.4 million and used the proceeds to refinance debt.
Until February 1997, Michael J. Rotko was a partner in the law firm of
Drinker Biddle & Reath LLP, which provided legal services to the Company during
fiscal 1997 and in prior years. The Company was not charged by Drinker Biddle &
Reath for any of Mr. Rotko's time on Company matters.
Mr. Bonovitz is Chairman of, and a partner in, the law firm of Duane, Morris
& Heckscher LLP, which provided legal services to the Company and Mr. Rotko
during fiscal 1997.
BRS MANAGEMENT AGREEMENT; CERTAIN FEES PAYABLE TO BRS AND CO-INVESTORS
Upon consummation of the Transactions, Holdings paid the Sponsor, FFT and
Galen Associates a closing fee of $6.0 million in the aggregate. In addition,
MEDIQ/PRN entered into a management services
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agreement (the "BRS Management Agreement") with the Sponsor, FFT and Galen
Associates pursuant to which the Sponsor, FFT and Galen Associates will be paid
the greater of $1.0 million per year or 1.5% of EBITDA for such year, in the
aggregate, for certain management, business and organizational strategy and
merchant and investment banking services rendered to the Company. The amount of
the annual management fee may be increased under certain circumstances based
upon performance or other criteria to be established by the Board of Directors
of MEDIQ/PRN.
PAYMENT OF PREVIOUSLY DEFERRED COMPENSATION
Under the terms of the Company's deferred compensation plan, approximately
$1.6 million of previously deferred employee compensation became payable upon
consummation of the Merger to certain former members of senior management of the
Company who have previously deferred such compensation. Deferred compensation
will be paid to employees only at their election.
ADDITIONAL PURCHASES OF COMMON STOCK
Certain persons to be designated by Holdings and BRS are expected to be
provided an opportunity to purchase shares of Common Stock, representing
approximately 8.3% of the outstanding Common Stock on a fully diluted basis, at
the same per share price as the shares of common stock of MQ sold to the BRS
Entities and the Co-Investors pursuant to the Equity Contribution. Any Common
Stock so acquired by an employee of the Company will be subject to repurchase by
Holdings if such employee resigns or is terminated at any time during the five
years after the date of such acquisition. The number of shares subject to
Holdings' repurchase option and the price at which such shares may be
repurchased are subject to a variety of factors, including whether the employee
is terminated for cause or without cause and at what point over the five-year
period a resignation or termination occurs.
It is also expected that certain employees of the Company will be provided
with an opportunity to receive non-qualified options (the "New Options") to
purchase shares of Common Stock, representing approximately 2.8% of the
outstanding Common Stock on a fully diluted basis, at a price per share equal to
the price per share at which the shares of common stock of MQ are sold to the
BRS Entities and the Co-Investors pursuant to the Equity Contribution. Such
employees will have the opportunity to acquire one-fifth of the New Options
during each year of the five-year period beginning with the consummation of the
Merger. For each such year, the opportunity to receive any New Option will be
subject to the Company's achievement of certain financial performance goals. In
certain circumstances, such persons will have the right to immediately receive
any unissued or unvested New Options regardless of whether such performance
goals have been met.
INDEMNIFICATION RIGHTS UNDER THE MERGER AGREEMENT
Pursuant to the Merger Agreement, Holdings is obligated, for a period of six
years after the Effective Time, to indemnify directors and officers of Holdings
and its subsidiaries and, subject to certain limitations, to maintain directors'
and officers' liability insurance substantially similar to that currently in
effect.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of the Company. To the
extent such summary contains descriptions of the indenture governing the
Exchangeable Debentures, or the New Credit Facility and other loan documents,
such descriptions do not purport to be complete and are qualified in their
entirety by reference to such documents.
NEW CREDIT FACILITY
In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company's existing credit facility (the "Existing Credit Facility")
with a syndicate of banks led by Banque Nationale de Paris ("BNP") was replaced
by the $325.0 million New Credit Facility.
The New Credit Facility consists of three facilities: (i) an eight-year
senior secured term loan facility in an aggregate principal amount equal to
$200.0 million (the "Term Loan Facility"); (ii) a six-year revolving credit
facility in an aggregate principal amount not to exceed $50.0 million (the
"Revolving Credit Facility"); and (iii) a six-year senior secured acquisition
facility in an aggregate principal amount not to exceed $75.0 million (the
"Acquisition Facility"). Loans made under the Term Loan Facility are referred to
herein as "Term Loans," advances made under the Revolving Credit Facility are
referred to herein as "Revolving Loans" and loans made under the Acquisition
Facility are referred to herein as "Acquisition Loans."
Term Loans in an aggregate principal amount of $200.0 million were drawn on
the closing date of the New Credit Facility in connection with the Transactions
and the consummation of the CHI Acquisition. Subject to compliance with
customary conditions precedent, Revolving Loans will be available at any time
prior to the final maturity of the Revolving Credit Facility. Amounts repaid
under the Revolving Credit Facility may be reborrowed prior to the final
maturity of the Revolving Credit Facility, provided that availability
requirements are met. Letters of credit will be available and mature at any time
before the sixtieth business day prior to the final maturity of the Revolving
Credit Facility. Subject to compliance with customary conditions precedent and
maximum ratios, both before and after making any acquisition, of pro forma
funded debt to consolidated EBITDA (as such term will be defined under the New
Credit Facility) and pro forma senior debt to consolidated EBITDA (as such term
will be defined under the New Credit Facility), Acquisition Loans will be
available for up to eighteen months following the execution and delivery of the
New Credit Facility, after which time (the "Conversion Date") the Acquisition
Facility shall convert to an amortizing Term Loan. Amounts repaid under the
Acquisition Facility may not be reborrowed.
All obligations of MEDIQ/PRN under the New Credit Facility are
unconditionally guaranteed (the "Facility Guaranties") by each existing and each
subsequently acquired or organized domestic and, to the extent no adverse tax
consequences would result, foreign subsidiary of MEDIQ/PRN (the "Facility
Guarantors"). The New Credit Facility and the related guarantees are secured by
substantially all the assets of MEDIQ/PRN and each Facility Guarantor, including
but not limited to (i) a first priority pledge of all the capital stock of each
Facility Guarantor and (ii) perfected first priority security interests in, and
mortgages on, substantially all tangible and intangible assets of MEDIQ/PRN and
each Facility Guarantor.
Borrowings under the New Credit Facility bear interest at a floating rate
based upon, at MEDIQ/ PRN's option, (i) the higher of the prime rate of BNP, or
the federal funds effective rate plus 0.5%, plus, in the case of the Term Loans,
a margin equal to 1.5%, and in the case of the Revolving Loans and the
Acquisition Loans, a margin equal to 1.0%, or (ii) the London Interbank Offered
Rate ("LIBOR") plus, in the case of the Term Loans, a margin equal to 2.75%, and
in the case of the Revolving Loans and the Acquisition Loans, a margin equal to
2.25%. MEDIQ/PRN may elect interest periods of one, two, three
or six months for LIBOR borrowings. Interest shall be payable at the end of each
interest period and, in any event, at least every three months.
In addition to paying interest on outstanding principal under the New Credit
Facility, MEDIQ/PRN is required to pay a commitment fee to the Senior Lenders
equal to 0.5% per annum of the undrawn portion
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of the commitments in respect of the facilities (subject to adjustment as set
forth below), commencing to accrue upon the execution and delivery of the New
Credit Facility and payable quarterly in arrears and upon the termination of any
commitment, in each case for the actual number of days elapsed in a 360-day
year. The New Credit Facility contains provisions under which commitment fees
and margins on interest rates under the facilities will be adjusted in
increments to be agreed upon based on performance goals to be agreed upon.
The Term Loans will amortize on a quarterly basis and be payable in
installments under a schedule to be agreed upon. Principal amounts outstanding
under the Revolving Credit Facility will be due and payable in full at maturity.
Principal amounts outstanding under the Acquisition Facility at the Conversion
Date will amortize on a quarterly basis and be payable in installments under a
schedule to be agreed upon. The Term Loans, Revolving Loans and Acquisition
Loans are subject to mandatory prepayments and reductions in the event of
certain extraordinary transactions or issuances of debt and equity by MEDIQ/PRN
or any Facility Guarantor. Such loans are also required to be prepaid with 75%
of the Excess Cash Flow (as such term will be defined in the New Credit
Facility) of MEDIQ/PRN or, if the Company's ratio of funded debt to pro forma
EBITDA for the preceding 12-month period is less than 5.0 to 1.0, 50% of such
Excess Cash Flow.
The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN has paid the Senior Lenders certain syndication and
administration fees, reimburse certain expenses and provide certain indemnities,
in each case which are customary for credit facilities of this type.
EXCHANGEABLE DEBENTURES
In July 1993, Holdings issued an aggregate of $34.5 million principal amount
of Exchangeable Debentures pursuant to an indenture dated as of July 30, 1993
(the "Exchangeable Debenture Indenture") between Holdings and First Fidelity
Bank, N.A. Pennsylvania ("First Fidelity"), as trustee. The Exchangeable
Debentures mature on July 15, 2003 and are exchangeable into shares of NutraMax
Common Stock at any time before the close of business on such date. Interest on
the Exchangeable Debentures accrues and is payable at the rate of 7 1/2% per
annum and is payable semiannually. The Exchangeable Debentures are general
unsecured obligations of Holdings and are subordinated to all existing and
future Senior Indebtedness (as defined in the Exchangeable Debenture Indenture)
of Holdings.
Approximately $10.1 million in principal amount of the Exchangeable
Debentures was outstanding at the time of the Merger. The Merger resulted in a
"Change of Control" under the Exchangeable Debentures, and Holdings was required
by the terms of the Exchangeable Debentures to notify holders thereof of their
right to require Holdings to purchase the Exchangeable Debentures at 100% of
their principal amount plus accrued interest. Holders of approximately $9.6
million in principal amount of the Exchangeable Debentures tendered their
Exchangeable Debentures for purchase by Holdings. Accordingly, approximately
$500,000 in principal amount of the Exchangeable Debentures is currently
outstanding.
Pursuant to an Escrow Agreement dated as of July 30, 1993 between Holdings
and First Fidelity, 2,254,902 shares of NutraMax Common Stock were deposited by
Holdings in escrow with First Fidelity in support of Holdings' exchange
obligations under the Exchangeable Debentures. On December 31, 1996, the Company
sold to NutraMax all of the shares of NutraMax Common Stock owned by the Company
pursuant to an agreement under which the Company received cash and an interest
bearing note secured by a $5.9 million letter of credit. In the event the
Exchangeable Debentures are exchanged into shares of NutraMax Common Stock, the
amount of the note, which as of December 31, 1997 was $5.9 million, will be
reduced on a pro rata basis. The note is payable when the shares of NutraMax
Common Stock held in escrow in support of the Exchangeable Debentures are
delivered to NutraMax upon release from escrow. All but 33,595 of the shares of
NutraMax Common Stock were released from escrow upon the purchase of
Exchangeable Debentures by the Company following the Merger. Accordingly,
Holdings expects to receive approximately $5.6 million in cash in respect of the
NutraMax note.
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were issued under an Indenture, dated as of May 15, 1998 (the
"Note Indenture"), among MEDIQ/PRN, the Subsidiary Guarantors and United States
Trust Company of New York, as Trustee (the "Note Trustee"). The terms of the
Note Indenture apply to the Old Notes and to the New Notes to be issued in
exchange therefor pursuant to the Note Exchange Offer (all such Notes being
referred to herein collectively as the "Notes").
The following is a summary of certain provisions of the Note Indenture and
the Notes, a copy of which Note Indenture and the form of Notes is available
upon request to MEDIQ/PRN at the address set forth under "Available
Information". The following summary of certain provisions of the Note Indenture
and the Notes does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Note
Indenture and the Notes, including the definitions of certain terms therein and
those terms made a part thereof by the Trust Indenture Act of 1939, as amended.
For purposes of this summary, the term "MEDIQ/PRN" refers only to MEDIQ/PRN and
not to any of its subsidiaries. The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but
MEDIQ/PRN may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of MEDIQ/PRN,
limited to $190 million aggregate principal amount, and will mature on June 1,
2008. The Notes will bear interest at the rate per annum shown on the cover page
hereof from May 29, 1998, or from the most recent date to which interest has
been paid or provided for, payable semiannually to Holders of record at the
close of business on the May 15 or November 15 immediately preceding the
interest payment date on June 1 and December 1 of each year, commencing December
1, 1998. MEDIQ/PRN will pay interest on overdue principal at 1% per annum in
excess of such rate, and it will pay interest on overdue installments of
interest at such higher rate to the extent lawful.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes are not redeemable
at the option of MEDIQ/PRN prior to June 1, 2003. Thereafter, the Notes will be
redeemable, at MEDIQ/PRN's option, in whole or in part, at any time or from time
to time, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed in percentages of principal amount), plus accrued
and unpaid interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on June 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------------------------------- -----------
<S> <C>
2003................................................................................. 105.500%
2004................................................................................. 103.667
2005................................................................................. 101.834
2006 and thereafter.................................................................. 100.000
</TABLE>
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In addition, at any time and from time to time prior to June 1 , 2001,
MEDIQ/PRN may redeem in the aggregate up to 25% of the original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market (provided that if the Public Equity Offering is
an offering by Holdings, a portion of the Net Cash Proceeds thereof equal to the
amount required to redeem any such Notes is contributed to the equity capital of
MEDIQ/PRN), at a redemption price (expressed as a percentage of principal
amount) of 111% plus accrued interest, if any, to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date); PROVIDED, HOWEVER, that at
least $142.5 million aggregate principal amount of the Notes remains outstanding
after each such redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Note Trustee on a pro rata basis, by lot or by such other
method as the Note Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancelation of the original Note.
SUBSIDIARY GUARANTIES
The obligations of MEDIQ/PRN pursuant to the Notes, including the repurchase
obligation resulting from a Change of Control, are unconditionally guaranteed,
jointly and severally, on an unsecured senior subordinated basis, by each of the
Subsidiary Guarantors. The Subsidiary Guarantors have agreed to pay, in addition
to the amount stated above, any and all expenses (including reasonable counsel
fees and expenses) incurred by the Note Trustee and the Holders in enforcing any
rights under the Subsidiary Guaranties with respect to the Subsidiary
Guarantors. Each Subsidiary Guaranty is limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the applicable Subsidiary
Guarantor, after giving effect to all other contingent and fixed liabilities of
such Subsidiary Guarantor (including, without limitation, any guarantees under
the Credit Agreement) and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
all obligations of such other Subsidiary Guarantor under its Subsidiary Guaranty
or pursuant to its contribution obligations under the Note Indenture, without
rendering the Subsidiary Guaranty, as it relates to such Subsidiary Guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. If a
Subsidiary Guaranty were to be rendered voidable, it could be subordinated by a
court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero.
Pursuant to the Note Indenture, a Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any other
Person to the extent described below under "--Certain Covenants--Merger and
Consolidation;" PROVIDED, HOWEVER, that if such other Person is not MEDIQ/PRN or
another Subsidiary Guarantor, such Subsidiary Guarantor's obligations under its
Subsidiary Guaranty must be expressly assumed by such other Person. However,
upon the sale or other disposition (including by way of consolidation or merger)
of all the Capital Stock, or the sale or disposition of all or substantially all
the assets, of a Subsidiary Guarantor (in each case other than to MEDIQ/PRN or
an Affiliate of MEDIQ/PRN) permitted by the Note Indenture, such Subsidiary
Guarantor will be released and relieved from all its obligations under the Note
Indenture and its Subsidiary Guaranty and such Subsidiary Guaranty shall
terminate.
RANKING
The indebtedness evidenced by the Notes and the Subsidiary Guaranties are
senior subordinated obligations of MEDIQ/PRN and the Subsidiary Guarantors, as
the case may be. The payment of the
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principal of, premium (if any) and interest on the Notes and the payment of any
Subsidiary Guaranty is subordinate in right of payment, as set forth in the Note
Indenture, to the prior payment in full of all Senior Indebtedness of MEDIQ/PRN
or the relevant Subsidiary Guarantor, as the case may be, whether outstanding on
the Issue Date or thereafter incurred, including the obligations of MEDIQ/PRN
and such Subsidiary Guarantor under the Credit Agreement. The Notes and the
Subsidiary Guaranties are also effectively subordinated to any Secured
Indebtedness of MEDIQ/PRN and the applicable Subsidiary Guarantor, as the case
may be, to the extent of the value of the assets securing such Indebtedness.
As of March 31, 1998, on a Pro Forma Basis, (i) the Senior Indebtedness of
MEDIQ/PRN would have been approximately $202.3 million (excluding unused
commitments under the Credit Agreement), all of which was secured indebtedness,
and (ii) the Senior Indebtedness of the Subsidiary Guarantors would have been
approximately $200.0 million, virtually all of it represented by guarantees of
Senior Indebtedness of MEDIQ/PRN under the Credit Agreement. Although the Note
Indenture contains limitations on the amount of additional Indebtedness that
MEDIQ/PRN and the Subsidiary Guarantors may incur, under certain circumstances
the amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness."
A portion of the operations of MEDIQ/PRN are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of MEDIQ/PRN,
including holders of the Notes, even if such obligations do not constitute
Senior Indebtedness. The Notes and each Subsidiary Guaranty, therefore, are
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of MEDIQ/PRN that are not Subsidiary
Guarantors.
Only Indebtedness of MEDIQ/PRN or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the Note Indenture. The Notes and each
Subsidiary Guaranty will in all respects rank PARI PASSU with all other Senior
Subordinated Indebtedness of MEDIQ/PRN and the relevant Subsidiary Guarantor,
respectively. MEDIQ/PRN and each Subsidiary Guarantor has agreed in the Note
Indenture that it will not Incur, directly or indirectly, any Indebtedness that
is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinated or junior to Secured
Indebtedness merely because it is unsecured.
MEDIQ/PRN may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Designated Senior Indebtedness is not
paid in full in cash when due or (ii) any other default on Designated Senior
Indebtedness occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived and any such acceleration has been rescinded or such
Designated Senior Indebtedness has been paid in full in cash. However, MEDIQ/PRN
may pay the Notes without regard to the foregoing if MEDIQ/PRN and the Note
Trustee receive written notice approving such payment from the Representative of
the Designated Senior Indebtedness with respect to which either of the events
set forth in clause (i) or (ii) of the immediately preceding sentence has
occurred and is continuing. During the continuance of any default (other than a
default described in clause (i) or (ii) of the second preceding sentence) with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, MEDIQ/PRN may not pay the Notes (other than in
Permitted Junior Securities) for a period (a "Payment Blockage Period")
commencing upon the receipt by the Note Trustee (with a copy to MEDIQ/PRN) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders of such Designated Senior
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Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Note Trustee and MEDIQ/PRN from the
Person or Persons who gave such Blockage Notice, (ii) because the default giving
rise to such Blockage Notice is no longer continuing or (iii) because such
Designated Senior Indebtedness has been repaid in full in cash). Notwithstanding
the provisions described in the immediately preceding sentence (but subject to
the provisions described in the first sentence of this paragraph), unless the
holders of such Designated Senior Indebtedness or the Representative of such
holders have accelerated the maturity of such Designated Senior Indebtedness,
MEDIQ/PRN may resume payments on the Notes after the end of such Payment
Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of MEDIQ/PRN upon a total or
partial liquidation or dissolution of MEDIQ/PRN or in a bankruptcy,
reorganization, insolvency, receivership or similar Insolvency or Liquidation
Proceeding relating to MEDIQ/PRN or its property, the holders of Senior
Indebtedness will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment or
distribution, and until the Senior Indebtedness is paid in full in cash, any
payment or distribution to which Noteholders would be entitled but for the
subordination provisions of the Note Indenture will be made to holders of such
Senior Indebtedness as their interests may appear except that Noteholders may
receive Permitted Junior Securities. If a payment or distribution is made to
Noteholders that, due to the subordination provisions, should not have been made
to them, such Noteholders are required to hold it in trust for the holders of
Senior Indebtedness and pay it over to such holders of Senior Indebtedness as
their interests may appear.
If payment of the Notes is accelerated because of an Event of Default,
MEDIQ/PRN or the Note Trustee shall promptly notify the holders of Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
If any Designated Senior Indebtedness is outstanding, neither MEDIQ/PRN nor any
Subsidiary Guarantor may pay the Notes until five Business Days after the
Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Notes only if the Note
Indenture otherwise permits payment at that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to MEDIQ/PRN's obligations under the Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Note Indenture,
in the event of insolvency, creditors of MEDIQ/PRN or a Subsidiary Guarantor who
are holders of Senior Indebtedness of MEDIQ/ PRN or such Subsidiary Guarantor,
as the case may be, may recover more, ratably, than the Noteholders, and
creditors of MEDIQ/PRN who are not holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Note Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that MEDIQ/PRN repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if
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any, to the date of purchase (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
(i) prior to the earlier to occur of (A) the first public offering of
common stock of Holdings or (B) the first public offering of common stock of
MEDIQ/PRN, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of the
Voting Stock of MEDIQ/ PRN, whether as a result of issuance of securities of
Holdings or MEDIQ/PRN, any merger, consolidation, liquidation or dissolution
of Holdings or MEDIQ/PRN, any direct or indirect transfer of securities by
Holdings or otherwise (for purposes of this clause (i) and clauses (ii) and
(iv) below, the Permitted Holders shall be deemed to beneficially own any
Voting Stock of any Person (the "specified entity") held by any other Person
(the "parent entity") so long as the Permitted Holders beneficially own (as
so defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent entity);
(ii) following the earlier to occur of (A) the first public offering of
common stock of Holdings or (B) the first public offering of common stock of
MEDIQ/PRN, any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (i) above, except that for
purposes of this clause (ii) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of MEDIQ/ PRN; PROVIDED, HOWEVER, that the Permitted
Holders beneficially own (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of MEDIQ/PRN than such other person and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the
purposes of this clause (ii), such other person shall be deemed to
beneficially own any Voting Stock of a specified entity held by a parent
entity, if such other person is the beneficial owner (as defined in this
clause (ii)), directly or indirectly, of more than 35% of the voting power
of the Voting Stock of such parent entity and the Permitted Holders
beneficially own (as defined in clause (i) above), directly or indirectly,
in the aggregate a lesser percentage of the voting power of the Voting Stock
of such parent entity and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
board of directors of such parent entity);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors (A) whose election by such Board of Directors or whose
nomination for election by the stockholders of MEDIQ/PRN was approved by a
vote of a majority of the directors of MEDIQ/PRN then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved or (B) who are designees
of one or more Permitted Holders) cease for any reason to constitute a
majority of the Board of Directors then in office; or
(iv) the merger or consolidation of MEDIQ/PRN with or into another
Person or the merger of another Person with or into MEDIQ/PRN, or the sale
of all or substantially all the assets of MEDIQ/ PRN to another Person
(other than a Person that is controlled by the Permitted Holders), and, in
the case of any such merger or consolidation, the securities of MEDIQ/PRN
that are outstanding immediately prior to such transaction and which
represent 100% of the aggregate voting power of the Voting Stock of
MEDIQ/PRN are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent, immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
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Within 30 days following any Change of Control, MEDIQ/PRN shall mail a
notice to each Holder with a copy to the Note Trustee (the "Change of Control
Offer") stating: (1) that a Change of Control has occurred and that such Holder
has the right to require MEDIQ/PRN to purchase such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (subject to the right of
holders of record on the relevant record date to receive interest on the
relevant interest payment date); (2) the circumstances and relevant facts
regarding such Change of Control; (3) the repurchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (4) the procedures determined by MEDIQ/PRN, consistent with the
covenant described hereunder, that a Holder must follow in order to have its
Notes purchased.
MEDIQ/PRN will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Note Indenture applicable to a Change of Control Offer made by MEDIQ/PRN
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
MEDIQ/PRN shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
MEDIQ/PRN shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of MEDIQ/PRN
and its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Note Indenture varies according
to the facts and circumstances of the subject transaction, has no clearly
established meaning under New York law (which is the choice of law under the
Note Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and, therefore, it may
be unclear as to whether a Change of Control has occurred and whether MEDIQ/PRN
is required to make an offer to repurchase the Notes as described above.
The Change of Control purchase feature is a result of negotiations between
MEDIQ/PRN and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that MEDIQ/PRN would decide to do so in the future. Subject to the limitations
discussed below, MEDIQ/PRN could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Note Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect MEDIQ/PRN's capital structure or credit ratings. Restrictions on the
ability of MEDIQ/ PRN to incur additional Indebtedness are contained in the
covenants described under "--Certain Covenants--Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount of the Notes then outstanding. Except for the
limitations contained in such covenants, however, the Note Indenture does not
contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
The Credit Agreement prohibits MEDIQ/PRN from purchasing Notes, and also
provides that the occurrence of certain change of control events with respect to
MEDIQ/PRN would constitute a default thereunder. In the event a Change of
Control occurs at a time when MEDIQ/PRN is prohibited from purchasing Notes,
MEDIQ/PRN could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If
MEDIQ/PRN does not obtain such a consent or repay such borrowings, MEDIQ/PRN
will remain prohibited from purchasing Notes. In such case, MEDIQ/PRN's failure
to purchase tendered Notes would constitute an Event of Default under the
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Note Indenture which would, in turn, constitute a default under the Credit
Agreement. In such circumstances, the subordination provisions in the Note
Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of MEDIQ/PRN and its Subsidiaries may also contain
prohibitions on the occurrence of certain events that would constitute a Change
of Control or require such indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the holders of their right to require
MEDIQ/PRN to repurchase the Notes could cause a default under such indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on MEDIQ/PRN. Finally, MEDIQ/PRN's ability to pay cash to the
holders of Notes following the occurrence of a Change of Control may be limited
by MEDIQ/PRN's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. The provisions under the Note Indenture relative to MEDIQ/PRN's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
CERTAIN COVENANTS
The Note Indenture contains covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS. (a) MEDIQ/PRN shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
PROVIDED, HOWEVER, that MEDIQ/PRN and its Restricted Subsidiaries may Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto,
the Consolidated Coverage Ratio exceeds 2.00 to 1 if such Indebtedness is
Incurred prior to June 1, 2000 or 2.25 to 1 if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), MEDIQ/PRN and the
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred by MEDIQ/PRN or any Restricted Subsidiary
pursuant to any Revolving Credit Facility; PROVIDED, HOWEVER, that,
immediately after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and
then outstanding does not exceed the greater of (A) $50 million less the
sum of all principal payments with respect to such Indebtedness pursuant
to clause (a)(ii)(A) of the covenant described under "--Limitation on
Sales of Assets and Subsidiary Stock" and (B) the sum of 60% of the book
value of the inventory of MEDIQ/PRN and its Restricted Subsidiaries and
85% of the book value of the accounts receivables of MEDIQ/PRN and its
Restricted Subsidiaries;
(2) Indebtedness Incurred by MEDIQ/PRN or any Restricted Subsidiary
pursuant to any Term Loan Facility; PROVIDED, HOWEVER, that, after giving
effect to any such Incurrence, the aggregate principal amount of all
Indebtedness Incurred under this clause (2) and then outstanding does not
exceed an amount equal to $200 million, less the aggregate sum of all
principal payments actually made from time to time after the Issue Date
with respect to such Indebtedness (other than principal payments made in
connection with any permitted Refinancings thereof);
(3) Indebtedness owed to and held by MEDIQ/PRN or a Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of
such Indebtedness (other than to MEDIQ/PRN or a Wholly Owned Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the obligor thereon;
(4) Indebtedness owed to and held by any Restricted Subsidiary (other
than a Wholly Owned Subsidiary); PROVIDED, HOWEVER, that (i) any such
Indebtedness shall be unsecured Subordinated Obligations of MEDIQ/PRN or
such Restricted Subsidiary, as applicable, and (ii) any subsequent
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issuance or transfer of any Capital Stock of such Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to MEDIQ/PRN,
a Wholly Owned Subsidiary or another Restricted Subsidiary) shall be
deemed to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(5) the Notes and the Exchange Notes;
(6) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2), (3), (4) or (5) of this
covenant);
(7) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (5) or (6) or this clause
(7);
(8) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Subsidiary was acquired by
MEDIQ/PRN or a Restricted Subsidiary (other than Indebtedness Incurred as
consideration in, in contemplation of or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by MEDIQ/PRN or a Restricted Subsidiary) and
Refinancing Indebtedness in respect thereof; PROVIDED, HOWEVER, that such
Indebtedness (including Refinancing Indebtedness in respect thereof) is
Non-Recourse to MEDIQ/PRN and its Restricted Subsidiaries, or to any of
their respective assets (other than the acquired Subsidiary and its
Subsidiaries, as applicable);
(9) Indebtedness in respect of performance bonds and surety or appeal
bonds entered into by MEDIQ/PRN and the Restricted Subsidiaries in the
ordinary course of their business;
(10) Hedging Obligations under or with respect to Interest Rate
Agreements and Currency Agreements entered into in the ordinary course of
business and not for the purpose of speculation;
(11) Purchase Money Indebtedness Incurred to finance the acquisition
by MEDIQ/PRN or a Restricted Subsidiary of any assets in the ordinary
course of business; PROVIDED, HOWEVER, at the time of such Incurrence and
after giving effect thereto, the aggregate principal amount of all
Indebtedness Incurred pursuant to this clause (11) and then outstanding
does not exceed $10 million;
(12) Subsidiary Guaranties of the Subsidiary Guarantors;
(13) the Guarantee of any Indebtedness otherwise permitted to be
Incurred pursuant to the Note Indenture (other than Indebtedness Incurred
pursuant to clause (8) above);
(14) Indebtedness of MEDIQ/PRN or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business, provided that such Indebtedness is satisfied within five
Business Days of Incurrence;
(15) Indebtedness of MEDIQ/PRN or any Restricted Subsidiary
consisting of indemnification, adjustment of purchase price or similar
obligations, in each case incurred in connection with the disposition of
any assets of MEDIQ/PRN or any Restricted Subsidiary in a principal
amount not to exceed the gross proceeds actually received by MEDIQ/PRN or
any Restricted Subsidiary in connection with such disposition; and
(16) Indebtedness in an aggregate principal amount which, together
with all other Indebtedness of MEDIQ/PRN and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (15) above or paragraph (a)) does not
exceed $50 million.
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(c) Notwithstanding the foregoing, MEDIQ/PRN shall not, and shall not permit
any Subsidiary Guarantor to, Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Notes or the applicable Subsidiary Guaranty, as the case may
be, to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, MEDIQ/PRN, in its sole discretion,
will classify such item of Indebtedness at the time of its Incurrence and only
be required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and classified in
more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, MEDIQ/PRN shall not, and
shall not permit any Subsidiary Guarantor to, Incur (i) any Indebtedness if such
Indebtedness is by its terms subordinate or junior in ranking in any respect to
any Senior Indebtedness of MEDIQ/PRN or such Subsidiary Guarantor, as
applicable, unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness
or (ii) any Secured Indebtedness (other than trade payables Incurred in the
ordinary course of business) that is not Senior Indebtedness of MEDIQ/ PRN or
such Subsidiary Guarantor, as applicable, unless contemporaneously therewith
effective provision is made to secure the Notes or the applicable Subsidiary
Guaranty, as the case may be, equally and ratably with such Secured Indebtedness
for so long as such Secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS. (a) MEDIQ/PRN shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time MEDIQ/PRN or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) MEDIQ/PRN is not able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Notes are
originally issued to the end of the most recent fiscal quarter for which
financial statements are available prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit);
(B) the aggregate Net Cash Proceeds (or non-cash proceeds when converted
to cash) received by MEDIQ/PRN from the issuance or sale of its Capital
Stock (other than Disqualified Stock) and the aggregate cash received by
MEDIQ/PRN as a capital contribution, in each case subsequent to the Issue
Date (other than an issuance or sale to a Subsidiary of MEDIQ/PRN and other
than an issuance or sale to an employee stock ownership plan or to a trust
established by MEDIQ/PRN or any of its Subsidiaries for the benefit of their
employees to the extent that the purchase by such plan or trust is financed
by Indebtedness of such plan or trust to MEDIQ/PRN or any Subsidiary or
Indebtedness Guaranteed by MEDIQ/PRN or any Subsidiary);
(C) the amount by which Indebtedness of MEDIQ/PRN or its Restricted
Subsidiaries is reduced on MEDIQ/PRN's consolidated balance sheet upon the
conversion or exchange (other than by a Subsidiary of MEDIQ/PRN) subsequent
to the Issue Date of any Indebtedness of MEDIQ/PRN or any Restricted
Subsidiary for Capital Stock (other than Disqualified Stock) of MEDIQ/PRN
(less the amount of any cash, or the fair value of any other property,
distributed by MEDIQ/PRN or such Restricted Subsidiary upon such conversion
or exchange); and
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(D) an amount equal to the sum of (i) the net reduction in Investments
in any Person resulting from dividends, repayments of loans or advances or
other transfers of assets, in each case to MEDIQ/ PRN or any Restricted
Subsidiary from such Person, or resulting from the receipt by MEDIQ/PRN or
any Restricted Subsidiary of proceeds realized upon the sale of such
Investment (other than a sale to an Affiliate), and (ii) the portion
(proportionate to MEDIQ/PRN's equity interest in such Subsidiary) of the
fair market value of the net assets of an Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted Subsidiary;
PROVIDED, HOWEVER, that the foregoing sum shall not exceed, in the case of
any Person, the amount of Investments previously made (and treated as a
Restricted Payment) by MEDIQ/PRN or any Restricted Subsidiary in such Person
plus, to the extent not added pursuant to clause (a)(3)(A) above, 50% of the
excess, if any, of the cash received upon the sale or other disposition of
an Investment over the amount of such Investment previously made (and
treated as a Restricted Payment).
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made out of the proceeds of the substantially
concurrent sale of, or capital contribution in respect of, or made by
exchange for, Capital Stock of MEDIQ/PRN (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of MEDIQ/PRN or an
employee stock ownership plan or to a trust established by MEDIQ/PRN or any
of its Subsidiaries for the benefit of their employees to the extent that
the purchase by such plan or trust is financed by Indebtedness of such plan
or trust to MEDIQ/PRN or any Subsidiary or Indebtedness Guaranteed by
MEDIQ/PRN or any Subsidiary); PROVIDED, HOWEVER, that (A) such Restricted
Payment shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale or capital
contribution shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness which is permitted to be Incurred pursuant to the covenant
described under "--Limitation on Indebtedness;" PROVIDED, HOWEVER, that such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; PROVIDED, HOWEVER, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or options to
purchase shares of, or dividends, distributions or advances to Holdings to
allow Holdings to repurchase or acquire shares of, or options to purchase
shares of, Capital Stock (other than Disqualified Stock) of Holdings, MEDIQ/
PRN or any of its Subsidiaries from employees, former employees, directors
or former directors of Holdings, MEDIQ/PRN or any of its Subsidiaries (or
permitted transferees of such employees, former employees, directors or
former directors), pursuant to the terms of the agreements (including
employment agreements) or plans or written arrangements (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of
such common stock; PROVIDED, HOWEVER, that the aggregate amount of such
repurchases and other acquisitions (and dividends to Holdings for such
repurchases and other acquisitions) shall not exceed the sum of (A) $5
million plus (B) the aggregate Net Cash Proceeds received by MEDIQ/PRN from
the issuance of such Capital Stock to, or the exercise of options to
purchase such Capital Stock by, employees or directors of Holdings,
MEDIQ/PRN or any of its Subsidiaries that occurs after the Issue Date (to
the extent the Net Cash Proceeds from the sale of such Capital Stock have
not otherwise been applied to the payment of Restricted Payments by virtue
of clause (3)(B) of paragraph (a) above or applied pursuant to clause (b)(i)
above); PROVIDED FURTHER,
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HOWEVER, that such repurchases and other acquisitions shall be excluded in
the calculation of the amount of Restricted Payments;
(v) payments of dividends on MEDIQ/PRN's common stock after an initial
public offering (other than an offering on Form S-8) of MEDIQ/PRN common
stock (or of Holdings' common stock) in an annual amount not to exceed, in
the case of an offering of MEDIQ/PRN's common stock, 6% of the aggregate
gross proceeds to MEDIQ/PRN from shares of common stock sold for the account
of MEDIQ/PRN in such initial public offering, or, in the case of an offering
of Holdings' common stock, 6% of the amount contributed to MEDIQ/PRN by
Holdings from the proceeds received by Holdings from a sale of common stock
of Holdings in an initial public offering (provided that the proceeds of any
such dividends to Holdings are immediately used to pay a dividend on the
class of common stock sold in Holdings' initial public offering); PROVIDED,
HOWEVER, that such payments shall be included in the calculation of the
amount of Restricted Payments;
(vi) dividends, distributions or advances to Holdings to the extent
required to pay non-deferrable scheduled cash interest when due on the
Debentures and the Exchangeable Debentures and any additional cash interest
(at a rate not to exceed 1/2 of 1% per annum) payable with respect to the
Debentures as a result of Holdings' failure to comply with its obligations
to register the Debentures; PROVIDED, HOWEVER, that (A) no Default shall
have occurred and be continuing (or would result therefrom), (B) Holdings
shall immediately apply any such dividend to make such cash interest payment
and (C) except in the case of such additional interest on the Debentures,
immediately after giving effect to any such dividend, the Company would be
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
of the covenant described under "--Limitation on Indebtedness"; PROVIDED
FURTHER, HOWEVER, that such dividends, distributions and advances shall be
included in the calculation of the amount of Restricted Payments;
(vii) dividends, distributions or advances to Holdings to the extent
required to pay the Exchangeable Debentures when due at Stated Maturity;
PROVIDED, HOWEVER, that such dividends, distributions or advances shall be
included in the calculation of the amount of Restricted Payments;
(viii) dividends, distributions or advances to Holdings to the extent
necessary to pay for general corporate and overhead expenses incurred by
Holdings in the ordinary course of business; PROVIDED, HOWEVER, that such
dividends shall not exceed $500,000 in any fiscal year of MEDIQ/PRN;
PROVIDED FURTHER, HOWEVER, that such dividends, distributions or advances
shall be excluded in the calculation of the amount of Restricted Payments;
(ix) dividends, distributions or advances to Holdings to be used by
Holdings to pay Federal, state and local taxes payable by Holdings and
directly attributable to (or arising as a result of) the operations of
MEDIQ/PRN and its Restricted Subsidiaries; PROVIDED, HOWEVER, that (A) the
amount of such dividends shall not exceed the amount that MEDIQ/PRN and its
Restricted Subsidiaries would be required to pay in respect of such Federal,
state and local taxes were MEDIQ/PRN to pay such taxes as a stand-alone
taxpayer and (B) such dividends pursuant to this clause (ix) are used by
Holdings for such purposes within 20 days of the receipt of such dividends
by Holdings; providing further, however, that such dividends shall be
excluded in the calculation of the amount of Restricted Payments;
(x) any purchase or redemption of Disqualified Stock of MEDIQ/PRN or a
Restricted Subsidiary made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of MEDIQ/PRN or a
Restricted Subsidiary which is permitted to be Incurred pursuant to the
covenant described under "--Limitation of Indebtedness;" PROVIDED, HOWEVER,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments;
(xi) upon the occurrence of a Change of Control and within 60 days after
the completion of the offer to repurchase the Notes pursuant to the covenant
described under "--Change of Control" above
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(including the purchase of the Notes tendered), any purchase or redemption
of Subordinated Obligations required pursuant to the terms thereof as a
result of such Change of Control at a purchase or redemption price not to
exceed the outstanding principal amount thereof, plus accrued and unpaid
interest (if any); PROVIDED, HOWEVER, that (A) at the time of such purchase
or redemption no Default shall have occurred and be continuing (or would
result therefrom), (B) MEDIQ/PRN would be able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness" after giving pro forma effect to such
Restricted Payment and (C) such purchase or redemption shall be included in
the calculation of the amount of Restricted Payments;
(xii) any repurchase or other acquisition for value of Capital Stock of
a Restricted Subsidiary deemed to occur upon the merger of such Restricted
Subsidiary with or into MEDIQ/PRN or a Wholly Owned Subsidiary of MEDIQ/PRN
within one year following the date on which such Restricted Subsidiary
became a Restricted Subsidiary; PROVIDED, HOWEVER, that such repurchases or
other acquisitions shall be excluded in the calculation of the amount of
Restricted Payments;
(xiii) payments required pursuant to the terms of the CHI Acquisition
Agreement to consummate the CHI Acquisition by MEDIQ/PRN or a Restricted
Subsidiary pursuant to the terms of the CHI Acquisition Agreement; PROVIDED,
HOWEVER, that such payments shall be excluded in the calculation of the
amount of Restricted Payments;
(xiv) dividends, distributions or advances to Holdings to allow Holdings
to repurchase shares of Capital Stock in, and to pay fees and expenses,
including deferred compensation which becomes payable, in connection with,
the Merger; PROVIDED, HOWEVER, that such dividends, distributions or
advances shall be excluded in the calculation of the amount of Restricted
Payments;
(xv) dividends, distributions or advances to Holdings to the extent
required to pay amounts in respect of pension plan or similar employee
benefit plan contributions, severance obligations of Holdings existing as of
the Issue Date and insurance premiums and deductibles; PROVIDED, HOWEVER,
that such dividends, distribution or advances shall be excluded in the
calculation of the amount of Restricted Payments; or
(xvi) Restricted Payments not exceeding $7.5 million in the aggregate;
PROVIDED, HOWEVER, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or would result therefrom)
and (B) such Restricted Payments shall be included in the calculation of the
amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. MEDIQ/PRN shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to MEDIQ/PRN or a Restricted Subsidiary or pay any Indebtedness owed to
MEDIQ/PRN, (b) make any loans or advances to MEDIQ/PRN or (c) transfer any of
its property or assets to MEDIQ/PRN, except:
(i) any encumbrance or restriction pursuant to an agreement, including
the Credit Agreement, in effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Capital Stock or
Indebtedness Incurred by such Restricted Subsidiary on or prior to the date
on which such Restricted Subsidiary was acquired by MEDIQ/PRN or any of its
Restricted Subsidiaries (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by MEDIQ/PRN or any of its Restricted Subsidiaries) and outstanding
on such date;
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(iii) any encumbrance or restriction pursuant to an agreement (A)
evidencing Indebtedness Incurred without violation of the Note Indenture or
(B) effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii) or contained in any amendment to an agreement referred to in clause
(i) or (ii) of this covenant or this clause (iii); PROVIDED, HOWEVER, that
in the case of clauses (A) and (B), the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any such agreement or
amendment are no more restrictive in any material respect, as determined in
good faith by the Board of Directors, than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in agreements of such
Restricted Subsidiary in effect at, or entered into on, the Issue Date;
(iv) any such encumbrance or restriction consisting of customary non
assignment or subletting provisions contained in leases and other contracts
entered into in the ordinary course of business and consistent with past
practices;
(v) in the case of clause (c) above, restrictions contained in security
agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements, mortgages or similar
documents;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition;
(vii) any encumbrance or restriction arising under applicable law; and
(viii) any encumbrance or restriction consisting of any restriction on
the sale or other disposition of assets or property securing Indebtedness as
a result of a Lien permitted to be Incurred under the Note Indenture on such
asset or property.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) MEDIQ/PRN shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) MEDIQ/ PRN or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by MEDIQ/PRN or such Restricted Subsidiary is in
the form of cash or cash equivalents (provided that such 75% requirement shall
not apply to any Asset Disposition in which the cash or cash equivalents portion
of the consideration received therefor, determined in accordance with this
covenant, is equal to or greater than what the net after-tax proceeds would have
been had the Asset Disposition complied with such 75% requirement) and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by MEDIQ/PRN (or such Restricted Subsidiary, as the case may be) (A)
FIRST, to the extent MEDIQ/PRN elects (or is required by the terms of any
Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness of
MEDIQ/PRN or a Subsidiary Guarantor or Indebtedness (other than any Disqualified
Stock) of a Wholly Owned Subsidiary that is not a Subsidiary Guarantor (in each
case other than Indebtedness owed to MEDIQ/PRN or an Affiliate of MEDIQ/PRN)
within one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (B) SECOND, to the extent of the balance of
such Net Available Cash after application, if any, in accordance with clause
(A), to the extent MEDIQ/PRN elects, to acquire Additional Assets within one
year from (or enter into a binding commitment to acquire Additional Assets,
provided that such commitment shall be subject only to customary conditions
(other than financing) and such acquisition shall be consummated within two
years from) the later of the date of such Asset Disposition or the receipt of
such Net Available Cash; and (C) THIRD, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A) and (B), to make
an offer to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness designated by MEDIQ/PRN) to purchase Notes (and such
other Senior Subordinated Indebtedness) pursuant to and subject to the
conditions contained in the
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Note Indenture; PROVIDED, HOWEVER, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A) or (C) above,
MEDIQ/PRN or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this paragraph,
MEDIQ/PRN and the Restricted Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this paragraph except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which are not applied
in accordance with this paragraph exceeds $10 million. Pending application of
Net Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Permitted Investments or used to temporarily reduce loans
outstanding under any Revolving Credit Facility.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of MEDIQ/PRN or any
Restricted Subsidiary and the release of MEDIQ/ PRN or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition (in which case MEDIQ/PRN shall, without further action, be deemed to
have applied such assumed Indebtedness in accordance with clause (A) of the
preceding paragraph) and (y) securities received by MEDIQ/PRN or any Restricted
Subsidiary from the transferee that are promptly converted by MEDIQ/PRN or such
Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(ii)(C)
above, MEDIQ/PRN will be required to purchase Notes tendered pursuant to an
offer by MEDIQ/PRN for the Notes (and other Senior Subordinated Indebtedness) at
a purchase price of 100% of their principal amount (without premium) plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the Note
Indenture. MEDIQ/PRN shall not be required to make such an offer to purchase
Notes (and other Senior Subordinated Indebtedness) pursuant to this covenant if
the Net Available Cash available therefor is less than $10 million (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) MEDIQ/PRN shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder,
MEDIQ/PRN shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) MEDIQ/PRN shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of MEDIQ/PRN (an "Affiliate Transaction") unless the terms thereof (1)
are no less favorable to MEDIQ/ PRN or such Restricted Subsidiary than those
that could be obtained at the time of such transaction in arm's-length dealings
with a Person who is not such an Affiliate, (2) if such Affiliate Transaction
involves an amount in excess of $1 million, have been approved by a majority of
the members of the Board of Directors having no personal stake in such Affiliate
Transaction and (3) if such Affiliate Transaction involves an amount in excess
of $5 million (other than Affiliate Transactions in the ordinary course of
business of MEDIQ/PRN and its Restricted Subsidiaries between or among MEDIQ/PRN
or any Restricted Subsidiary of MEDIQ/PRN and any Person providing goods and/or
services to MEDIQ/PRN or any Restricted Subsidiary in the ordinary course of
business that is an Affiliate of MEDIQ/PRN or such Restricted Subsidiary solely
by virtue of the fact that BRS, or any Person controlling BRS, directly or
indirectly controls both MEDIQ/PRN or such Restricted Subsidiary and such
Affiliate; PROVIDED, HOWEVER, that such Affiliate Transaction shall comply with
clause (1) above), have been determined by (A) a
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nationally recognized investment banking firm to be fair, from a financial
standpoint, to MEDIQ/PRN and its Restricted Subsidiaries or (B) an accounting or
appraisal firm nationally recognized in making such determinations to be on
terms that are not less favorable to MEDIQ/PRN and its Restricted Subsidiaries
than the terms that could be obtained in an arm's-length transaction from a
Person that is not an Affiliate of MEDIQ/PRN.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors, (iii) the grant of stock options or similar
rights to employees and directors of MEDIQ/ PRN pursuant to plans approved by
the Board of Directors, (iv) loans or advances to employees in the ordinary
course of business of MEDIQ/PRN or its Restricted Subsidiaries, but in any event
not to exceed $2 million in the aggregate outstanding at any one time, (v) the
payment of reasonable compensation or employee benefit arrangements to and
indemnity provided for the benefit of directors, officers or employees of
MEDIQ/PRN or its Restricted Subsidiaries in the ordinary course of business,
(vi) payments made in connection with the Transactions, including the payment to
BRS, the Co-Investors or any of their respective Affiliates of (A) a transaction
fee in connection with the Merger in an aggregate amount not to exceed $6
million and (B) other fees pursuant to the Management Agreement in an annual
amount not to exceed in any fiscal year an amount equal to the greater of (x) $1
million and (y) one and one-half percent of MEDIQ/PRN's EBITDA for such fiscal
year; (vii) any Affiliate Transaction between MEDIQ/PRN and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries and (viii) the issuance or sale
of any Capital Stock (other than Disqualified Stock) of MEDIQ/PRN.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. MEDIQ/PRN shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary (other than the pledge of Capital Stock
pursuant to the Credit Agreement), and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
of its Capital Stock except (i) to MEDIQ/PRN or a Wholly Owned Subsidiary, (ii)
directors' qualifying shares or other shares required by applicable law to be
held by a Person other than MEDIQ/PRN or a Restricted Subsidiary, (iii) if,
immediately after giving effect to such issuance, sale or other disposition,
neither MEDIQ/PRN nor any of its Subsidiaries own any Capital Stock of such
Restricted Subsidiary or (iv) if, immediately after giving effect to such
issuance, sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such Person remaining
after giving effect thereto would have been permitted to be made under the
covenant described under "--Limitation on Restricted Payments" if made on the
date of such issuance, sale or other disposition.
MERGER AND CONSOLIDATION. MEDIQ/PRN shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
or any State thereof or the District of Columbia, and the Successor Company (if
not MEDIQ/PRN) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Note Trustee, in form satisfactory to the Note
Trustee, all the obligations of MEDIQ/PRN under the Notes and the Note
Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor Company
or any Subsidiary as a result of such transaction as having been Incurred by
such Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness;" and (iv) MEDIQ/PRN shall have
delivered to the Note Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Note Indenture.
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The Successor Company shall be the successor to MEDIQ/PRN and shall succeed
to, and be substituted for, and may exercise every right and power of, MEDIQ/PRN
under the Note Indenture, and the predecessor Company, except in the case of a
lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
MEDIQ/PRN will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(i) the resulting, surviving or transferee Person (if not such Subsidiary) shall
be a Person organized and existing under the laws of the jurisdiction under
which such Subsidiary was organized or under the laws of the United States of
America, or any State thereof or the District of Columbia, and such Person shall
expressly assume, by executing a Guaranty Agreement in a form satisfactory to
the Note Trustee, all the obligations of such Subsidiary, if any, under its
Subsidiary Guaranty; (ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the resulting, surviving or transferee Person as a result of
such transaction as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be continuing; and (iii)
MEDIQ/PRN delivers to the Note Trustee an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or transfer and such
Guaranty Agreement, if any, complies with the Note Indenture. The provision of
clauses (i) and (ii) shall not apply to any transactions that constitute an
Asset Disposition if MEDIQ/PRN has complied with the applicable provisions of
the covenant described under "Limitation on Sales of Assets and Subsidiary
Stock" above.
The foregoing will not prohibit any consolidation or merger of, or transfer
of all or part of the property and assets of, any Restricted Subsidiary with or
to MEDIQ/PRN or any Subsidiary Guarantor.
FUTURE GUARANTORS. MEDIQ/PRN shall cause each domestic Restricted
Subsidiary to execute and deliver to the Note Trustee a Guaranty Agreement
pursuant to which such Restricted Subsidiary will Guarantee payment of the Notes
on the same terms and conditions as those set forth in the Note Indenture.
SEC REPORTS. Notwithstanding that MEDIQ/PRN may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, MEDIQ/PRN
shall file with the SEC (to the extent the SEC will accept such filings) and
provide the Note Trustee and Noteholders with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Note Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by MEDIQ/PRN to comply with its obligations under "--Certain
Covenants--Merger and Consolidation" above, (iv) the failure by MEDIQ/PRN to
comply for 30 days after written notice with any of its obligations under the
covenants described above under "--Change of Control" (other than a failure to
purchase Notes) or under "--Certain Covenants" under "--Limitation on
Indebtedness," "--Limitation on Restricted Payments," "--Limitation on
Restrictions on Distributions from Restricted Subsidiaries," "--Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"--Limitation on Affiliate Transactions," "--Limitation on the Sale or Issuance
of Capital Stock of Restricted Subsidiaries," "--Future Guarantors" or "--SEC
Reports," (v) the failure by MEDIQ/PRN to comply for 60 days after written
notice with its other agreements contained in the Note Indenture, (vi)
Indebtedness of MEDIQ/PRN or any Significant Subsidiary (other than Indebtedness
owed to MEDIQ/PRN or its Restricted Subsidiaries) is not paid within any
applicable grace period after final
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maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $10 million and
such default shall not have been cured or such acceleration rescinded after a
10-day period (the "cross acceleration provision"), (vii) certain events of
bankruptcy, insolvency or reorganization of MEDIQ/PRN or a Significant
Subsidiary (the "bankruptcy provisions"), (viii) any judgment or decree (not
subject to appeal) for the payment of money in an uninsured amount in excess of
$10 million is entered against MEDIQ/PRN or a Significant Subsidiary, remains
outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days after written notice (the "judgment
default provision") or (ix) any Subsidiary Guaranty ceases to be in full force
and effect (other than in accordance with the terms of such Subsidiary Guaranty
or as contemplated in the Note Indenture) or a Subsidiary Guarantor denies or
disaffirms its obligations under its Subsidiary Guaranty. However, a default
under clauses (iv), (v) and (viii) will not constitute an Event of Default until
the Note Trustee or the holders of 25% in principal amount of the outstanding
Notes notify MEDIQ/PRN in writing of the default and MEDIQ/PRN does not cure
such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Note Trustee or the
holders of at least 25% in principal amount of the outstanding Notes may declare
the principal of and accrued but unpaid interest, if any, on all the Notes to be
due and payable; PROVIDED, HOWEVER, that so long as any Designated Senior
Indebtedness shall be outstanding, no such acceleration shall be effective until
the earlier of (i) acceleration of any such Designated Senior Indebtedness or
(ii) five business days after the giving of written notice to MEDIQ/PRN and the
representatives under the Designated Senior Indebtedness of such acceleration.
Upon such a declaration, such principal and interest shall be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of MEDIQ/PRN occurs and is continuing, the
principal of and interest on all the Notes will IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the Note Trustee or any holders of the Notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences. In the
event of any Event of Default specified in clause (vi) above, such Event of
Default and all consequences thereof (including, without limitation, any
acceleration or resulting payment default) shall be annulled, waived or
rescinded, automatically and without any action by the Note Trustee or the
Holders of the Notes, if within 20 days after such Event of Default arose (x)
the Indebtedness or guarantee that is the basis for such Event of Default has
been discharged in a manner that does not violate the terms of the Note
Indenture or (y) the holders thereof have rescinded or waived the acceleration,
notice or action (as the case may be) giving rise to such Event of Default.
Subject to the provisions of the Note Indenture relating to the duties of
the Note Trustee, if an Event of Default occurs and is continuing, the Note
Trustee will be under no obligation to exercise any of the rights or powers
under the Note Indenture at the request or direction of any of the holders of
the Notes unless such holders have offered to the Note Trustee reasonable
indemnity or security against any loss, liability or expense. Except to enforce
the right to receive payment of principal, premium (if any) or interest when
due, no holder of a Note may pursue any remedy with respect to the Note
Indenture or the Notes unless (i) such holder has previously given the Note
Trustee notice that an Event of Default is continuing, (ii) holders of at least
25% in principal amount of the outstanding Notes have requested the Note Trustee
to pursue the remedy, (iii) such holders have offered the Note Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the Note Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the holders of a
majority in principal amount of the outstanding Notes have not given the Note
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Note Trustee
or of exercising any trust or power conferred on the Note Trustee. The Note
Trustee, however, may refuse to follow any direction
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that conflicts with law or the Note Indenture or that the Note Trustee
determines is unduly prejudicial to the rights of any other holder of a Note or
that would involve the Note Trustee in personal liability.
The Note Indenture provides that if a Default occurs and is continuing and
is known to the Note Trustee, the Note Trustee must mail to each holder of the
Notes notice of the Default within 90 days after it occurs. Except in the case
of a Default in the payment of principal of or interest on any Note, the Note
Trustee may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is not opposed to the interest of the holders
of the Notes. In addition, MEDIQ/PRN is required to deliver to the Note Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. MEDIQ/PRN also is required to deliver to the Note Trustee, within
30 days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action MEDIQ/PRN is taking or
proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Note Indenture, the Subsidiary Guaranties
or the Notes may be amended with the consent of the holders of a majority in
principal amount of the Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Notes) and any past default
or compliance with any provisions may also be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding.
However, without the consent of each holder of an outstanding Note affected
thereby, no amendment may, among other things, (i) reduce the amount of Notes
whose holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the amount payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under "--Optional Redemption" above, (v) make any Note payable in
money other than that stated in the Note, (vi) impair the right of any holder of
the Notes to receive payment of principal of and interest on such holder's Notes
on or after the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such holder's Notes, (vii) make any change in
the amendment provisions which require each holder's consent or in the waiver
provisions or (viii) make any change in any Subsidiary Guaranty that would
adversely affect the Noteholders. In addition, any amendment to the
subordination provisions of the Note Indenture that would adversely affect the
Noteholders requires the consent of the holders of at least 75% in aggregate
principal amount of the Notes then outstanding.
Without the consent of any holder of the Notes, MEDIQ/PRN, the Subsidiary
Guarantors and the Note Trustee may amend or supplement the Note Indenture, the
Subsidiary Guaranties or the Notes to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of MEDIQ/PRN or the Subsidiary Guarantors under the Note Indenture,
to provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
further guarantees with respect to the Notes, to release Subsidiary Guaranties
when permitted by the Note Indenture, to secure the Notes, to add to the
covenants of MEDIQ/PRN for the benefit of the holders of the Notes or to
surrender any right or power conferred upon MEDIQ/PRN or any Subsidiary
Guarantor, to make any change that does not adversely affect the rights of any
holder of the Notes or to comply with any requirement of the SEC in connection
with the qualification of the Note Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the Note
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of MEDIQ/PRN or the Subsidiary Guarantors then outstanding unless the holders of
such Senior Indebtedness (or their Representative) consent to such change.
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The consent of the holders of the Notes is not necessary under the Note
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Note Indenture becomes effective, MEDIQ/PRN is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes are issued in registered form and will be transferable only upon
the surrender of the Notes being transferred for registration of transfer.
MEDIQ/PRN may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
MEDIQ/PRN at any time may terminate all its obligations under the Notes and
the Note Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. MEDIQ/PRN at any time may terminate its obligations under "--Change of
Control" and under the covenants described under "-- Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clause (iii) under
"--Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
MEDIQ/PRN may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If MEDIQ/PRN exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If MEDIQ/PRN exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of MEDIQ/PRN to comply with clause (iii) under "--Certain Covenants--
Merger and Consolidation" above. If MEDIQ/PRN exercises its legal defeasance
option or its covenant defeasance option, each Subsidiary Guarantor will be
released from all of its obligations with respect to its Subsidiary Guaranty.
In order to exercise either defeasance option, MEDIQ/PRN must irrevocably
deposit in trust (the "defeasance trust") with the Note Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Note Trustee of an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE NOTE TRUSTEE
United States Trust Company of New York is the Trustee under the Note
Indenture and has been appointed by MEDIQ/PRN as Registrar and Paying Agent with
regard to the Notes.
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The Note Indenture contains certain limitations on the rights of the Note
Trustee, should it become a creditor of MEDIQ/PRN, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Note Trustee is permitted to engage in
other transactions; PROVIDED, HOWEVER, if it acquires any conflicting interest
it must either eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Note Trustee, subject to certain
exceptions. The Note Indenture provides that if an Event of Default occurs (and
is not cured), the Note Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Note Trustee is under no obligation to exercise
any of its rights or powers under the Note Indenture at the request of any
Holder of Notes, unless such Holder shall have offered to the Note Trustee
security and indemnity satisfactory to it against any loss, liability or expense
and then only to the extent required by the terms of the Note Indenture.
GOVERNING LAW
The Note Indenture provides that it (including the Subsidiary Guaranties)
and the Notes will be governed by, and construed in accordance with, the laws of
the State of New York without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of another
jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by MEDIQ/PRN or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants--Limitation on
Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of MEDIQ/PRN or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions that are part of a
common plan) by MEDIQ/PRN or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of (i) any
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares or shares required by applicable law to be held by a Person
other than MEDIQ/PRN or a Restricted Subsidiary), (ii) all or substantially all
the assets of any division or line of business of MEDIQ/PRN or any Restricted
Subsidiary or (iii) any other assets of MEDIQ/PRN or any Restricted Subsidiary
outside of the ordinary course of business of MEDIQ/PRN or
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such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii)
above, (x) a disposition by a Restricted Subsidiary to MEDIQ/PRN or by MEDIQ/PRN
or a Restricted Subsidiary to a Wholly Owned Subsidiary, (y) for purposes of the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" and (z) disposition of assets with a fair market value of
less than $100,000); PROVIDED, HOWEVER, that a disposition of all or
substantially all of the assets of MEDIQ/PRN and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Note Indenture
described above under the caption "--Change of Control" and/or the provisions
described above under the caption "--Merger and Consolidation" and not by the
provisions of the "--Limitation on Sales of Assets and Subsidiary Stock"
covenant.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in such transaction, compounded annually) of the total obligations of
the lessee for net rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Bank Indebtedness" means all Obligations pursuant to or in respect of the
Credit Agreement.
"Board of Directors" means the Board of Directors of MEDIQ/PRN or any
committee thereof duly authorized to act on behalf of such Board.
"BRS" means Bruckmann, Rosser, Sherrill & Co., L.P.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"CHI Acquisition" means the acquisition transactions contemplated by the CHI
Acquisition Agreement.
"CHI Acquisition Agreement" means the Asset Purchase Agreement dated April
24, 1998, among MEDIQ/PRN and the sellers named therein, as such agreement is in
effect on the Issue Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Co-Investors" means Ferrer Freeman Thompson & Co. LLC and Galen Partners
III, L.P.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are available
prior to the date of such determination to (ii) Consolidated Interest Expense
for
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such four fiscal quarters; PROVIDED, HOWEVER, that (1) if MEDIQ/PRN or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
outstanding on the date of such calculation shall be computed based on (A) the
average daily balance of such Indebtedness during such four fiscal quarters or
such shorter period when such facility was outstanding or (B) if such facility
was created after the end of such four fiscal quarters, the average balance of
such Indebtedness during the period from the date of creation of such facility
to the date of the computation), (2) if MEDIQ/PRN or any Restricted Subsidiary
has repaid, repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the date
of the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall
be calculated on a pro forma basis as if such discharge had occurred on the
first day of such period and as if MEDIQ/PRN or such Restricted Subsidiary has
not earned the interest income actually earned during such period in respect of
cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
MEDIQ/PRN or any Restricted Subsidiary shall have made any Asset Disposition,
the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
MEDIQ/PRN or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to MEDIQ/PRN and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent MEDIQ/PRN and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale), (4) if
since the beginning of such period MEDIQ/PRN or any Restricted Subsidiary (by
merger or otherwise) shall have made an Investment in any Restricted Subsidiary
(or any person which becomes a Restricted Subsidiary) or an acquisition of
assets, including any such Investment or acquisition of assets occurring in
connection with a transaction requiring a calculation to be made hereunder,
which constitutes all or substantially all of a product line or an operating
unit of a business, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness and the application of the proceeds therefrom) as
if such Investment or acquisition occurred on the first day of such period and
(5) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into MEDIQ/PRN or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset
Disposition, any Investment or any acquisition of assets that would have
required an adjustment pursuant to clause (3) or (4) above if made by MEDIQ/PRN
or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition occurred on the
first day of such period. For purposes of this definition, whenever pro forma
effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting Officer of MEDIQ/PRN. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest of such Indebtedness
shall be calculated as if the
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rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of MEDIQ/PRN and its consolidated Restricted Subsidiaries, PLUS, to the
extent not included in such total interest expense, and to the extent incurred
by MEDIQ/PRN or its Restricted Subsidiaries, without duplication, (i) interest
expense attributable to Capital Lease Obligations and the interest expense
attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) cash and Disqualified Stock dividends in respect of
all Preferred Stock of Restricted Subsidiaries and Disqualified Stock of
MEDIQ/PRN held by Persons other than MEDIQ/PRN or a Wholly Owned Subsidiary,
(viii) interest incurred in connection with Investments in discontinued
operations, (ix) interest accruing on any Indebtedness of any other Person to
the extent such Indebtedness is Guaranteed by (or secured by the assets of)
MEDIQ/PRN or any Restricted Subsidiary and (x) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan or trust to pay interest or fees to any Person (other than
MEDIQ/PRN or any Wholly Owned Subsidiary) in connection with Indebtedness
Incurred by such plan or trust and LESS, to the extent included in such total
interest expense, the amortization during such period of debt issuance costs;
PROVIDED, HOWEVER, that the aggregate amount of amortization relating to any
such debt issuance costs deducted in calculating Consolidated Interest Expense
shall not exceed 5% of the aggregate amount of the financing giving rise to such
debt issuance costs.
"Consolidated Net Income" means, for any period, the net income of MEDIQ/PRN
and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall not be
included in such Consolidated Net Income:
(i) any net income of any Person (other than MEDIQ/PRN) if such Person
is not a Restricted Subsidiary, except that (A) subject to the exclusion
contained in clause (iv) below, MEDIQ/PRN's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to MEDIQ/PRN or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained
in clause (iii) below) and (B) MEDIQ/PRN's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated
Net Income;
(ii) for purposes of clause (a)(3)(A) of the covenant described under
"Certain Covenants-- Limitation on Restricted Payments" only, any net income
(or loss) of any Person acquired by MEDIQ/ PRN or a Subsidiary in a pooling
of interests transaction for any period prior to the date of such
acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to MEDIQ/PRN, except that (A) subject to
the exclusion contained in clause (iv) below, MEDIQ/PRN's equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary during such period
to MEDIQ/PRN or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid
to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) MEDIQ/PRN's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(iv) any gain or loss realized upon the sale or other disposition of any
assets of MEDIQ/PRN or its consolidated Subsidiaries (including pursuant to
any sale-and-leaseback arrangement) which is not
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sold or otherwise disposed of in the ordinary course of business and any
gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to
MEDIQ/PRN or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Credit Agreement" means the Credit Agreement entered into by and among
MEDIQ/PRN, certain of its Subsidiaries, the lenders referred to therein, Banque
Nationale de Paris, as Administrative Agent, NationsBank, N.A., as Syndication
Agent, and Credit Suisse First Boston, as Documentation Agent, together with the
related documents thereto (including the term loans and revolving loans
thereunder, any guarantees, all security documents and any hedge agreements), in
each case, as amended, extended, renewed, restated, supplemented or otherwise
modified or refinanced (in whole or in part, and without limitation as to
amount, terms, conditions, covenants and other provisions) from time to time,
and any agreement (and related document) governing Indebtedness incurred to
Refinance, in whole or in part, the borrowings and commitments then outstanding
or permitted to be outstanding under such Credit Agreement or a successor Credit
Agreement, whether by the same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of MEDIQ/PRN which, at the date of determination,
has an aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $25
million and is specifically designated by MEDIQ/PRN in the instrument evidencing
or governing such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of the Note Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable or must be purchased, upon the occurrence of certain events
or otherwise, by such Person at the option of the holder thereof, in whole or in
part, in each case on or prior to the first anniversary of the Stated Maturity
of the Notes; PROVIDED, HOWEVER, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the terms applicable to the Notes and described under
"--Change of Control" and "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock."
"EBITDA" for any period means the sum of Consolidated Net Income plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of
MEDIQ/PRN and its consolidated Restricted Subsidiaries, (b) depreciation expense
of MEDIQ/PRN and its consolidated Restricted Subsidiaries, (c) amortization
expense of MEDIQ/PRN
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and its consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid cash item that was paid in a prior period), (d)
non-recurring severance and transaction costs incurred in connection with any
acquisition (including the Merger and the CHI Acquisition) by MEDIQ/PRN and its
consolidated Restricted Subsidiaries and (e) all other non-cash charges of
MEDIQ/PRN and its consolidated Restricted Subsidiaries (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash expenditures in any future period), in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to MEDIQ/PRN by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the notes issued in exchange for the Notes pursuant
to the Registration Rights Agreement entered into in connection with the
issuance of the Notes between the Company and the Subsidiary Guarantors and the
Initial Purchasers.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such other Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of such other Person (whether arising
by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Note Trustee, pursuant to which a Subsidiary Guarantor or any other
Person guarantees MEDIQ/PRN's obligations with respect to the Notes on the terms
provided for in the Note Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Holdings" means MEDIQ Incorporated, Inc., a Delaware corporation, and any
successor corporation.
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"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business)
which purchase price or obligation is due more than six months after the
date of placing such property in service or taking delivery and title
thereto;
(iv) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iii)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of such Person, the liquidation preference with
respect to, any Preferred Stock (but excluding, in each case, any accrued
dividends);
(vi) all obligations of the type referred to in clauses (i) through (v)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations described above at such
date; PROVIDED, HOWEVER, that the amount outstanding at any time of any
Indebtedness issued with original issue discount shall be deemed to be the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith,
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relating to MEDIQ/PRN or any of its assets, (ii) any liquidation, dissolution or
other winding up of MEDIQ/PRN, whether voluntary or involuntary or whether or
not involving insolvency or bankruptcy or (iii) any assignment for the benefit
of creditors or any other marshaling of assets or liabilities of MEDIQ/ PRN.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person; PROVIDED, HOWEVER, that an acquisition of
assets, Capital Stock or other securities of any Person for consideration
consisting of common equity securities of MEDIQ/PRN shall not be deemed to be an
"Investment". For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment" and the covenant described under "-- Certain
Covenants--Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to MEDIQ/PRN's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of MEDIQ/PRN at the
time that such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, MEDIQ/PRN shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) MEDIQ/PRN's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to MEDIQ/PRN's equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Old Notes were originally issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the management services agreement that became
effective at the effective time of the Merger among Bruckmann, Rosser, Sherrill
& Co., Inc., MEDIQ/PRN, Galen Associates and Ferrer Freeman Thompson & Co. LLC,
as amended from time to time.
"Merger" means the merger of MQ Acquisition Corporation with and into
Holdings pursuant to the Agreement and Plan of Merger dated as of January 14,
1998, as amended as of April 27, 1998, between MQ Acquisition Corporation and
Holdings.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of (i) all legal, accounting, investment
banking, title and recording tax expenses, commissions and other fees and
expenses incurred, and all Federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other
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security agreement of any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law, be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to a Person
owning a beneficial interest in assets subject to sale or minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition,
(iv) the deduction of appropriate amounts provided by the seller as a reserve,
in accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by MEDIQ/PRN or any
Restricted Subsidiary after such Asset Disposition and (v) any portion of the
purchase price from an Asset Disposition required by the terms of such Asset
Disposition to be placed in escrow (whether as a reserve for a purchase price
adjustment, for satisfaction of indemnities or otherwise); PROVIDED, HOWEVER,
that upon the termination of such escrow, Net Available Cash shall be increased
by any portion of the funds therein released to MEDIQ/PRN or any Restricted
Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse," with respect to any Indebtedness of a subsidiary, means
Indebtedness (i) as to which neither MEDIQ/PRN nor any of its other Restricted
Subsidiaries (a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness) and (b) is directly
or indirectly liable (as a Guarantor or otherwise); and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of MEDIQ/PRN
or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of MEDIQ/PRN
or any of its other Restricted Subsidiaries.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to or in respect of the documentation
governing such Indebtedness.
"Permitted Holders" means (i) BRS, Bruce C. Bruckmann, Harold O. Rosser II,
Stephen C. Sherrill and Stephen Edwards, the Co-Investors and the Rotko Entities
and any Person who on the Issue Date was an Affiliate of any of the foregoing,
(ii) Thomas S. Carroll, Jay M. Kaplan and any other Person who was a member of
the management of MEDIQ/PRN or Holdings, and a shareholder of Holdings, on the
Issue Date and (iii) any Related Party of any of the foregoing.
"Permitted Investment" means an Investment by MEDIQ/PRN or any Restricted
Subsidiary in (i) MEDIQ/PRN, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, MEDIQ/PRN or a Restricted Subsidiary; PROVIDED,
HOWEVER, that such Person's primary business is a Related Business; (iii)
Temporary Cash Investments; (iv) receivables owing to MEDIQ/PRN or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms as
MEDIQ/PRN or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of MEDIQ/PRN or such Restricted Subsidiary; (vii)
stock, obligations or securities received in
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settlement of debts created in the ordinary course of business and owing to
MEDIQ/PRN or any Restricted Subsidiary or in satisfaction of judgments; (viii)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock;" and (ix) additional Investments in an aggregate amount which,
together with all other Investments made pursuant to this clause (ix) that are
outstanding, does not exceed $2.5 million.
"Permitted Junior Securities" means (i) Capital Stock of MEDIQ/PRN and (ii)
any debt securities of MEDIQ/PRN or any Subsidiary Guarantor, as the case may
be, that are subordinated to all Senior Indebtedness of MEDIQ/PRN or such
Subsidiary Guarantor, as the case may be, to at least the same extent as the
Notes or the applicable Subsidiary Guaranty are subordinated to Senior
Indebtedness of the Company or such Subsidiary Guarantor.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Post-Petition Interest" means all interest accrued or accruing after the
commencement of any Insolvency or Liquidation Proceeding (and interest that
would accrue but for the commencement of any Insolvency or Liquidation
Proceeding) in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing any Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
as a claim in such Insolvency or Liquidation Proceeding.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings or MEDIQ/PRN pursuant to an effective registration
statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 10% of the total issued and outstanding common
stock of Holdings or MEDIQ/PRN, as applicable, has been distributed by means of
an effective registration statement under the Securities Act or sales pursuant
to Rule 144 under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness (including Capital Lease
Obligations) (i) consisting of the deferred purchase price of property,
conditional sale obligations, obligations under any title retention agreement,
other purchase money obligations and obligations in respect of industrial
revenue bonds or similar Indebtedness, in each case where the maturity of such
Indebtedness does not exceed the anticipated useful life of the asset being
financed, and (ii) Incurred to finance the acquisition by MEDIQ/PRN or a
Restricted Subsidiary of such asset, including additions and improvements;
PROVIDED, HOWEVER, that any Lien arising in connection with any such
Indebtedness shall be limited to the specified asset being financed or, in the
case of real property or fixtures, including additions and improvements, the
real property on which such asset is attached; PROVIDED FURTHER, HOWEVER, that
such Indebtedness is Incurred within 180 days after such acquisition of such
assets by MEDIQ/PRN or any Restricted Subsidiary.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of MEDIQ/PRN or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Note Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; PROVIDED FURTHER,
HOWEVER, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of MEDIQ/PRN or (y) Indebtedness of
MEDIQ/PRN or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors) to the businesses of
MEDIQ/PRN and the Restricted Subsidiaries on the Issue Date.
"Related Party" means (i) any controlling stockholder, general partner, 80%
(or more) owned Subsidiary, or spouse or immediate family member (in the case of
an individual) of any Permitted Holder or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons holding an 80% or more controlling interest of which consist solely
of one or more Permitted Holders and/or such other Persons referred to in the
immediately preceding clause (i).
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of MEDIQ/PRN; PROVIDED, HOWEVER, that if and for so
long as any Senior Indebtedness lacks such a representative, then the
Representative for such Senior Indebtedness shall at all times be the holders of
a majority in outstanding principal amount of such Senior Indebtedness.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and other
than dividends or distributions payable solely to MEDIQ/ PRN or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of MEDIQ/PRN held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of
MEDIQ/PRN (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than, in any such case, in exchange
for or into Capital Stock of MEDIQ/PRN that is not Disqualified Stock), (iii)
the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) the making of any Investment in any Person (other than a Permitted
Investment). In determining the amount of any Restricted Payment made in
property other than in cash, such amount shall be the fair market value of such
property at the time of such Restricted Payment, as determined in good faith by
the Board of Directors.
"Restricted Subsidiary" means any Subsidiary of MEDIQ/PRN that is not an
Unrestricted Subsidiary.
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"Revolving Credit Facility" means the revolving credit facility contained in
the Credit Agreement and any other facility or financing arrangement that
Refinances or replaces, in whole or in part, any such revolving credit facility.
"Rotko Entities" means (i) a trust established on November 18, 1983, by the
late Bernard B. Rotko, (ii) Michael J. Rotko, (iii) Bessie G. Rotko and (iv)
Judith M. Shipon.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby MEDIQ/PRN or a Restricted Subsidiary
transfers such property to a Person and MEDIQ/PRN or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of MEDIQ/PRN or a Subsidiary
Guarantor, as the case may be, secured by a Lien.
"Senior Indebtedness" means, with respect to any Person, (i) Indebtedness of
such Person, whether outstanding on the Issue Date or thereafter Incurred
(including the Indebtedness of such Person under the Credit Agreement or any
Guarantee thereof), and (ii) accrued and unpaid interest (including
Post-Petition Interest) in respect of (A) Indebtedness of such Person for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable unless, in the case of (i) and (ii), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes or the
applicable Subsidiary Guaranty; PROVIDED, HOWEVER, that Senior Indebtedness
shall not include (1) any obligation of such Person to any Subsidiary of such
Person, (2) any liability for Federal, state, local or other taxes owed or owing
by such Person, (3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities), (4) any Indebtedness of such Person
(and any accrued and unpaid interest in respect thereof) which is subordinate or
junior by its terms to any other Indebtedness or other obligation of such Person
or (5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Note Indenture (but as to any such Indebtedness
under the Credit Agreement, no such violation shall be deemed to exist if the
Representative of the Banks shall have received an officers' certificate of the
Company to the effect that the issuance of such Indebtedness does not violate
such covenant and setting forth in reasonable detail the reasons therefor).
"Senior Subordinated Indebtedness" means (i) with respect to MEDIQ/PRN, the
Notes and any other Indebtedness of MEDIQ/PRN that specifically provides that
such Indebtedness is to rank PARI PASSU with the Notes in right of payment and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of MEDIQ/PRN which is not Senior Indebtedness of MEDIQ/PRN and
(ii) with respect to each Subsidiary Guarantor, its Subsidiary Guaranty of the
Notes and any other indebtedness of such Person that specifically provides that
such Indebtedness rank PARI PASSU with its applicable Subsidiary Guaranty in
respect of payment and is not subordinated by its terms in respect of payment to
any Indebtedness or other obligation of such Person which is not Senior
Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of MEDIQ/PRN within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of MEDIQ/PRN or any
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of
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payment to the Notes or, in the case of a Subsidiary Guarantor, its Subsidiary
Guaranty pursuant to a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantor" means any domestic Restricted Subsidiary of MEDIQ/PRN
that Guarantees MEDIQ/PRN's obligations with respect to the Notes pursuant to
the terms of the Note Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of
MEDIQ/PRN's obligations with respect to the Notes pursuant to the terms of the
Note Indenture.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of MEDIQ/PRN) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group,
and
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Term Loan Facility" means the term loan facilities (including any delayed
draw acquisition facilities) contained in the Credit Agreement and any other
facility or financing arrangement that Refinances or replaces in whole or in
part any such term loan facilities.
"Unrestricted Subsidiary" means (i) any Subsidiary of MEDIQ/PRN that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
MEDIQ/PRN (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of,
MEDIQ/PRN or any other Subsidiary of MEDIQ/PRN that is not a
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Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER, that either
(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately
after giving effect to such designation (x) MEDIQ/PRN could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Note Trustee by promptly filing with the Note Trustee a copy
of the resolution of the Board of Directors giving effect to such designation
and an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by MEDIQ/PRN
or one or more Wholly Owned Subsidiaries.
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DESCRIPTION OF THE DEBENTURES
GENERAL
The Old Debentures were issued under an Indenture, dated as of May 15, 1998
(the "Debenture Indenture" and, together with the Note Indenture, the
"Indentures"), between Holdings and United States Trust Company of New York, as
Trustee (the "Debenture Trustee" and, together with the Note Trustee, the
"Trustees"). The terms of the Debenture Indenture apply to the Old Debentures
and to the New Debentures to be issued in exchange therefor pursuant to the
Debenture Exchange Offer (all such Debentures being referred to herein
collectively as the "Debentures").
The following is a summary of certain provisions of the Debenture Indenture
and the Debentures, a copy of which Debenture Indenture and the form of
Debentures is available upon request to Holdings at the address set forth under
"Available Information". The following summary of certain provisions of the
Debenture Indenture and the Debentures does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Debenture Indenture and the Debentures, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended. For purposes of this summary, the term "Holdings"
refers only to MEDIQ Incorporated, Inc. and not to any of its subsidiaries. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions".
The Debentures are issued only in fully registered form, without coupons, in
denominations of $1,000 principal amount at maturity and any integral multiple
of $1,000. No service charge shall be made for any registration of transfer or
exchange of Debentures, but Holdings may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
TERMS OF THE DEBENTURES
The Debentures are unsecured senior obligations of Holdings, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. Except as described under "Registered Exchange Offer; Registration
Rights", no cash interest will accrue on the Debentures prior to June 1, 2003,
although for U.S. Federal income tax purposes a significant amount of OID will
be recognized by a Holder as such discount accrues. See "Certain U.S. Federal
Income Tax Considerations" for a discussion regarding the taxation of such OID.
Cash interest will accrue on the Debentures at the rate per annum shown on the
front cover of this Prospectus from June 1, 2003, or from the most recent date
to which interest has been paid or provided for, payable semiannually on June 1
and December 1 of each year, commencing December 1, 2003 to holders of record at
the close of business on the May 15 or November 15 immediately preceding the
interest payment date. Holdings will pay interest on overdue principal at 1% per
annum in excess of such rate, and it will pay interest on overdue installments
of interest at such higher rate to the extent lawful.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Debentures are not be
redeemable at the option of Holdings prior to June 1, 2003. Thereafter, the
Debentures will be redeemable, at Holdings' option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest
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due on the relevant interest payment date), if redeemed during the 12-month
period commencing on June 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------------------------------- -----------
<S> <C>
2003................................................................................. 106.500%
2004................................................................................. 104.333
2005................................................................................. 102.167
2006 and thereafter.................................................................. 100.000
</TABLE>
In addition, at any time and from time to time prior to June 1, 2001,
Holdings may redeem in the aggregate up to 25% of the Accreted Value of the
Debentures with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price (expressed as a percentage
of Accreted Value) of 113% plus accrued interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); PROVIDED, HOWEVER,
that at least $105.6 million aggregate principal amount at maturity of the
Debentures remains outstanding after each such redemption.
In the case of any partial redemption, selection of the Debentures for
redemption will be made by the Debenture Trustee on a pro rata basis, by lot or
by such other method as the Debenture Trustee in its sole discretion shall deem
to be fair and appropriate, although no Debenture of $1,000 in original
principal amount at maturity or less shall be redeemed in part. If any Debenture
is to be redeemed in part only, the notice of redemption relating to such
Debenture shall state the portion of the principal amount thereof to be
redeemed. A new Debenture in principal amount at maturity equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancelation of the original Debenture.
RANKING
The indebtedness evidenced by the Debentures is unsecured senior obligations
of Holdings, which rank PARI PASSU in right of payment with all existing and
future senior indebtedness of Holdings and will rank senior in right of payment
to all future subordinated indebtedness of Holdings.
As of March 31, 1998, on a Pro Forma Basis, Holdings would have had no other
senior indebtedness outstanding.
All the operations of Holdings are conducted through its subsidiaries.
Claims of creditors of such subsidiaries, including trade creditors, secured
creditors and creditors holding indebtedness (including the Notes) and
guarantees issued by such subsidiaries, and claims of preferred stockholders (if
any) of such subsidiaries generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of
Holdings, including holders of the Debentures, even if such obligations do not
constitute Senior Indebtedness. The Debentures, therefore, are effectively
subordinated to creditors (including trade creditors) and preferred stockholders
(if any) of subsidiaries of Holdings. As of March 31, 1998, on a Pro Forma
Basis, the total liabilities of Holdings' subsidiaries would have been
approximately $448.0 million, including indebtedness under the Credit Agreement,
trade payables and the Notes. Although the Debenture Indenture limits the
incurrence of Indebtedness and preferred stock of certain of Holdings'
subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Debenture Indenture does not impose any limitation
on the incurrence by such subsidiaries of liabilities that are not considered
Indebtedness or Preferred Stock under the Debenture Indenture. See "--Certain
Covenants--Limitation on Indebtedness."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that Holdings repurchase
all or any part of such Holder's Debentures at a
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purchase price in cash equal to 101% of the Accreted Value thereof on the date
of purchase plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
(i) prior to the first public offering of common stock of Holdings, the
Permitted Holders cease to be the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Stock of
Holdings, whether as a result of issuance of securities of Holdings, any
merger, consolidation, liquidation or dissolution of Holdings, any direct or
indirect transfer of securities by Holdings or otherwise (for purposes of
this clause (i) and clauses (ii) and (iv) below, the Permitted Holders shall
be deemed to beneficially own any Voting Stock of any Person (the "specified
entity") held by any other Person (the "parent entity") so long as the
Permitted Holders beneficially own (as so defined), directly or indirectly,
in the aggregate a majority of the voting power of the Voting Stock of the
parent entity);
(ii) following the first public offering of common stock of Holdings,
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in clause (i) above, except that for purposes
of this clause (ii) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of Holdings; PROVIDED, HOWEVER, that the Permitted Holders
beneficially own (as defined in clause (i) above), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of the Voting
Stock of Holdings than such other person and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors (for the purposes of this
clause (ii), such other person shall be deemed to beneficially own any
Voting Stock of a specified entity held by a parent entity, if such other
person is the beneficial owner (as defined in this clause (ii)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of such
parent entity and the Permitted Holders beneficially own (as defined in
clause (i) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent entity and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of such
parent entity);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors (A) whose election by such Board of Directors or whose
nomination for election by the stockholders of Holdings was approved by a
vote of a majority of the directors of Holdings then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved or (B) who are designees
of one or more Permitted Holders) cease for any reason to constitute a
majority of the Board of Directors then in office; or
(iv) the merger or consolidation of Holdings with or into another Person
or the merger of another Person with or into Holdings, or the sale of all or
substantially all the assets of Holdings to another Person (other than a
Person that is controlled by the Permitted Holders), and, in the case of any
such merger or consolidation, the securities of Holdings that are
outstanding immediately prior to such transaction and which represent 100%
of the aggregate voting power of the Voting Stock of Holdings are changed
into or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
Within 30 days following any Change of Control, Holdings shall mail a notice
to each Holder with a copy to the Debenture Trustee (the "Change of Control
Offer") stating: (1) that a Change of Control has occurred and that such Holder
has the right to require Holdings to purchase such Holder's Debentures at a
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purchase price in cash equal to 101% of the Accreted Value thereof on the date
of purchase plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest on the relevant interest payment date); (2) the circumstances
and relevant facts regarding such Change of Control; (3) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (4) the procedures determined by Holdings,
consistent with the covenant described hereunder, that a Holder must follow in
order to have its Debentures purchased.
Holdings will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Debenture Indenture applicable to a Change of Control Offer made by
Holdings and purchases all Debentures validly tendered and not withdrawn under
such Change of Control Offer.
Holdings shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Debentures pursuant to this covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
Holdings shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of Holdings
and its Subsidiaries. With respect to the disposition of property or assets, the
phrase "all or substantially all" as used in the Debenture Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
the Debenture Indenture) and is subject to judicial interpretation. Accordingly,
in certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and, therefore, it may
be unclear as to whether a Change of Control has occurred and whether Holdings
is required to make an offer to repurchase the Debentures as described above.
The Change of Control purchase feature is a result of negotiations between
Holdings and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Holdings would decide to do so in the future. Subject to the limitations
discussed below, Holdings could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Debenture Indenture, but that could
increase the amount of indebtedness outstanding at such time or otherwise affect
Holdings' capital structure or credit ratings. Restrictions on the ability of
Holdings to incur additional Indebtedness are contained in the covenants
described under "--Certain Covenants--Limitation on Indebtedness," "--Limitation
on Liens" and "--Limitation on Sale/Leaseback Transactions." Such restrictions
can only be waived with the consent of the holders of a majority in principal
amount at maturity of the Debentures then outstanding. Except for the
limitations contained in such covenants, however, the Debenture Indenture does
not contain any covenants or provisions that may afford holders of the
Debentures protection in the event of a highly leveraged transaction.
Future indebtedness of Holdings may contain prohibitions on the occurrence
of certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require Holdings to repurchase the Debentures
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on Holdings.
Finally, Holdings' ability to pay cash to the holders of Debentures following
the occurrence of a Change of Control may be limited by Holdings' then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. The provisions under
the Debenture Indenture relative to
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Holdings' obligation to make an offer to repurchase the Debentures as a result
of a Change of Control may be waived or modified with the written consent of the
holders of a majority in principal amount at maturity of the Debentures.
CERTAIN COVENANTS
The Debenture Indenture contains covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS. (a) Holdings shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
PROVIDED, HOWEVER, that Holdings and its Restricted Subsidiaries may Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto,
the Consolidated Coverage Ratio exceeds 1.80 to 1 if such Indebtedness is
Incurred prior to June 1, 2000 or 2.00 to 1 if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its Restricted
Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred by MEDIQ/PRN or any Restricted Subsidiary of
MEDIQ/PRN pursuant to any Revolving Credit Facility; PROVIDED, HOWEVER,
that, immediately after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and then
outstanding does not exceed the greater of (A) $50 million less the sum of
all principal payments with respect to such Indebtedness pursuant to clause
(a)(ii)(A) of the covenant described under "--Limitation on Sales of Assets
and Subsidiary Stock" and (B) the sum of 60% of the book value of the
inventory of MEDIQ/PRN and its Restricted Subsidiaries and 85% of the book
value of the accounts receivables of MEDIQ/PRN and its Restricted
Subsidiaries;
(2) Indebtedness Incurred by MEDIQ/PRN or any Restricted Subsidiary of
MEDIQ/PRN pursuant to any Term Loan Facility; PROVIDED, HOWEVER, that, after
giving effect to any such Incurrence, the aggregate principal amount of all
Indebtedness Incurred under this clause (2) and then outstanding does not
exceed an amount equal to $200 million, less the aggregate sum of all
principal payments actually made from time to time after the Issue Date with
respect to such Indebtedness (other than principal payments made in
connection with any permitted Refinancings thereof);
(3) Indebtedness owed to and held by Holdings or a Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to Holdings or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness by
the obligor thereon;
(4) Indebtedness owed to and held by any Restricted Subsidiary (other
than a Wholly Owned Subsidiary); PROVIDED, HOWEVER, that (i) any such
Indebtedness shall be unsecured Subordinated Obligations of Holdings or such
Restricted Subsidiary, as applicable, and (ii) any subsequent issuance or
transfer of any Capital Stock of such Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to Holdings, a Wholly
Owned Subsidiary or another Restricted Subsidiary) shall be deemed to
constitute the Incurrence of such Indebtedness by the issuer thereof;
(5) the Notes, the Debentures, the Exchange Notes and the Exchange
Debentures;
(6) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2), (3), (4) or (5) of this covenant);
(7) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (5) or (6) or this clause
(7);
(8) Indebtedness of a Restricted Subsidiary Incurred and outstanding on
or prior to the date on which such Subsidiary was acquired by Holdings or a
Restricted Subsidiary (other than Indebtedness
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Incurred as consideration in, contemplation of or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by Holdings or a Restricted
Subsidiary) and Refinancing Indebtedness in respect thereof; PROVIDED,
HOWEVER, that such Indebtedness (including Refinancing Indebtedness in
respect thereof) is Non-Recourse to Holdings and its Restricted
Subsidiaries, or to any of their respective assets (other than the acquired
Subsidiary and its Subsidiaries, as applicable);
(9) Indebtedness in respect of performance bonds and surety or appeal
bonds entered into by Holdings and the Restricted Subsidiaries in the
ordinary course of their business;
(10) Hedging Obligations under or with respect to Interest Rate
Agreements and Currency Agreements entered into in the ordinary course of
business and not for the purpose of speculation;
(11) Purchase Money Indebtedness Incurred to finance the acquisition by
Holdings or a Restricted Subsidiary of any assets in the ordinary course of
business; PROVIDED, HOWEVER, at the time of such Incurrence and after giving
effect thereto, the aggregate principal amount of all Indebtedness Incurred
pursuant to this clause (11) and then outstanding does not exceed $10
million;
(12) Subsidiary Guaranties of the Subsidiary Guarantors;
(13) the Guarantee of any Indebtedness otherwise permitted to be
Incurred pursuant to the Debenture Indenture or the Note Indenture (other
than Indebtedness Incurred pursuant to clause (8) above);
(14) Indebtedness of Holdings or any Restricted Subsidiary arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of daylight overdrafts)
drawn against insufficient funds in the ordinary course of business,
provided that such Indebtedness is satisfied within five Business Days of
Incurrence;
(15) Indebtedness of Holdings or any Restricted Subsidiary consisting of
indemnification, adjustment of purchase price or similar obligations, in
each case incurred in connection with the disposition of any assets of
Holdings or any Restricted Subsidiary in a principal amount not to exceed
the gross proceeds actually received by Holdings or any Restricted
Subsidiary in connection with such disposition; and
(16) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of Holdings and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (15) above or paragraph (a)) does not
exceed $50 million.
(c) Notwithstanding the foregoing, Holdings shall not, and shall not permit
any Restricted Subsidiary to, Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Debentures to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, Holdings, in its sole discretion,
will classify such item of Indebtedness at the time of its Incurrence and only
be required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and classified in
more than one of the types of Indebtedness described above.
LIMITATION ON RESTRICTED PAYMENTS. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time Holdings or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would
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result therefrom); (2) Holdings is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Debentures are
originally issued to the end of the most recent fiscal quarter for which
financial statements are available prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit);
(B) the aggregate Net Cash Proceeds (or non-cash proceeds when converted
to cash) received by Holdings from the issuance or sale of its Capital Stock
(other than Disqualified Stock) and the aggregate cash received by Holdings
as a capital contribution, in each case subsequent to the Issue Date (other
than an issuance or sale to a Subsidiary of Holdings and other than an
issuance or sale to an employee stock ownership plan or to a trust
established by Holdings or any of its Subsidiaries for the benefit of their
employees to the extent that the purchase by such plan or trust is financed
by Indebtedness of such plan or trust to Holdings or any Subsidiary or
Indebtedness Guaranteed by Holdings or any Subsidiary);
(C) the amount by which Indebtedness of Holdings or its Restricted
Subsidiaries is reduced on Holdings' consolidated balance sheet upon the
conversion or exchange (other than by a Subsidiary of Holdings) subsequent
to the Issue Date of any Indebtedness of Holdings or any Restricted
Subsidiary for Capital Stock (other than Disqualified Stock) of Holdings
(less the amount of any cash, or the fair value of any other property,
distributed by Holdings or such Restricted Subsidiary upon such conversion
or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments
in any Person resulting from dividends, repayments of loans or advances or
other transfers of assets, in each case to Holdings or any Restricted
Subsidiary from such Person, or resulting from the receipt by Holdings or
any Restricted Subsidiary of proceeds realized upon the sale of such
Investment (other than a sale to an Affiliate), and (ii) the portion
(proportionate to Holdings' equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Restricted Subsidiary;
PROVIDED, HOWEVER, that the foregoing sum shall not exceed, in the case of
any Person, the amount of Investments previously made (and treated as a
Restricted Payment) by Holdings or any Restricted Subsidiary in such Person
plus, to the extent not added pursuant to clause (a)(3)(A) above, 50% of the
excess, if any, of the cash received upon the sale or other disposition of
an Investment over the amount of such Investment previously made (and
treated as a Restricted Payment).
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(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made out of the proceeds of the substantially
concurrent sale of, or capital contribution in respect of, or made by
exchange for, Capital Stock of Holdings (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of Holdings or an
employee stock ownership plan or to a trust established by Holdings or any
of its Subsidiaries for the benefit of their employees to the extent that
the purchase by such plan or trust is financed by Indebtedness of such plan
or trust to Holdings or any Subsidiary or Indebtedness Guaranteed by
Holdings or any Subsidiary); PROVIDED, HOWEVER, that (A) such Restricted
Payment shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale or capital
contribution shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness which is permitted to be Incurred pursuant to the covenant
described under "--Limitation on Indebtedness;" PROVIDED, HOWEVER, that such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; PROVIDED, HOWEVER, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or options to
purchase shares of, Capital Stock (other than Disqualified Stock) of
Holdings, MEDIQ/PRN or any of its Subsidiaries from employees, former
employees, directors or former directors of Holdings, MEDIQ/PRN or any of
its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans or written
arrangements (or amendments thereto) approved by the Board of Directors
under which such individuals purchase or sell or are granted the option to
purchase or sell, shares of such common stock; PROVIDED, HOWEVER, that the
aggregate amount of such repurchases and other acquisitions shall not exceed
the sum of (A) $5 million plus (B) the aggregate Net Cash Proceeds received
by Holdings from the issuance of such Capital Stock to, or the exercise of
options to purchase such Capital Stock by, employees or directors of
Holdings or any of its Subsidiaries that occurs after the Issue Date (to the
extent the Net Cash Proceeds from the sale of such Capital Stock have not
otherwise been applied to the payment of Restricted Payments by virtue of
clause (3)(B) of paragraph (a) above or applied pursuant to clause (b)(i)
above); PROVIDED FURTHER, HOWEVER, that such repurchases and other
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments;
(v) payments of dividends on Holdings' common stock after an initial
public offering (other than an offering on Form S-8) of such common stock in
an annual amount not to exceed 6% of the aggregate gross proceeds to
Holdings from shares of common stock sold for the account of Holdings in
such initial public offering; PROVIDED, HOWEVER, that such payments shall be
included in the calculation of the amount of Restricted Payments;
(vi) any purchase or redemption of Disqualified Stock of Holdings or a
Restricted Subsidiary made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of Holdings or a
Restricted Subsidiary which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness;" PROVIDED, HOWEVER,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments;
(vii) upon the occurrence of a Change of Control and within 60 days
after the completion of the offer to repurchase the Debentures pursuant to
the covenant described under "--Change of Control"
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above (including the purchase of the Debentures tendered), any purchase or
redemption of Subordinated Obligations required pursuant to the terms
thereof as a result of such Change of Control at a purchase or redemption
price not to exceed the outstanding principal amount thereof, plus accrued
and unpaid interest (if any); PROVIDED, HOWEVER, that (A) at the time of
such purchase or redemption no Default shall have occurred and be continuing
(or would result therefrom), (B) Holdings would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness" after giving pro forma effect
to such Restricted Payment and (C) such purchase or redemption shall be
included in the calculation of the amount of Restricted Payments;
(viii) any repurchase or other acquisition for value of Capital Stock of
a Restricted Subsidiary deemed to occur upon the merger of such Restricted
Subsidiary with or into Holdings or a Wholly Owned Subsidiary of Holdings
within one year following the date on which such Restricted Subsidiary
became a Restricted Subsidiary; PROVIDED, HOWEVER, that such repurchase or
acquisition shall be excluded in the calculation of the amount of Restricted
Payments;
(ix) payments required pursuant to the terms of the CHI
AcquisitionAgreement to consummate the CHI Acquisition by MEDIQ/PRN or a
Restricted Subsidiary pursuant to the terms of the CHI Acquisition
Agreement; PROVIDED, HOWEVER, that such payments shall be excluded in the
calculation of the amount of Restricted Payments;
(x) repurchases of shares of Capital Stock in, and the payment of fees
and expenses, including deferred compensation which becomes payable, in
connection with, the Merger; PROVIDED, HOWEVER, that such payments shall be
excluded in the calculation of the amount of Restricted Payments;
(xi) Restricted Payments not exceeding $7.5 million in the aggregate;
PROVIDED, HOWEVER, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or would result therefrom)
and (B) such Restricted Payments shall be included in the calculation of the
amount of Restricted Payments; or
(xii) payments required in respect of the Exchangeable Debentures when
due at Stated Maturity; PROVIDED, HOWEVER, that such payments shall be
included in the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. Holdings shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to Holdings or a Restricted Subsidiary or pay any Indebtedness owed to
Holdings, (b) make any loans or advances to Holdings or (c) transfer any of its
property or assets to Holdings, except:
(i) any encumbrance or restriction pursuant to an agreement, including
the Credit Agreement and the Note Indenture, in effect at or entered into on
the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Capital Stock or
Indebtedness Incurred by such Restricted Subsidiary on or prior to the date
on which such Restricted Subsidiary was acquired by Holdings or any of its
Restricted Subsidiaries (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by Holdings or any of its Restricted Subsidiaries) and outstanding
on such date;
(iii) any encumbrance or restriction pursuant to an agreement (A)
evidencing Indebtedness Incurred without violation of the Debenture
Indenture or (B) effecting a Refinancing of Indebtedness Incurred pursuant
to an agreement referred to in clause (i) or (ii) of this covenant or this
clause
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(iii) or contained in any amendment to an agreement referred to in clause
(i) or (ii) of this covenant or this clause (iii); PROVIDED, HOWEVER, that
in the case of clauses (A) and (B), the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any such agreement or
amendment are no more restrictive in any material respect, as determined in
good faith by the Board of Directors, than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in agreements of such
Restricted Subsidiary in effect at, or entered into on, the Issue Date;
(iv) any such encumbrance or restriction consisting of customary non
assignment or subletting provisions contained in leases and other contracts
entered into in the ordinary course of business and consistent with past
practices;
(v) in the case of clause (c) above, restrictions contained in security
agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements, mortgages or similar
documents;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition;
(vii) any encumbrance or restriction arising under applicable law; and
(viii) any encumbrance or restriction consisting of any restriction on
the sale or other disposition of assets or property securing Indebtedness as
a result of a Lien permitted to be Incurred under the Debenture Indenture on
such asset or property.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) Holdings shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) Holdings or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by Holdings or such Restricted Subsidiary is in
the form of cash or cash equivalents (provided that such 75% requirement shall
not apply to any Asset Disposition in which the cash or cash equivalents portion
of the consideration received therefor, determined in accordance with this
covenant, is equal to or greater than what the net after-tax proceeds would have
been had the Asset Disposition complied with such 75% requirement) and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by Holdings (or such Restricted Subsidiary, as the case may be) (A)
FIRST, to the extent Holdings (or such Restricted Subsidiary, as the case may
be) elects (or is required by the terms of any Indebtedness), to prepay, repay,
redeem or purchase Senior Indebtedness of Holdings or Indebtedness (other than
any Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than
Indebtedness owed to Holdings or an Affiliate of Holdings) within one year from
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (B) SECOND, to the extent of the balance of such Net Available
Cash after application, if any, in accordance with clause (A), to the extent
Holdings elects, to acquire Additional Assets within one year from (or enter
into a binding commitment to acquire Additional Assets, provided that such
commitment shall be subject only to customary conditions (other than financing)
and such acquisition shall be consummated within two years from) the later of
the date of such Asset Disposition or the receipt of such Net Available Cash;
and (C) THIRD, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Debentures (and to holders of other Senior Indebtedness
designated by Holdings) to purchase Debentures (and such other Senior
Indebtedness) pursuant to and subject to the conditions contained in the
Debenture Indenture; PROVIDED, HOWEVER, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A) or (C) above,
Holdings or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal
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amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions
of this paragraph, Holdings and the Restricted Subsidiaries shall not be
required to apply any Net Available Cash in accordance with this paragraph
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions which are not applied in accordance with this paragraph exceeds $10
million. Pending application of Net Available Cash pursuant to this covenant,
such Net Available Cash shall be invested in Permitted Investments or used to
temporarily reduce loans outstanding under any Revolving Credit Facility.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of Holdings or any
Restricted Subsidiary and the release of Holdings or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition (in which case Holdings shall, without further action, be deemed to
have applied such assumed Indebtedness in accordance with clause (A) of the
preceding paragraph) and (y) securities received by Holdings or any Restricted
Subsidiary from the transferee that are promptly converted by Holdings or such
Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Debentures (and other Senior Indebtedness) pursuant to clause (a)(ii)(C) above,
Holdings will be required to purchase Debentures tendered pursuant to an offer
by Holdings for the Debentures (and other Senior Indebtedness) at a purchase
price of 100% of their Accreted Value (in the case of Debentures) or 100% of
their principal amount, without premium (in the case of other Senior
Indebtedness), plus accrued but unpaid interest (or, in respect of such other
Senior Indebtedness, such lesser price, if any, as may be provided for by the
terms of such Senior Indebtedness) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Debenture
Indenture. Holdings shall not be required to make such an offer to purchase
Debentures (and other Senior Indebtedness) pursuant to this covenant if the Net
Available Cash available therefor is less than $10 million (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(c) Holdings shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Debentures pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder,
Holdings shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of Holdings (an "Affiliate Transaction") unless the terms thereof (1)
are no less favorable to Holdings or such Restricted Subsidiary than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate, (2) if such Affiliate Transaction
involves an amount in excess of $1 million, have been approved by a majority of
the members of the Board of Directors having no personal stake in such Affiliate
Transaction and (3) if such Affiliate Transaction involves an amount in excess
of $5 million (other than Affiliate Transactions in the ordinary course of
business of Holdings and its Restricted Subsidiaries between or among Holdings
or any Restricted Subsidiary of Holdings and any Person providing goods and/or
services to Holdings or any Restricted Subsidiary in the ordinary course of
business that is an Affiliate of Holdings or such Restricted Subsidiary solely
by virtue of the fact that BRS, or any Person controlling BRS, directly or
indirectly controls both Holdings or such Restricted Subsidiary and such
Affiliate; PROVIDED, HOWEVER, that such Affiliate Transaction shall comply with
clause (1) above), have been determined by (A) a nationally recognized
investment banking firm to be fair, from a financial standpoint, to Holdings and
its Restricted Subsidiaries or (B) an accounting or appraisal firm nationally
recognized in making such determinations to be on terms that are not less
favorable to Holdings and its
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Restricted Subsidiaries than the terms that could be obtained in an arm's-length
transaction from a Person that is not an Affiliate of Holdings.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors, (iii) the grant of stock options or similar
rights to employees and directors of Holdings pursuant to plans approved by the
Board of Directors, (iv) loans or advances to employees in the ordinary course
of business of Holdings or its Restricted Subsidiaries, but in any event not to
exceed $2 million in the aggregate outstanding at any one time, (v) the payment
of reasonable compensation or employee benefit arrangements to and indemnity
provided for the benefit of directors, officers or employees of Holdings or its
Restricted Subsidiaries in the ordinary course of business, (vi) payments made
in connection with the Transactions, including the payment to BRS, the
Co-Investors or any of their respective Affiliates of (A) a transaction fee in
connection with the Merger in an aggregate amount not to exceed $6 million and
(B) other fees pursuant to the Management Agreement in an annual amount not to
exceed in any fiscal year an amount equal to the greater of (x) $1 million and
(y) one and one-half percent of Holdings' EBITDA for such fiscal year, (vii) any
Affiliate Transaction between Holdings and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries and (viii) the issuance or sale of any Capital Stock
(other than Disqualified Stock) of Holdings.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Holdings shall not sell or otherwise dispose of any Capital Stock
of a Restricted Subsidiary (other than the pledge of Capital Stock pursuant to
the Credit Agreement), and shall not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except (i) to Holdings or a Wholly Owned Subsidiary, (ii) directors' qualifying
shares or other shares required by applicable law to be held by a Person other
than Holdings or a Restricted Subsidiary, (iii) if, immediately after giving
effect to such issuance, sale or other disposition, neither Holdings nor any of
its Subsidiaries own any Capital Stock of such Restricted Subsidiary or (iv) if,
immediately after giving effect to such issuance, sale or other disposition,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect thereto would
have been permitted to be made under the covenant described under "--Limitation
on Restricted Payments" if made on the date of such issuance, sale or other
disposition.
LIMITATION ON LIENS. Holdings shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Debentures shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. Holdings shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) Holdings or such Subsidiary
would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "--Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Debentures pursuant to the covenant described under
"--Limitation on Liens", (ii) the net proceeds received by Holdings or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined in good faith by the Board of
Directors) of such property and (iii) Holdings applies the proceeds of such
transaction in compliance with the covenant described under "--Limitation on
Sale of Assets and Subsidiary Stock."
MERGER AND CONSOLIDATION. Holdings shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any
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Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the laws of
the United States of America, or any State thereof or the District of Columbia,
and the Successor Company (if not Holdings) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Debenture Trustee,
in form satisfactory to the Debenture Trustee, all the obligations of Holdings
under the Debentures and the Debenture Indenture; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such Subsidiary
at the time of such transaction), no Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness;" and (iv) Holdings shall have delivered to the Debenture Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Debenture Indenture.
The Successor Company shall be the successor to Holdings and shall succeed
to, and be substituted for, and may exercise every right and power of, Holdings
under the Debenture Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Debentures.
SEC REPORTS. Notwithstanding that Holdings may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings
shall file with the SEC (to the extent the SEC will accept such filings) and
provide the Debenture Trustee and Debentureholders with such annual reports and
such information, documents and other reports as are specified in Sections 13
and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to
such Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Debenture Indenture as (i) a default
in the payment of interest on the Debentures when due, continued for 30 days,
(ii) a default in the payment of principal of any Debenture when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by Holdings to comply with its
obligations under "--Certain Covenants--Merger and Consolidation" above, (iv)
the failure by Holdings to comply for 30 days after written notice with any of
its obligations under the covenants described above under "--Change of Control"
(other than a failure to purchase Debentures) or under "--Certain Covenants"
under "--Limitation on Indebtedness," "--Limitation on Restricted Payments,"
"--Limitation on Restrictions on Distributions from Restricted Subsidiaries,"
"--Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to
purchase Debentures), "--Limitation on Affiliate Transactions," "--Limitation on
the Sale or Issuance of Capital Stock of Restricted Subsidiaries," "--Limitation
on Liens," "--Limitation on Sale/ Leaseback Transactions" or "--SEC Reports,"
(v) the failure by Holdings to comply for 60 days after written notice with its
other agreements contained in the Debenture Indenture, (vi) Indebtedness of
Holdings or any Significant Subsidiary (other than Indebtedness owed to Holdings
or its Restricted Subsidiaries) is not paid within any applicable grace period
after final maturity or is accelerated by the holders thereof because of a
default and the total amount of such Indebtedness unpaid or accelerated exceeds
$10 million and such default shall not have been cured or such acceleration
rescinded after a 10-day period (the "cross acceleration provision"), (vii)
certain events of bankruptcy, insolvency or reorganization of Holdings or a
Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment or
decree (not subject to appeal) for the payment of money in an uninsured amount
in excess of $10 million is entered against Holdings or a Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after written notice (the
"judgment default provision"). However, a default under clauses (iv), (v) and
(viii) will not constitute an
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Event of Default until the Debenture Trustee or the holders of 25% in principal
amount at maturity of the outstanding Debentures notify Holdings in writing of
the default and Holdings does not cure such default within the time specified
after receipt of such notice.
If an Event of Default occurs and is continuing, the Debenture Trustee or
the holders of at least 25% in principal amount at maturity of the outstanding
Debentures may declare the Accreted Value of and accrued but unpaid interest, if
any, on all the Debentures to be due and payable. Upon such a declaration, such
principal and interest shall be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of Holdings occurs and is continuing, the principal of and interest on all the
Debentures will IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Debenture Trustee or any holders of
the Debentures. Under certain circumstances, the holders of a majority in
principal amount at maturity of the outstanding Debentures may rescind any such
acceleration with respect to the Debentures and its consequences. In the event
of any Event of Default specified in clause (vi) above, such Event of Default
and all consequences thereof (including, without limitation, any acceleration or
resulting payment default) shall be annulled, waived or rescinded, automatically
and without any action by the Debenture Trustee or the Holders of the
Debentures, if within 20 days after such Event of Default arose (x) the
Indebtedness or guarantee that is the basis for such Event of Default has been
discharged in a manner that does not violate the terms of the Debenture
Indenture or (y) the holders thereof have rescinded or waived the acceleration,
notice or action (as the case may be) giving rise to such Event of Default.
Subject to the provisions of the Debenture Indenture relating to the duties
of the Debenture Trustee, if an Event of Default occurs and is continuing, the
Debenture Trustee will be under no obligation to exercise any of the rights or
powers under the Debenture Indenture at the request or direction of any of the
holders of the Debentures unless such holders have offered to the Debenture
Trustee reasonable indemnity or security against any loss, liability or expense.
Except to enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder of a Debenture may pursue any remedy with respect
to the Debenture Indenture or the Debentures unless (i) such holder has
previously given the Debenture Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount at maturity of the
outstanding Debentures have requested the Debenture Trustee to pursue the
remedy, (iii) such holders have offered the Debenture Trustee reasonable
security or indemnity against any loss, liability or expense, (iv) the Debenture
Trustee has not complied with such request within 60 days after the receipt
thereof and the offer of security or indemnity and (v) the holders of a majority
in principal amount at maturity of the outstanding Debentures have not given the
Debenture Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount at maturity of the outstanding Debentures are given the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Debenture Trustee or of exercising any trust or power conferred on the
Debenture Trustee. The Debenture Trustee, however, may refuse to follow any
direction that conflicts with law or the Debenture Indenture or that the
Debenture Trustee determines is unduly prejudicial to the rights of any other
holder of a Debenture or that would involve the Debenture Trustee in personal
liability.
The Debenture Indenture provides that if a Default occurs and is continuing
and is known to the Debenture Trustee, the Debenture Trustee must mail to each
holder of the Debentures notice of the Default within 90 days after it occurs.
Except in the case of a Default in the payment of principal of or interest on
any Debenture, the Debenture Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the Debentures. In addition, Holdings
is required to deliver to the Debenture Trustee, within 120 days after the end
of each fiscal year, a certificate indicating whether the signers thereof know
of any Default that occurred during the previous year. Holdings also is required
to deliver to the Debenture Trustee, within 30 days after the occurrence
thereof, written notice of any events which would constitute certain Defaults,
their status and what action Holdings is taking or proposes to take in respect
thereof.
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AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Debenture Indenture or the Debentures may
be amended with the consent of the holders of a majority in principal amount at
maturity of the Debentures then outstanding (including consents obtained in
connection with a tender offer or exchange for the Debentures) and any past
default or compliance with any provisions may also be waived with the consent of
the holders of a majority in principal amount at maturity of the Debentures then
outstanding. However, without the consent of each holder of an outstanding
Debenture affected thereby, no amendment may, among other things, (i) reduce the
amount of Debentures whose holders must consent to an amendment, (ii) reduce the
rate of or extend the time for payment of interest on any Debenture, (iii)
reduce the principal of or extend the Stated Maturity of any Debenture, (iv)
reduce the amount payable upon the redemption of any Debenture or change the
time at which any Debenture may be redeemed as described under "--Optional
Redemption" above, (v) make any Debenture payable in money other than that
stated in the Debenture, (vi) impair the right of any holder of the Debentures
to receive payment of principal of and interest on such holder's Debentures on
or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Debentures or (vii) make any change
in the amendment provisions which require each holder's consent or in the waiver
provisions.
Without the consent of any holder of the Debentures, Holdings and the
Debenture Trustee may amend or supplement the Debenture Indenture or the
Debentures to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of Holdings
under the Debenture Indenture, to provide for uncertificated Debentures in
addition to or in place of certificated Debentures (provided that the
uncertificated Debentures are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Debentures are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Debentures, to secure the Debentures, to add to the covenants of Holdings
for the benefit of the holders of the Debentures or to surrender any right or
power conferred upon Holdings, to make any change that does not adversely affect
the rights of any holder of the Debentures or to comply with any requirement of
the SEC in connection with the qualification of the Debenture Indenture under
the Trust Indenture Act.
The consent of the holders of the Debentures is not necessary under the
Debenture Indenture to approve the particular form of any proposed amendment. It
is sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Debenture Indenture becomes effective, Holdings
is required to mail to holders of the Debentures a notice briefly describing
such amendment. However, the failure to give such notice to all holders of the
Debentures, or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Debentures are issued in registered form and will be transferable only
upon the surrender of the Debentures being transferred for registration of
transfer. Holdings may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
Holdings at any time may terminate all its obligations under the Debentures
and the Debenture Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Debentures, to replace mutilated,
destroyed, lost or stolen Debentures and to maintain a registrar and paying
agent in respect of the Debentures. Holdings at any time may terminate its
obligations under "--Change of Control" and under the covenants described under
"--Certain Covenants" (other than the covenant described under
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"--Merger and Consolidation"), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "-- Defaults" above and the
limitations contained in clause (iii) under "--Certain Covenants--Merger and
Consolidation" above ("covenant defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Debentures may not be accelerated because of
an Event of Default with respect thereto. If Holdings exercises its covenant
defeasance option, payment of the Debentures may not be accelerated because of
an Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of Holdings to comply with clause (iii) under "--Certain Covenants--
Merger and Consolidation" above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Debenture Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Debenture Trustee of an
Opinion of Counsel to the effect that holders of the Debentures will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amounts and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
CONCERNING THE DEBENTURE TRUSTEE
United States Trust Company of New York is the Trustee under the Debenture
Indenture and has been appointed by Holdings as Registrar and Paying Agent with
regard to the Debentures.
The Debenture Indenture contains certain limitations on the rights of the
Debenture Trustee, should it become a creditor of Holdings, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Debenture Trustee is permitted
to engage in other transactions; PROVIDED, HOWEVER, if it acquires any
conflicting interest it must either eliminate such conflict within 90 days,
apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount at maturity of the outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Debenture
Trustee, subject to certain exceptions. The Debenture Indenture provides that if
an Event of Default occurs (and is not cured), the Debenture Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Debenture
Trustee is under no obligation to exercise any of its rights or powers under the
Debenture Indenture at the request of any Holder of Debentures, unless such
Holder shall have offered to the Debenture Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Debenture Indenture.
GOVERNING LAW
The Debenture Indenture provides that it and the Debentures will be governed
by, and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Debentures:
(i) if the Specified Date occurs on one of the following dates (each, a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
- ----------------------------------------------------------- -------------
<S> <C>
Issue Date................................................. $ 532.350
June 1, 1998............................................... 532.726
December 1, 1998........................................... 567.353
June 1, 1999............................................... 604.231
December 1, 1999........................................... 643.506
June 1, 2000............................................... 685.334
December 1, 2000........................................... 729.881
June 1, 2001............................................... 777.323
December 1, 2001........................................... 827.849
June 1, 2002............................................... 881.659
December 1, 2002........................................... 938.967
June 1, 2003............................................... 1,000.000
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the
immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction,
the numerator of which is the number of days elapsed from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of 12 30-day months, and the denominator of which is 180 (or, if the
Semi-Annual Accrual Date immediately preceding the Specified Date is the
Issue Date, the denominator of which is 2); or
(iii) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Holdings or another Restricted Subsidiary or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants--Limitation on
Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of Holdings or of rights or warrants to
purchase such Capital Stock (whether or not currently
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exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions that are part of a
common plan) by Holdings or any Restricted Subsidiary, including any disposition
by means of a merger, consolidation or similar transaction (each referred to for
the purposes of this definition as a "disposition"), of (i) any shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares or shares required by applicable law to be held by a Person other than
Holdings or a Restricted Subsidiary), (ii) all or substantially all the assets
of any division or line of business of Holdings or any Restricted Subsidiary or
(iii) any other assets of Holdings or any Restricted Subsidiary outside of the
ordinary course of business of Holdings or such Restricted Subsidiary (other
than, in the case of (i), (ii) and (iii) above, (x) a disposition by a
Restricted Subsidiary to Holdings or by Holdings or a Restricted Subsidiary to a
Wholly Owned Subsidiary, (y) for purposes of the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Limitation on Restricted Payments" and (z)
disposition of assets with a fair market value of less than $100,000); PROVIDED,
HOWEVER, that a disposition of all or substantially all of the assets of
Holdings and its Restricted Subsidiaries taken as a whole will be governed by
the provisions of the Debenture Indenture described above under the caption
"--Change of Control" and/or the provisions described above under the caption
"--Merger and Consolidation" and not by the provisions of the "--Limitation on
Sales of Assets and Subsidiary Stock" covenant.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in such transaction, compounded annually) of the total obligations of
the lessee for net rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of Holdings or any
committee thereof duly authorized to act on behalf of such Board.
"BRS" means Bruckmann, Rosser, Sherrill & Co., L.P.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"CHI Acquisition" means the acquisition transactions contemplated by the CHI
Acquisition Agreement.
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"CHI Acquisition Agreement" means the Asset Purchase Agreement dated April
24, 1998, among MEDIQ/PRN and the sellers named therein, as such agreement is in
effect on the Issue Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Co-Investors" means Ferrer Freeman Thompson & Co. LLC and Galen Partners
III, L.P..
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are available
prior to the date of such determination to (ii) Consolidated Interest Expense
for such four fiscal quarters; PROVIDED, HOWEVER, that (1) if Holdings or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
outstanding on the date of such calculation shall be computed based on (A) the
average daily balance of such Indebtedness during such four fiscal quarters or
such shorter period when such facility was outstanding or (B) if such facility
was created after the end of such four fiscal quarters, the average balance of
such Indebtedness during the period from the date of creation of such facility
to the date of the computation), (2) if Holdings or any Restricted Subsidiary
has repaid, repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the date
of the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall
be calculated on a pro forma basis as if such discharge had occurred on the
first day of such period and as if Holdings or such Restricted Subsidiary has
not earned the interest income actually earned during such period in respect of
cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Holdings or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
Holdings or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to Holdings and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent Holdings and its continuing Restricted Subsidiaries are
no longer liable for such Indebtedness after such sale), (4) if since the
beginning of such period Holdings or any Restricted Subsidiary (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary (or any
person which becomes a Restricted Subsidiary) or an acquisition of assets,
including any such Investment or acquisition of assets occurring in connection
with a transaction requiring a calculation to be made hereunder, which
constitutes all or substantially all of a product line or an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and the application of the proceeds therefrom) as if such
Investment or acquisition occurred on the first day of such period and (5) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into Holdings or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset
Disposition, any Investment or any acquisition of assets that
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would have required an adjustment pursuant to clause (3) or (4) above if made by
Holdings or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition occurred
on the first day of such period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting Officer of Holdings. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest of such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its consolidated Restricted Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by Holdings or its Restricted Subsidiaries, without duplication, (i) interest
expense attributable to Capital Lease Obligations and the interest expense
attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) cash and Disqualified Stock dividends in respect of
all Preferred Stock of Restricted Subsidiaries and Disqualified Stock of
Holdings held by Persons other than Holdings or a Wholly Owned Subsidiary,
(viii) interest incurred in connection with Investments in discontinued
operations, (ix) interest accruing on any Indebtedness of any other Person to
the extent such Indebtedness is Guaranteed by (or secured by the assets of)
Holdings or any Restricted Subsidiary and (x) the cash contributions to any
employee stock ownership plan or similar trust to the extent such contributions
are used by such plan or trust to pay interest or fees to any Person (other than
Holdings or any Wholly Owned Subsidiary) in connection with Indebtedness
Incurred by such plan or trust and LESS, to the extent included in such total
interest expense, the amortization during such period of debt issuance costs;
PROVIDED, HOWEVER, that the aggregate amount of amortization relating to any
such debt issuance costs deducted in calculating Consolidated Interest Expense
shall not exceed 5% of the aggregate amount of the financing giving rise to such
debt issuance costs.
"Consolidated Net Income" means, for any period, the net income of Holdings
and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall not be
included in such Consolidated Net Income:
(i) any net income of any Person (other than Holdings) if such Person is
not a Restricted Subsidiary, except that (A) subject to the exclusion
contained in clause (iv) below, Holdings' equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to Holdings or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained
in clause (iii) below) and (B) Holdings' equity in a net loss of any such
Person for such period shall be included in determining such Consolidated
Net Income;
(ii) for purposes of clause (a)(3)(A) of the covenant described under
"Certain Covenants-- Limitation on Restricted Payments" only, any net income
(or loss) of any Person acquired by Holdings or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Holdings, except that (A) subject to
the exclusion contained in clause (iv) below, Holdings' equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of
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cash that could have been distributed by such Restricted Subsidiary during
such period to Holdings or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) Holdings' equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(iv) any gain or loss realized upon the sale or other disposition of any
assets of Holdings or its consolidated Subsidiaries (including pursuant to
any sale-and-leaseback arrangement) which is not sold or otherwise disposed
of in the ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants-- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to Holdings
or a Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"Credit Agreement" means the Credit Agreement to be entered into by and
among MEDIQ/PRN, certain of its Subsidiaries, the lenders referred to therein,
Banque Nationale de Paris, as Administrative Agent, NationsBank, N.A., as
Syndication Agent, and Credit Suisse First Boston, as Documentation Agent,
together with the related documents thereto (including the term loans and
revolving loans thereunder, any guarantees, all security documents and any hedge
agreements), in each case, as amended, extended, renewed, restated, supplemented
or otherwise modified or refinanced (in whole or in part, and without limitation
as to amount, terms, conditions, covenants and other provisions) from time to
time, and any agreement (and related document) governing Indebtedness incurred
to Refinance, in whole or in part, the borrowings and commitments then
outstanding or permitted to be outstanding under such Credit Agreement or a
successor Credit Agreement, whether by the same or any other lender or group of
lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable or must be purchased, upon the occurrence of certain events
or otherwise, by such Person at the option of the holder thereof, in whole or in
part, in each case on or prior to the first anniversary of the Stated Maturity
of the Debentures; PROVIDED, HOWEVER, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Debentures shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the terms applicable to the Debentures and described under
"--Change of Control" and "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of Holdings
and its consolidated Restricted Subsidiaries, (b) depreciation expense of
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Holdings and its consolidated Restricted Subsidiaries, (c) amortization expense
of Holdings and its consolidated Restricted Subsidiaries (excluding amortization
expense attributable to a prepaid cash item that was paid in a prior period),
(d) non-recurring severance and transaction costs incurred in connection with
any acquisition (including the Merger and the CHI Acquisition) by Holdings and
its consolidated Restricted Subsidiaries and (e) all other non-cash charges of
Holdings and its consolidated Restricted Subsidiaries (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash expenditures in any future period), in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to Holdings by such Restricted Subsidiary without
prior approval (that has not been obtained), pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to such Restricted Subsidiary or
its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Debentures" means the debentures issued in exchange for the
Debentures pursuant to the Registration Rights Agreement entered into in
connection with the issuance of the Debentures between Holdings, MEDIQ/PRN, the
Subsidiary Guarantors and the Initial Purchasers.
"Exchange Notes" means the notes issued in exchange for the Notes pursuant
to the Registration Rights Agreement entered into in connection with the
issuance of the Notes between Holdings, MEDIQ/ PRN, the Subsidiary Guarantors
and the Initial Purchasers.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such other Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of such other Person (whether arising
by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Debentureholders" means the Person in whose name a Debenture is
registered on the Registrar's books.
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"Holdings" means MEDIQ Incorporated, Inc., a Delaware corporation, and any
successor corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business)
which purchase price or obligation is due more than six months after the
date of placing such property in service or taking delivery and title
thereto;
(iv) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iii)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of such Person, the liquidation preference with
respect to, any Preferred Stock (but excluding, in each case, any accrued
dividends);
(vi) all obligations of the type referred to in clauses (i) through (v)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations described above at such
date; PROVIDED, HOWEVER, that the amount outstanding at any time of any
Indebtedness issued with original issue discount shall be deemed to be the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
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"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to
Holdings or any of its assets, (ii) any liquidation, dissolution or other
winding up of Holdings, whether voluntary or involuntary or whether or not
involving insolvency or bankruptcy or (iii) any assignment for the benefit of
creditors or any other marshaling of assets or liabilities of Holdings.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person; PROVIDED, HOWEVER, that an acquisition of
assets, Capital Stock or other securities of any Person for consideration
consisting of common equity securities of Holdings shall not be deemed to be an
"Investment." For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to Holdings' equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of Holdings at the
time that such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, Holdings shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) Holdings' "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to Holdings' equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Old Debentures were originally
issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charg'e of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the management services agreement that became
effective at the effective time of the Merger among Bruckmann, Rosser, Sherrill
& Co., Inc., MEDIQ/PRN, Galen Associates and Ferrer Freeman Thompson & Co. LLC,
as amended from time to time.
"Merger" means the merger of MQ Acquisition Corporation with and into
Holdings pursuant to the Agreement and Plan of Merger dated as of January 14,
1998, as amended as of April 27, 1998, between MQ Acquisition Corporation and
Holdings.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of (i) all legal, accounting, investment
banking, title and recording tax expenses, commissions and other fees and
expenses incurred, and all Federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured
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by any assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary consent to
such Asset Disposition, or by applicable law, be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments required to
be made to a Person owning a beneficial interest in assets subject to sale or
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition, (iv) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the property or other assets disposed in such Asset Disposition and
retained by Holdings or any Restricted Subsidiary after such Asset Disposition
and (v) any portion of the purchase price from an Asset Disposition required by
the terms of such Asset Disposition to be placed in escrow (whether as a reserve
for a purchase price adjustment, for satisfaction of indemnities or otherwise);
PROVIDED, HOWEVER, that upon the termination of such escrow, Net Available Cash
shall be increased by any portion of the funds therein released to Holdings or
any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse," with respect to any Indebtedness of a subsidiary, means
Indebtedness (i) as to which neither Holdings nor any of its other Restricted
Subsidiaries (a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness) and (b) is directly
or indirectly liable (as a Guarantor or otherwise); and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of Holdings
or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of Holdings
or any of its other Restricted Subsidiaries.
"Permitted Holders" means (i) BRS, Bruce C. Bruckmann, Harold O. Rosser II,
Stephen C. Sherrill and Stephen Edwards, the Co-Investors and the Rotko Entities
and any Person who on the Issue Date was an Affiliate of any of the foregoing,
(ii) Thomas S. Carroll, Jay M. Kaplan and any other Person who was a member of
the management of MEDIQ/PRN or Holdings, and a shareholder of Holdings, on the
Issue Date and (iii) any Related Party of any of the foregoing.
"Permitted Investment" means an Investment by Holdings or any Restricted
Subsidiary in (i) Holdings, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Holdings or a Restricted Subsidiary; PROVIDED,
HOWEVER, that such Person's primary business is a Related Business; (iii)
Temporary Cash Investments; (iv) receivables owing to Holdings or any Restricted
Subsidiary if created or acquired in the ordinary course of business and payable
or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER,
that such trade terms may include such concessionary trade terms as Holdings or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business consistent with
past practices of Holdings or such Restricted Subsidiary; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Holdings or any Restricted Subsidiary
or in satisfaction of judgments; (viii) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described
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under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock";
and (ix) additional Investments in an aggregate amount which, together with all
other Investments made pursuant to this clause (ix) that are outstanding, does
not exceed $2.5 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; PROVIDED, HOWEVER, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights-of-way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Purchase Money Indebtedness or other
Indebtedness Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, property of such Person; PROVIDED,
HOWEVER, that the Lien may not extend to any other property owned by such Person
or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness (other than any interest thereon) secured by the Lien may not be
Incurred more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien; (g) Liens to secure (A) Indebtedness permitted
under the provisions described in clauses (b)(1) and (b)(2) under "--Certain
Covenants--Limitation on Indebtedness" and (B) Indebtedness Incurred pursuant to
the Credit Agreement and permitted under the provisions of paragraph (a) of, or
the provisions described in clause (b)(16) under, "--Certain
Covenants--Limitation on Indebtedness"; (h) Liens existing on the Issue Date;
(i) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; PROVIDED, HOWEVER, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; PROVIDED
FURTHER, HOWEVER, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (j) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; PROVIDED, HOWEVER, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; PROVIDED FURTHER, HOWEVER, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (l) Liens securing
Hedging Obligations so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted to be under the Debenture Indenture, secured by a Lien
on the same property securing such Hedging Obligations; and (m) Liens to secure
any Refinancing (or successive Refinancings) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f), (h),
(i) and (j); PROVIDED, HOWEVER, that (x) such new Lien shall be limited to all
or part of the same property that secured the original Lien (plus improvements
to or on such property) and (y) the Indebtedness secured by such Lien at such
time is not increased to any amount greater than the sum of (A) the outstanding
principal amount or, if greater, committed amount of the
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Indebtedness described under clauses (f), (h), (i) or (j) at the time the
original Lien became a Permitted Lien and (B) an amount necessary to pay any
fees and expenses, including premiums, related to such refinancing, refunding,
extension, renewal or replacement. Notwithstanding the foregoing, "Permitted
Liens" will not include any Lien described in clauses (f), (i) or (j) above to
the extent such Lien applies to any Additional Assets acquired directly or
indirectly from Net Available Cash pursuant to the covenant described under
"--Certain Covenants--Limitation on Sale of Assets and Subsidiary Stock". For
purposes of this definition, the term "Indebtedness" shall be deemed to include
interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Post-Petition Interest" means all interest accrued or accruing after the
commencement of any Insolvency or Liquidation Proceeding (and interest that
would accrue but for the commencement of any Insolvency or Liquidation
Proceeding) in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing any Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
as a claim in such Insolvency or Liquidation Proceeding.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Debenture means the principal of the Debenture plus the
premium, if any, payable on the Debenture which is due or overdue or is to
become due at the relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holdings pursuant to an effective registration statement under
the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 10% of the total issued and outstanding common
stock of Holdings has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Purchase Money Indebtedness" means Indebtedness (including Capital Lease
Obligations) (i) consisting of the deferred purchase price of property,
conditional sale obligations, obligations under any title retention agreement,
other purchase money obligations and obligations in respect of industrial
revenue bonds or similar Indebtedness, in each case where the maturity of such
Indebtedness does not exceed the anticipated useful life of the asset being
financed, and (ii) Incurred to finance the acquisition by Holdings or a
Restricted Subsidiary of such asset, including additions and improvements;
PROVIDED, HOWEVER, that any Lien arising in connection with any such
Indebtedness shall be limited to the specified asset being financed or, in the
case of real property or fixtures, including additions and improvements, the
real property on which such asset is attached; PROVIDED FURTHER, HOWEVER, that
such Indebtedness is Incurred within 180 days after such acquisition of such
assets by Holdings or any Restricted Subsidiary.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Holdings or any Restricted Subsidiary existing on the Issue Date
or Incurred in compliance with the Debenture Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such
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Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced and (iii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; PROVIDED FURTHER, HOWEVER, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of
Holdings or (y) Indebtedness of Holdings or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors) to the businesses of
Holdings and the Restricted Subsidiaries on the Issue Date.
"Related Party" means (i) any controlling stockholder, general partner, 80%
(or more) owned Subsidiary, or spouse or immediate family member (in the case of
an individual) of any Permitted Holder or (ii) any trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons holding an 80% or more controlling interest of which consist solely
of one or more Permitted Holders and/or such other Persons referred to in the
immediately preceding clause (i).
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and other
than dividends or distributions payable solely to Holdings or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of Holdings held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of
Holdings (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than, in any such case, in exchange
for or into Capital Stock of Holdings that is not Disqualified Stock), (iii) the
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition) or
(iv) the making of any Investment in any Person (other than a Permitted
Investment). In determining the amount of any Restricted Payment made in
property other than in cash, such amount shall be the fair market value of such
property at the time of such Restricted Payment, as determined in good faith by
the Board of Directors.
"Restricted Subsidiary" means any Subsidiary of Holdings that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility contained in
the Credit Agreement and any other facility or financing arrangement that
Refinances or replaces, in whole or in part, any such revolving credit facility.
"Rotko Entities" means (i) a trust established on November 18, 1983, by the
late Bernard B. Rotko, (ii) Michael J. Rotko, (iii) Bessie G. Rotko and (iv)
Judith M. Shipon.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
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"Senior Indebtedness" means (i) Indebtedness of Holdings, whether
outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and
unpaid interest (including Post-Petition Interest) in respect of (A)
Indebtedness of Holdings for money borrowed and (B) Indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
Holdings is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinate in right of
payment to the Debentures; PROVIDED, HOWEVER, that Senior Indebtedness shall not
include (1) any obligation of Holdings to any Subsidiary, (2) any liability for
Federal, state, local or other taxes owed or owing by Holdings, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of Holdings (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior by its terms to any
other Indebtedness or other obligation of Holdings or (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in violation of the
Debenture Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of Holdings (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Debentures pursuant to a written agreement to
that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantor" means any domestic Restricted Subsidiary of MEDIQ/PRN
that Guarantees MEDIQ/PRN's obligations with respect to the Notes pursuant to
the Note Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of
MEDIQ/PRN's obligations with respect to the Notes pursuant to the Note
Indenture.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
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(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of Holdings) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group,
and
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Term Loan Facility" means the term loan facilities (including any delayed
draw acquisition facilities) contained in the Credit Agreement and any other
facility or financing arrangement that Refinances or replaces in whole or in
part any such term loan facilities.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
Holdings (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of,
Holdings or any other Subsidiary of Holdings that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED, HOWEVER, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately
after giving effect to such designation (x) Holdings could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Debenture Trustee by promptly filing with the Debenture
Trustee a copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Holdings or
one or more Wholly Owned Subsidiaries.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Securities for its own account pursuant
to an Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Securities received in exchange for Old
Securities where such Old Securities were acquired as a result of market-making
activities or other trading activities. The Issuers have agreed that, for a
period of 180 days after the Expiration Date, they will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 1998 (90 days after the
date of this Prospectus), all dealers effecting transactions in the New
Securities may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sale of New Securities by
broker-dealers. New Securities received by broker-dealers for their own account
pursuant to the Exchange Offers may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Securities or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market price or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Securities. Any broker-dealer
that resells New Securities that were received by it for its own account
pursuant to an Exchange Offer and any broker or dealer that participates in a
distribution of such New Securities may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of New
Securities and any commissions or concessions received by any such persons may
be deemed to be underwriting compensation under the Securities Act. The Letters
of Transmittal state that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. For a period of 180
days after the Expiration Date, the Issuers will promptly send additional copies
of this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in a Letter of Transmittal. The
Issuers have agreed to pay all expenses incident to the Exchange Offers
(including the expenses of one counsel for the holders of the Old Securities)
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Old Securities (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the provisions of the Code, the
applicable Treasury Regulations promulgated and proposed thereunder, judicial
authority and current administrative rulings and practice, all of which are
subject to change, possibly with retroactive effect. This discussion does not
purport to deal with all aspects of U.S. Federal income taxation that might be
relevant to particular holders in light of their personal investment
circumstances or status, nor does it discuss the U.S. Federal income tax
consequences to certain types of holders subject to special treatment under the
U.S. Federal income tax laws (for example, financial institutions, insurance
companies, dealers in securities, tax-exempt organizations, or taxpayers holding
the Securities as part of a "straddle," "hedge" or "conversion transaction").
Moreover, the effect of any applicable state, local, foreign, gift, estate or
other tax laws generally is not discussed.
Except as otherwise indicated below, this discussion assumes that the
Securities are held as capital assets (as defined in Section 1221 of the Code)
by the holders thereof. This discussion is limited to the material U.S. Federal
income tax consequences to initial holders of the Securities.
The New Debentures are viewed as a continuation of the Old Debentures for
U.S. Federal income tax purposes rather than as the issuance of a new debt
obligation. For ease of reference, the Old Debentures
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and the New Debentures are referred to below simply as the "Debentures," and the
term "Securities," includes, as applicable, New Debentures and Old Debentures.
U.S. HOLDERS
Except as specifically provided below, the immediately following discussion
is limited to the U.S. Federal income tax consequences relevant to a holder of
the Securities who or which is (i) an individual who is a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized under the laws of the United States, or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. Federal income
taxation regardless of its source, (iv) a trust with respect to which a court
within the United States is able to exercise primary supervision of the
administration of such trust and one or more United States fiduciaries have the
authority to control all substantial decisions of such trust or (v) a person
whose worldwide income or gain is otherwise subject to U.S. Federal income
taxation on a net income basis (each a "U.S. Holder"). Potential Federal income
tax consequences to persons who are not U.S. Holders are discussed in detail
below under "--Non-U.S. Holders."
Prospective holders are urged to consult their own tax advisors regarding
the Federal, state, local, foreign and other tax considerations of the
acquisition, ownership and disposition of the Securities.
TAX TREATMENT OF THE NOTES AND THE DEBENTURES
STATED INTEREST ON THE NOTES. The stated interest on the Notes will be
included in income by a U.S. Holder as ordinary income in accordance with such
U.S. Holder's usual method of accounting. It is anticipated that the Notes will
be issued without any OID, as described below.
STATED INTEREST ON THE DEBENTURES. The stated interest on the Debentures
will be included in the amount of OID on such Debentures, as described in more
detail below. A U.S. Holder will not be required to report separately as taxable
income actual payments of stated interest with respect to the Debentures.
ORIGINAL ISSUE DISCOUNT ON THE DEBENTURES. Because the Debentures were
issued at an issue price which is substantially less than the stated amount at
maturity and because cash interest on the Debentures will not be payable until
December 1, 2003, the Debentures are deemed to have been issued with OID.
Accordingly, each U.S. Holder will be required to include in income (regardless
of whether such U.S. Holder is a cash or accrual basis taxpayer) in each taxable
year, in advance of the receipt of cash payments on such Debentures, that
portion of the OID, computed on a constant yield basis, attributable to each day
during such year on which the holder held the Debentures. See "--Taxation of
Original Issue Discount" below.
The amount of OID with respect to each Debenture will be equal to the excess
of (i) its "stated redemption price at maturity" over (ii) its "issue price."
Under the Treasury Regulations, the issue price of an investment unit, such as
the Units comprised of the Old Debentures and Warrants, is the first price at
which a substantial amount of the Units are sold for money. The issue price for
the investment unit as so determined is allocated between the Debentures and the
Warrants, based on their relative fair market values at the time of issuance.
Moreover, the Issuers' allocation is binding on each U.S. Holder unless the U.S.
Holder discloses that his, her or its allocation differs from the Issuers'
allocation on a statement attached to the U.S. Holder's timely filed U.S.
Federal income tax return for the year in which he, she or it acquires the
investment unit. The Issuers allocated the issue price of the Units between the
Debentures and the Warrants in accordance with their relative fair market values
at the time of issuance based on advice furnished to them by the Initial
Purchasers. The issue price of the Debentures was $ per $1,000 face amount
of Debentures, which was the portion of the issue price of the Units so
allocated to the Debentures. This allocation, however, is not binding on the
Internal Revenue Service (the "Service"), and therefore, there can be no
assurance that the Service will respect such allocation. Under the Treasury
Regulations, the "stated redemption price at maturity" of each Debenture will
equal the sum of all cash payments required to be made on such Debenture
(including principal and stated interest).
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TAXATION OF ORIGINAL ISSUE DISCOUNT. A U.S. Holder of a debt instrument
issued with OID is required to include in gross income for U.S. Federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which such holder holds the debt instrument
without regard to when the cash or other payments attributable to such income
are received. The daily portions of OID required to be included in a U.S.
Holder's gross income in a taxable year will be determined under a constant
yield method by allocating to each day during the taxable year on which the U.S.
Holder held the debt instrument a pro rata portion of the OID on such debt
instrument which is attributable to the "accrual period" in which such day is
included. The amount of the OID attributable to each accrual period will be the
product of the "adjusted issue price" of the Debenture at the beginning of such
accrual period multiplied by the "yield to maturity" of the Debenture (properly
adjusted for the length of the accrual period). The Debenture's "yield to
maturity" is that discount rate which, when used in computing the present value
of all principal and stated interest payments to be made under a Debenture,
produces an amount equal to the issue price of a Debenture. Based on the issue
price of $ per $1,000 principal amount of Debentures, the yield to
maturity of the Debentures was determined to be %. The "adjusted issue price"
of the Debenture at the beginning of an accrual period will generally be its
issue price plus the aggregate amount of OID that accrued in all prior accrual
periods (determined without regard to the rules described below concerning
acquisition premium) less any cash payments on the Debenture. An "accrual
period" may be of any length and may vary in length over the term of the debt
instrument, provided that each accrual period is not longer than one year and
each scheduled payment of principal or interest occurs either on the final day
or the first day of an accrual period.
ACQUISITION PREMIUM ON DEBENTURES. A U.S. Holder of a Debenture who
purchases such Debenture for an amount that is greater than its issue price but
equal to or less than its stated redemption price at maturity will be considered
to have purchased such Debenture at an "acquisition premium." Under the
acquisition premium rules, unless a U.S. Holder makes the election described
below under "--Election to Apply OID Principles," the amount of OID which such
U.S. Holder must include in income with respect to such Debenture for any
taxable year will be reduced by the portion of such acquisition premium properly
allocable to such year.
AMORTIZABLE BOND PREMIUM ON NOTES. If the holder's basis in the Notes
exceeds the amount payable at the maturity date (or earlier call date, under
certain circumstances), such excess will be deductible by the holder of the
Notes (taking into account earlier call dates, under certain circumstances),
under a yield-to-maturity formula, if an election by the holder under Section
171 of the Code is made or is already in effect. This election is revocable only
with the consent of the Service and applies to all obligations owned or acquired
by the holder on or after the first day of the taxable year to which the
election applies. To the extent the excess is deducted as amortizable bond
premium, the holder's adjusted tax basis in the Notes will be reduced. Except as
may otherwise be provided in future Treasury Regulations, the amortizable bond
premium will be treated as an offset to interest income on the Notes rather than
as a separate deduction item. Recently promulgated Treasury Regulations have
modified the described rules under Section 171 in order to coordinate such rules
with the rules relating to OID, generally effective for debt instruments
acquired on or after March 2, 1998.
MARKET DISCOUNT ON THE NOTES AND DEBENTURES. Generally, the market discount
rules discussed below will not apply to a U.S. Holder who acquired the Note or
Debenture when they were originally issued. These rules would apply, however, to
an original holder whose tax basis in the Note or Debenture is less than the
"issue price" of such Note or Debenture. The "issue price" of a Debenture is as
defined above; the "issue price" of a Note will be the first price at which a
substantial amount of the Notes are sold. For purposes of determining the issue
price of the Notes, sales to bond houses, brokers, or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers are ignored.
Gain recognized on the disposition (including a redemption) by a U.S. Holder
of a Note or Debenture that has accrued market discount will be treated as
ordinary income, and not capital gain, to the extent of
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the accrued market discount, provided that the amount of market discount exceeds
a statutorily defined DE MINIMIS amount. "Market discount" is defined as the
excess, if any, of the "revised issue price" (as defined below) in the case of
the Debentures or the "stated redemption price at maturity" in the case of the
Notes over the tax basis of the debt obligation in the hands of the holder
immediately after its acquisition. The "revised issue price" of a debt
obligation generally equals the sum of its issue price and the total amount of
OID includable in the gross income of all holders for periods before the
acquisition of the debt obligation by the current holder (without regard to any
reduction in such income resulting from any prior purchase at an acquisition
premium) and less any cash payments in respect of such debt obligation. The
"stated redemption price at maturity" of the Notes will equal the stated
principal amount thereof.
The amount of market discount treated as accrued would be calculated either
(i) ratably, by multiplying the market discount by a fraction, the numerator of
which is the number of days the obligation has been held by the U.S. Holder and
the denominator of which is the number of days after the U.S. Holder's
acquisition of the obligation up to and including its maturity date or (ii), if
the U.S. Holder so elects, on a constant yield to maturity basis.
A U.S. Holder of a Note or Debenture acquired at a market discount also may
be required to defer the deduction of all or a portion of the interest on any
indebtedness incurred or maintained to carry the Note or Debenture until it is
disposed of in a taxable transaction. Moreover, to the extent of any accrued
market discount on such Notes or Debentures, any partial principal payment with
respect to Notes or Debentures (possibly including stated interest payments on
the Debentures) would be includable as ordinary income upon receipt, as would
the fair market value of the Notes or Debentures on certain otherwise
non-taxable transfers (such as gifts).
A U.S. Holder of a Note or Debenture acquired at market discount may elect
to include the market discount in income as it accrues (on either a ratable or
elective constant yield to maturity basis). This election would apply to all
market discount obligations acquired by the electing U.S. Holder on or after the
first day of the first taxable year to which the election applies. The election
may be revoked only with the consent of the Service. If a holder of a Note or
Debenture so elects currently to include market discount in income, the
above-discussed rules with respect to ordinary income recognition resulting from
sales and certain other disposition transactions and to deferral of interest
deductions would not apply.
ELECTION TO APPLY OID PRINCIPLES. A U.S. Holder may generally, upon
election, include in income all interest (including stated interest, acquisition
discount, OID, DE MINIMIS OID, market discount, DE MINIMIS market discount, and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium) that accrued on a Note or Debenture by using the constant yield method
applicable to OID obligations, subject to certain limitations and exceptions.
The election is to be made for the taxable year in which the U.S. Holder
acquired the Note or Debenture, is generally applicable only to the Note or
Debenture with respect to which the election is made and may not be revoked
without the consent of the Service.
TAX BASIS. A U.S. Holder's initial tax basis in a Note or Debenture will be
equal to the purchase price paid by such holder for such Note or Debenture. A
U.S. Holder's tax basis in a Debenture will be increased by the amount of OID
that is included in such U.S. Holder's income pursuant to the foregoing rules
(taking into account acquisition premium) through the day preceding the day of
disposition (and the accruals of market discount, if any, which the U.S. Holder
elected to include in gross income on an annual basis) and will be decreased by
the amount of any cash payments received. A U.S. Holder's tax basis in a Note or
Debenture will be increased by the amount of accrued market discount, if any,
which the U.S. Holder elected to include in gross income on an annual basis and
decreased by the amortizable bond premium, if any, which the U.S. Holder has
elected to offset against interest income.
SALE OR REDEMPTION. Unless a nonrecognition provision applies, the sale,
exchange, redemption or other disposition of Notes or Debentures will be a
taxable event for U.S. Federal income tax purposes. In
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such event, a U.S. Holder will recognize gain or loss equal to the difference
between (i) the amount of cash plus the fair market value of any property
received upon such sale, exchange, redemption or other taxable disposition
(except to the extent that amounts received are attributable, in the case of the
Notes, to accrued interest, which portion of the consideration would be taxed as
ordinary income if the interest was previously untaxed) and (ii) the holder's
adjusted tax basis therein. Subject to the discussion above under the caption
"Market Discount on the Notes and Debentures," such gain or loss should be
capital gain or loss and will be long-term capital gain or loss if the U.S.
Holder has held the Notes or Debentures for more than one year at the time of
the sale, exchange, redemption or other disposition. In the case of a U.S.
Holder who is an individual, estate or trust such capital gain will generally be
subject to tax at a 28% maximum marginal rate if the Notes or Debentures have
been held for more than 12 months but not more than 18 months at the time of
sale, exchange, redemption or other disposition, and a maximum marginal rate of
20% generally will apply if the Notes or Debentures have been held for more than
18 months. Under the "IRS Restructuring and Reform Bill of 1998" currently
pending before Congress, the 20% maximum rate would generally be effective for
capital assets held for more than one year, effective for amounts taken into
account after January 1, 1998. For corporate holders, long-term capital gains
and ordinary income are both taxable at a maximum marginal rate of 35%.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS. The Debentures are "applicable
high yield discount obligations" ("AHYDOs") under Section 163 of the Code, so
that a portion of the OID accruing on the Debentures may be treated as a
dividend generally eligible for the dividends-received deduction in the case of
corporate holders (and subject to the limitations described above), and the
Company (A) will not be entitled to deduct the "disqualified portion" of the OID
accruing on the Debentures and (B) will be allowed to deduct the remainder of
the OID only when paid in cash.
A corporate holder will be treated as receiving dividend income to the
extent of the lesser of (i) Holdings' current and accumulated earnings and
profits and (ii) the "disqualified portion" of the OID of such Debenture. The
"disqualified portion" of the OID is equal to the lesser of (i) the amount of
OID or (ii) the portion of the "total return" (i.e., the excess of all payments
to be made with respect to the Debentures over its issue price) in excess of
% (the AFR for the month in which the Debentures were issued plus six
percentage points).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, U.S. Holders may be subject, under certain circumstances, to
information reporting and "backup withholding" at a 31% rate with respect to
cash payments in respect of principal (and premium, if any), OID, interest on
and the gross proceeds from dispositions of the Notes or Debentures. Backup
withholding applies only if the U.S. Holder (i) fails to furnish its social
security or other taxpayer identification number ("TIN") within a reasonable
time after a request therefor, (ii) furnishes an incorrect TIN, (iii) fails
properly to report interest or dividends or (iv) fails under certain
circumstances to provide a certified statement, signed under penalty of perjury,
that the TIN provided is its correct number and that it is not subject to backup
withholding. Any amount withheld from a payment to a U.S. Holder under the
backup withholding rules is allowable as a credit (and may entitle such holder
to a refund) against such U.S. Holder's U.S. Federal income tax liability,
provided that the required information is furnished to the Service. Certain
persons are exempt from backup withholding, including corporations and financial
institutions. U.S. Holders of Securities should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
The Issuers will furnish annually to the Service and to record holders of
the Securities (to whom it is required to furnish such information) information
relating to the amount of OID, interest and dividends, as applicable. Because
this information will be based upon the adjusted issue price of the Debentures
as if the holder were an original holder, purchasers who purchase Debentures for
an amount other than the adjusted issue price at the time of purchase will be
required to determine for themselves the amount of
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OID, if any, that they are required to report. See also "--Acquisition Premium
on Debentures" and "-- Market Discount on Notes and Debentures."
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Securities that is not a U.S. Holder (a
"Non-U.S. Holder").
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of Securities will be considered to be "U.S. trade
or business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of a treaty resident,
attributable to a permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
STATED INTEREST AND OID ON NOTES OR DEBENTURES. Generally, any interest or
OID paid to a Non-U.S. Holder of a Note or Debenture that is not U.S. trade or
business income will not be subject to U.S. Federal income tax if the interest
or OID qualifies as "portfolio interest." Generally, interest and OID on the
Notes or Debentures received on or prior to December 31, 1999 by a Non-U.S.
Holder will qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of MEDIQ/PRN (in the case of the Notes) or Holdings (in the case of
the Debentures), (ii) such holder is not a "controlled foreign corporation" with
respect to which MEDIQ/ PRN or Holdings, as the case may be, is a "related
person" within the meaning of the Code, (iii) either (A) the beneficial owner,
under penalty of perjury, certifies that the beneficial owner is not a United
States person and such certificate provides the beneficial owner's name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") and holds the Notes or Debentures
certifies to MEDIQ/ PRN or Holdings, as the case may be, or their respective
agents under penalties of perjury that such statement has been received from the
Non-U.S. Holder by it or by another financial institutional and furnishes the
payor with a copy thereof and (iv) the Non-U.S. Holder is not a bank receiving
interest on the extension of credit made pursuant to a loan agreement made in
the ordinary course of its trade or business.
Payments of interest and OID received by a Non-U.S. Holder after December
31, 1999 will not be subject to United States Federal withholding tax (or to
backup withholding and information reporting) provided that requirements (i),
(ii) and (iv) of the preceding paragraph are satisfied and, in general,
MEDIQ/PRN or Holdings, as the case may be, or its paying agent, in accordance
with Treasury regulations issued under Section 1441 of the Code, reliably
establishes, based on documentation supplied by the beneficial owner or
intermediate holders, that payments are made to a foreign beneficial owner. In
general, it will not be necessary for a Non-U.S. Holder to obtain or furnish a
United States taxpayer identification number to MEDIQ/PRN or Holdings, as the
case may be, or its paying agent in order to claim any of the foregoing
exemptions from United States withholding tax on payments of interest and OID.
The gross amount of payments to a Non-U.S. Holder of interest or OID that do
not qualify for the portfolio interest exception and that are not effectively
connected with the conduct of a U.S. trade or business will be subject to a U.S.
Federal income tax at the rate of 30%, unless a U.S. income tax treaty applies
to reduce or eliminate withholding. U.S. trade or business income will be taxed
on a net basis at regular U.S. rates rather than the 30% gross rate. In the case
of a Non-U.S. Holder that is a corporation, such United States trade or business
income may also be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to United States trade or business
income) at a 30% rate. The branch profits tax may not apply (or may apply at a
reduced rate) if a recipient is a qualified resident of certain countries with
which the United States has an income tax treaty. To claim the benefit of a tax
treaty or to claim exemption from withholding because the income is U.S. trade
or business income, the Non-U.S.
170
<PAGE>
Holder must provide a properly executed Form 1001 or 4224 (or such successor
forms as the Service may designate), as applicable, prior to the payment of
interest. These forms must be periodically updated. Under recently revised U.S.
Treasury regulations that will become effective for payments made after December
31, 1999, however, a Non-U.S. Holder who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification and
other requirements, which would include the requirement that the Non-U.S. Holder
file a form containing the holder's name and address or provide certain
documentary evidence issued by foreign governmental authorities as proof of
residence in the foreign county. Certain special procedures are provided in the
revised regulations for payment through qualified intermediaries. The
recharacterization of a portion of OID as dividends under the rules applicable
to AHYDOs, as described above, will not apply for purposes of U.S. withholding
tax.
SALE, EXCHANGE OR REDEMPTION OF NOTES OR DEBENTURES. Except as described
below and subject to the discussions concerning backup withholding, any gain
realized by a Non-U.S. Holder on the sale, exchange, redemption or other
disposition of a Note or Debenture, generally will not be subject to U.S.
Federal income tax, unless (i) such gain is U.S. trade or business income, (ii)
subject to certain exceptions, the Non-U.S. Holder is an individual who holds
the Note or Debenture as a capital asset, is present in the United States for
183 days or more in the taxable year of the disposition and certain other
conditions are satisfied or (iii) the Non-U.S. Holder is subject to tax pursuant
to the provisions of U.S. tax law applicable to certain U.S. expatriates
(including certain former citizens or residents of the United States).
FEDERAL ESTATE TAX. Notes or Debentures held (or treated as held) by an
individual who is not a citizen or resident of the United States (for U.S.
Federal estate tax purposes) at the time of his or her death will not be
included in such individual's gross estate for U.S. Federal estate tax purposes
provided that (i) the individual does not actually or constructively own 10% or
more of the total voting power of all voting stock of MEDIQ/PRN or Holdings (as
the case may be) and (ii) income on the Notes or Debentures was not effectively
connected with the conduct of a U.S. trade or business.
INFORMATION REPORTING AND BACKUP WITHHOLDING. MEDIQ/PRN and Holdings must
report annually to the Service and to each Non-U.S. Holder any interest or OID
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest or OID that is exempt from U.S. tax under
the portfolio interest exception. Copies of these information returns may also
be made available under the provisions of a specific treaty or agreement to the
tax authorities of the country in which the Non-U.S. Holder resides. In the case
of payments of principal or interest (including OID) to Non-U.S. Holders,
Treasury Regulations provide that information reporting and backup withholding
at a rate of 31% will not apply to such payments with respect to which either
the requisite certification has been received or an exemption has otherwise been
established (provided that neither the payor nor its paying agent has actual
knowledge that the holder is a U.S. person or the conditions of any other
exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of the Notes or Debentures
to or through the United States office of any broker, U.S. or foreign, will be
subject to information reporting and possibly backup withholding unless the
owner certifies as its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of Notes or Debentures to or through a non-U.S. office of a non-U.S.
broker that is not a U.S. related person will not be subject to information
reporting or backup withholding. For this purpose, a "U.S. related person" is
(i) a "controlled foreign corporation" for U.S. Federal income tax purposes or
(ii) a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business.
171
<PAGE>
In the case of the payment of proceeds from the disposition of Notes or
Debentures, to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, the Treasury Regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder and the broker has no knowledge to the
contrary. Backup withholding will not apply to payments made through foreign
offices of a broker that is not a U.S. person or a U.S. related person (absent
actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. Federal income tax liability, provided that the requisite
procedures are followed.
THE FOREGOING DISCUSSION IS BASED ON THE PROVISIONS OF THE CODE,
REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH ARE
SUBJECT TO CHANGE. ANY SUCH CHANGES MAY BE APPLIED RETROACTIVELY IN A MANNER
THAT COULD ADVERSELY AFFECT HOLDERS OF NOTES OR DEBENTURES. EACH PURCHASER OF
ANY OF THE NOTES OR DEBENTURES SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES TO IT, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS, OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE NOTES OR DEBENTURES.
LEGAL MATTERS
The validity of the New Securities offered hereby will be passed upon for
the Issuers by Dechert Price & Rhoads, New York, New York.
EXPERTS
The consolidated financial statements of MEDIQ Incorporated and subsidiaries
and MEDIQ/PRN Life Support Services, Inc. (a wholly owned subsidiary of MEDIQ
Incorporated) and subsidiaries as of September 30, 1997 and 1996, and for each
of the three years in the period ended September 30, 1997, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
172
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MEDIQ INCORPORATED AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Operations--Three Years Ended September 30, 1997................................ F-3
Consolidated Balance Sheets--September 30, 1997 and 1996................................................... F-4
Consolidated Statements of Stockholders' Equity--Three Years Ended September 30, 1997...................... F-5
Consolidated Statements of Cash Flows--Three Years Ended September 30, 1997................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
Unaudited Condensed Consolidated Statements of Operations--Six and Three Months Ended March 31, 1998 and
1997..................................................................................................... F-25
Unaudited Condensed Consolidated Balance Sheets--March 31, 1998 and
September 30, 1997....................................................................................... F-26
Unaudited Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31, 1998 and 1997........ F-27
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-28
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-33
Consolidated Statements of Operations--Three Years Ended September 30, 1997................................ F-34
Consolidated Balance Sheets--September 30, 1997 and 1996................................................... F-35
Consolidated Statements of Stockholders' Equity--Three Years Ended September 30, 1997...................... F-36
Consolidated Statements of Cash Flows--Three Years Ended September 30, 1997................................ F-37
Notes to Consolidated Financial Statements................................................................. F-38
Unaudited Condensed Consolidated Statements of Operations--Six and Three Months Ended March 31, 1998 and
1997..................................................................................................... F-50
Unaudited Condensed Consolidated Balance Sheets--March 31, 1998 and
September 30, 1997....................................................................................... F-51
Unaudited Condensed Consolidated Statements of Cash Flows--Six Months Ended March 31, 1998 and 1997........ F-52
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-53
CH MEDICAL, INC. AND SUBSIDIARIES
Consolidated Statements of Net Assets--August 31, 1997 and 1996............................................ F-56
Consolidated Statements of Income--Three Years Ended August 31, 1997....................................... F-57
Consolidated Statements of Cash Flows--Three Years Ended August 31, 1997................................... F-58
Summary of Accounting Policies............................................................................. F-59
Notes to Consolidated Financial Statements................................................................. F-61
Unaudited Consolidated Statements of Net Assets--February 28, 1998......................................... F-64
Unaudited Consolidated Statements of Income--Six Months Ended February 28, 1998 and 1997................... F-65
Unaudited Consolidated Statements of Cash Flows--Six Months Ended February 28, 1998 and 1997............... F-66
Unaudited Summary of Accounting Policies................................................................... F-67
Unaudited Notes to Consolidated Financial Statements....................................................... F-69
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MEDIQ Incorporated
Pennsauken, New Jersey
We have audited the accompanying consolidated balance sheets of MEDIQ
Incorporated and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MEDIQ Incorporated and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
November 25, 1997
F-2
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Rental...................................................... $ 124,316 $ 114,275 $ 117,043
Sales....................................................... 19,922 11,696 7,036
Other....................................................... 11,722 10,095 8,162
--------- --------- ---------
155,960 136,066 132,241
Costs and Expenses:
Cost of sales............................................... 16,334 9,534 5,686
Operating................................................... 56,609 47,934 47,478
Selling and administrative.................................. 23,154 20,795 24,714
Restructuring............................................... -- 2,200 --
Depreciation and amortization............................... 30,359 30,157 30,161
--------- --------- ---------
126,456 110,620 108,039
--------- --------- ---------
Operating Income.............................................. 29,504 25,446 24,202
Other (Charges) Credits:
Interest expense............................................ (19,107) (27,307) (29,241)
Interest income............................................. 2,069 1,452 1,502
Other--net.................................................. (9,573) (6,147) (121)
--------- --------- ---------
Income (Loss) from Continuing Operations before Income Tax
Expense (Benefit) and Extraordinary Item.................... 2,893 (6,556) (3,658)
Income Tax Expense (Benefit).................................. 5,134 (378) (312)
--------- --------- ---------
Loss from Continuing Operations before Discontinued Operations
and Extraordinary Item...................................... (2,241) (6,178) (3,346)
Discontinued Operations:
Income from operations (net of income taxes of $2,025,000 in
1996 and $3,393,000 in 1995).............................. -- 3,929 3,132
Gain (Loss) on disposal (net of income taxes of $20,507,000
in 1997, ($5,406,000) in 1996 and $953,000 in 1995)....... 34,941 (14,598) (4,733)
--------- --------- ---------
34,941 (10,669) (1,601)
--------- --------- ---------
Income (Loss) before Extraordinary Item....................... 32,700 (16,847) (4,947)
Extraordinary Gain (Loss), Early Retirement of Debt (net of
income taxes of ($5,316,000) in 1997 and $587,000 in
1996)....................................................... (8,037) 1,143 --
--------- --------- ---------
Net Income (Loss)............................................. $ 24,663 $ (15,704) $ (4,947)
--------- --------- ---------
--------- --------- ---------
Earnings Per Share:
Income (Loss) from:
Continuing Operations..................................... $ (.09) $ (.25) $ (.14)
Discontinued Operations................................... 1.35 (.43) (.06)
--------- --------- ---------
Income (Loss) before Extraordinary Item..................... 1.26 (.68) (.20)
Extraordinary Item.......................................... (.31) .05 --
--------- --------- ---------
Net Income (Loss)........................................... $ .95 $ (.63) $ (.20)
--------- --------- ---------
--------- --------- ---------
Weighted Average Shares Outstanding........................... 25,960 24,967 24,604
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................................... $ 3,639 $ 3,219
Accounts receivable (net of allowance of $4,077,000 in 1997 and
$2,383,000 in 1996)................................................................... 39,686 30,233
Inventories............................................................................. 13,047 6,614
Deferred income taxes................................................................... 6,967 2,447
Income taxes receivable................................................................. 4,917 310
Other current assets.................................................................... 1,495 2,280
---------- ----------
Total Current Assets.............................................................. 69,751 45,103
Investment in discontinued operations--restricted......................................... -- 64,967
Note receivable from MHM.................................................................. -- 3,967
Property, plant and equipment............................................................. 113,589 122,706
Goodwill.................................................................................. 57,056 58,321
Other assets.............................................................................. 17,156 13,359
---------- ----------
Total Assets.............................................................................. $ 257,552 $ 308,423
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................ $ 8,793 $ 8,907
Accrued expenses........................................................................ 22,732 27,729
State taxes payable..................................................................... 177 --
Other current liabilities............................................................... 669 458
Current portion of long-term debt....................................................... 7,648 8,520
---------- ----------
Total Current Liabilities........................................................... 40,019 45,614
Senior debt............................................................................... 128,131 192,461
Subordinated debt......................................................................... 10,055 41,229
Deferred income taxes..................................................................... 28,178 7,254
Other liabilities......................................................................... 2,566 4,420
Commitments and contingencies............................................................. -- --
Stockholders' Equity:
Preferred stock ($.50 par value: Authorized 20,000,000 shares; issued Series A:
6,644,000 in 1997 and 6,688,000 in 1996).............................................. 3,322 3,344
Common stock ($1 par value: Authorized 40,000,000 shares; issued 20,068,000 in 1997 and
19,191,000 in 1996)................................................................... 20,068 19,191
Capital in excess of par value.......................................................... 27,127 21,517
Retained earnings (Accumulated deficit)................................................. 2,892 (21,771)
Treasury stock, at cost (preferred shares: 377,000 in 1997 and 1996; common shares:
739,000 in 1997 and 772,000 in 1996).................................................. (4,806) (4,836)
---------- ----------
Total Stockholders' Equity.......................................................... 48,603 17,445
---------- ----------
Total Liabilities and Stockholders' Equity................................................ $ 257,552 $ 308,423
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
---------------------- -------------------- CAPITAL IN EARNINGS
SHARES SHARES EXCESS OF (ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT PAR VALUE DEFICIT)
----------- --------- --------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance October 1, 1994......................... 6,816 $ 3,408 19,064 $ 19,064 $ 22,357 $ (1,120)
Net loss........................................ (4,947)
Conversion of preferred stock to common stock... (64) (32) 63 63 (31)
Stock options exercised......................... (202)
----- --------- --------- --------- ----------- -------------
Balance September 30, 1995...................... 6,752 3,376 19,127 19,127 22,124 (6,067)
Net loss........................................ (15,704)
Conversion of preferred stock to common stock... (64) (32) 64 64 (32)
Stock options exercised......................... (575)
----- --------- --------- --------- ----------- -------------
Balance September 30, 1996...................... 6,688 3,344 19,191 19,191 21,517 (21,771)
Net income...................................... 24,663
Conversion of subordinated debentures to common
stock......................................... 833 833 5,417
Conversion of preferred stock to common stock... (44) (22) 44 44 (22)
Acquisition of SpectraCair......................
Stock options exercised......................... 215
----- --------- --------- --------- ----------- -------------
Balance September 30, 1997...................... 6,644 $ 3,322 20,068 $ 20,068 $ 27,127 $ 2,892
----- --------- --------- --------- ----------- -------------
----- --------- --------- --------- ----------- -------------
<CAPTION>
TREASURY
STOCK
---------
<S> <C>
Balance October 1, 1994......................... $ (7,429)
Net loss........................................
Conversion of preferred stock to common stock...
Stock options exercised......................... 386
---------
Balance September 30, 1995...................... (7,043)
Net loss........................................
Conversion of preferred stock to common stock...
Stock options exercised......................... 2,207
---------
Balance September 30, 1996...................... (4,836)
Net income......................................
Conversion of subordinated debentures to common
stock.........................................
Conversion of preferred stock to common stock...
Acquisition of SpectraCair...................... (404)
Stock options exercised......................... 434
---------
Balance September 30, 1997...................... $ (4,806)
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................... $ 24,663 $ (15,704) $ (4,947)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................... 30,359 30,157 30,161
Provision for doubtful accounts................................................. 3,234 1,237 993
Provision for deferred income taxes (benefit)................................... 29,480 (650) (434)
Reserve on note receivable from MHM............................................. 5,523 6,000 --
Cash provided by discontinued operations........................................ 660 3,240 7,532
(Income) loss from discontinued operations...................................... (34,941) 10,669 1,601
Extraordinary item, early extinguishment of debt................................ 2,879 (1,730) --
Gain on sale of Cardinal Stock.................................................. (9,213) -- --
Equity participation--PRN warrants.............................................. 11,047 625 --
Other........................................................................... 1,751 484 1,775
Increase (decrease), net of effects from acquisitions:
Accounts receivable............................................................. (8,067) (2,428) (11,305)
Inventories..................................................................... (6,397) (2,433) 1,758
Accounts payable................................................................ (1,577) 2,213 (108)
Accrued expenses................................................................ (4,402) (2,973) (3,036)
Federal and state taxes payable................................................. (36,273) -- (83)
Deferred income taxes........................................................... (2,559) 1,933 3,236
Other current assets and liabilities............................................ (4,930) (1,572) (824)
--------- --------- ---------
Net cash provided by operating activities........................................... 1,237 29,068 26,319
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets........................................................ -- 3,976 10,957
Proceeds from sale of discontinued operations....................................... 130,259 1,500 23,858
Purchase of equipment............................................................... (15,458) (18,073) (11,548)
Acquisition of SpectraCair.......................................................... (1,915) -- --
Note receivable from SpectraCair.................................................... -- (3,250) --
Payment of note receivable from SpectraCair......................................... -- 3,250 --
Repurchase of MEDIQ/PRN warrants.................................................... (12,500) (1,625) --
Other............................................................................... 947 (2,727) (6,636)
--------- --------- ---------
Net cash provided by (used in) investing activities................................. 101,333 (16,949) 16,631
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings.......................................................................... 214,000 25,747 1,190
Debt repayments..................................................................... (307,639) (39,045) (42,853)
Deferred financing fees............................................................. (8,874) -- --
Proceeds from exercise of options................................................... 363 1,432 184
--------- --------- ---------
Net cash used in financing activities............................................... (102,150) (11,866) (41,479)
--------- --------- ---------
Increase in cash.................................................................... 420 253 1,471
Cash:
Beginning balance................................................................. 3,219 2,966 1,495
--------- --------- ---------
Ending balance.................................................................... $ 3,639 $ 3,219 $ 2,966
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid..................................................................... $ 21,381 $ 25,563 $ 26,200
--------- --------- ---------
--------- --------- ---------
Income taxes paid................................................................. $ 7,553 $ 557 $ 205
--------- --------- ---------
--------- --------- ---------
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........................... $ -- $ 840 $ 1,808
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS--The Company rents movable critical care and life
support medical equipment, distributes disposable products, accessories and
repair parts used with the types of equipment it rents and provides other
services to its customers in the health care industry.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of MEDIQ Incorporated and its subsidiaries (the "Company").
Investments in companies owned 20% to 50% are accounted for under the equity
method of accounting. Investments in discontinued operations are stated at the
lower of cost or net realizable value. In consolidation, all significant
intercompany transactions and balances have been eliminated.
INVENTORIES--Inventories, which consist primarily of disposable products and
repair parts for rental equipment, are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT--Rental equipment, machinery and equipment,
buildings and improvements, and land are recorded at cost. Capital leases are
recorded at the lower of fair market value or the present value of future lease
payments. The Company provides straight-line depreciation and amortization over
the estimated useful lives (rental equipment and machinery and equipment--2 to
10 years and buildings and improvements--10 to 25 years).
GOODWILL--The cost of acquired businesses in excess of net assets is
amortized on a straight-line basis primarily over periods of 20 years.
Accumulated amortization was $18.6 million and $15.3 million as of September 30,
1997 and 1996, respectively.
CARRYING VALUE OF LONG-TERM ASSETS--The Company evaluates the carrying value
of long-term assets, including rental equipment, goodwill and other intangible
assets, based upon current and anticipated undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated cash flows will
be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value.
REVENUE RECOGNITION POLICY--The Company derives revenues from the following
sources: RENTAL-- rental of moveable medical equipment; SALES--sales of
disposable products, repair parts and equipment; and 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 bills the customer and
pays the OEM a fee based upon a percentage of the amount billed. Revenue share
arrangements have allowed the Company to generate revenue without any additional
capital investment. The Company bears the risk of loss relating to the equipment
and collection of revenue. The revenue related to the rental of such OEM-owned
equipment is included in rental revenue while the related fees are reflected in
operating expenses. The revenue related to the sale of the OEM's disposable
products is included in sales while the related fees are reflected in cost of
goods sold.
Rental revenue is recognized in accordance with the terms of the related
rental agreement and the usage of the related rental equipment. Revenues from
other operating activities are recognized as services are rendered, as income is
earned or as products are shipped.
F-7
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUBSIDIARY AND UNCONSOLIDATED AFFILIATE STOCK TRANSACTIONS--Gains (losses)
resulting from the issuance or repurchase of stock by subsidiaries and
unconsolidated affiliates are recognized by the Company as equity participation,
a component of Other Expense-net, in the Consolidated Statements of Operations.
EARNINGS (LOSS) PER SHARE--Primary net earnings (loss) per share are
computed by dividing net earnings (loss) by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include shares issuable upon conversion of the
Company's convertible preferred stock and exercise of outstanding stock options.
Fully diluted earnings per share are not disclosed because the calculation
results in dilution of less than 3%.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
RECLASSIFICATION OF ACCOUNTS--Certain reclassifications have been made to
conform prior years' balances to the current year presentation.
NOTE B--DISPOSITIONS
During fiscal 1997 the Company completed its previously announced strategy
of divesting substantially all operating assets other than MEDIQ/PRN Life
Support Services, Inc. ("MEDIQ/PRN") and MEDIQ Management Services, Inc. and
using the proceeds thereof to reduce indebtedness.
In November 1997, the Company sold to InnoServ Technologies ("InnoServ") all
of the 2,026,483 shares of InnoServ common stock owned by it, together with a
warrant to acquire additional shares of InnoServ common stock. Under the terms
of the agreement, no cash payment was made by InnoServ. However, the parties
agreed to terminate a non-compete covenant relating to maintenance and repair
services. In addition, in the event of a change of control of InnoServ before
September 30, 1998, the Company will be entitled to certain payments from the
acquiring party as if it had continued to own the shares. Accordingly, the
Company has recorded a reserve of $5 million before taxes ($1.3 million after
taxes) as a component of Income from Discontinued Operations in the Company's
Consolidated Statement of Operations. The Company had acquired the InnoServ
shares and warrant in connection with its 1994 sale of MEDIQ Equipment and
Maintenance Services, Inc.
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 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 million, or $.04 per share in addition to
the estimated net loss on the disposal recorded in fiscal 1996. The charge is
reflected as a component of Income from Discontinued Operations in the Company's
Consolidated Statement of Operations.
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. Under the terms of the agreement, 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 is payable
when NutraMax
F-8
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE B--DISPOSITIONS (CONTINUED)
shares owned by the Company, which currently are held in escrow in support of
the Company's 7.50% Exchangeable Subordinated Debentures ("7.50% debentures"),
are released from that escrow. The NutraMax shares are to be released from
escrow upon the purchase or redemption of the 7.50% debentures. In the event the
7.50% debentures are exchanged into shares of NutraMax, the note receivable will
be reduced on a pro rata basis. The note does not bear a market rate of interest
for its full term. Accordingly, the Company discounted the note to $13.6 million
and recognized an after-tax gain of $4.8 million.
From January through September 1997, the Company repurchased $17.8 million
of the 7.50% debentures in the open market and a private transaction (See Note
H) 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 pre-tax
gain as a result of the recognition of a portion of the discount on the note.
The gain is reflected in Other Expense-net on the Company's Consolidated
Statement of Operations. At September 30, 1997, the balance of the note
receivable was $4.8 million, net of a discount of $1.1 million. The cash
proceeds from these transactions were used to reduce debt.
In November 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 at the closing with
the possibility of the Company receiving additional cash consideration based
upon the occurrence of certain future events. In July 1997, the Company sold the
IHS shares at an amount which approximated its carrying value. Also, in fiscal
1997 the Company received approximately $1.1 million in additional cash
consideration.
On October 11, 1996, PCI Services, Inc. ("PCI"), was acquired by Cardinal
Health, Inc. ("Cardinal"). In that transaction, the Company received 1,449,000
shares (adjusted for stock split) of Cardinal stock in exchange for its 46%
ownership interest in PCI. The Company recognized an after-tax gain of $32.6
million on this transaction as a component of Income from Discontinued
Operations in the Company's Consolidated Statement of Operations. The Company
sold its Cardinal shares in January 1997 for $88.4 million and used the proceeds
to reduce debt.
In September 1996, the Company sold its common stock investment in
HealthQuest to management for approximately $75,000 which approximated its
carrying value.
In August 1995, the Company sold the assets of MEDIQ Imaging Services, Inc.,
to NMC Diagnostic Services Inc., a division of W.R. Grace & Co., for
approximately $17.0 million in cash, and the assumption of $9.7 million of debt.
In June 1995, the Company sold Medifac, Inc. and related assets to the
management of Medifac for approximately $11.0 million, consisting of $6.0
million in cash and $5.0 million in notes, and the assumption of $26.9 million
of non-recourse debt.
Revenues from discontinued operations (excluding equity investees) were $6.6
million, $36.8 million and $78.4 million in 1997, 1996 and 1995 respectively.
F-9
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE C--RESTRUCTURING CHARGE
In the first quarter of fiscal 1996, the Company recorded a restructuring
charge of $2.2 million for employee severance costs incurred in connection with
a plan approved by the Board of Directors to downsize corporate functions and
consolidate certain activities with the operations of MEDIQ/PRN. The plan
resulted in the termination of 29 employees in fiscal 1996. The Company paid
approximately $1.5 million of severance benefits through September 30, 1997 with
the balance of the restructuring obligation due over the next two fiscal years.
NOTE D--UNIVERSAL HOSPITAL SERVICES, INC.
In February 1997, the Company entered into a definitive agreement with
Universal Hospital Services, Inc. ("UHS") to acquire the outstanding shares of
UHS for $17.50 per share. Including the assumption of debt, the total purchase
price would have been $138.0 million. In April 1997, the shareholders of UHS
approved the acquisition subject to Federal regulatory approval pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act. In July 1997, the Company and UHS
were informed by the Federal Trade Commission ("FTC") that it had authorized its
staff to take legal action to block the proposed transaction, and subsequently
the FTC filed a motion for a preliminary injunction to block the transaction. In
September 1997, facing the likelihood of a protracted administrative proceeding
before the FTC, the uncertainty of the outcome and the costs associated with
continuing to defend against the efforts of the FTC to prevent the merger, the
Company and UHS mutually terminated the proposed acquisition. The Company
wrote-off $4.0 million ($2.4 million net of taxes, or $.09 per share) of
deferred acquisition and financing costs related to the proposed acquisition
which is included in Other Expense-net in the Company's Consolidated Statement
of Operations.
NOTE E--ACQUISITION
On September 18, 1997, the Company's wholly owned subsidiary, MEDIQ/PRN,
acquired the remaining 50% interest in its SpectraCair Joint Venture
("SpectraCair") from a subsidiary of Huntleigh Healthcare ("Huntleigh") for $1.9
million in cash and the assumption of Huntleigh's portion of the outstanding
debt of SpectraCair. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on their estimated fair market values at
the date of the acquisition. The excess of the purchase price over the estimated
fair values of the net assets acquired was recorded as goodwill and is being
amortized over twenty years.
F-10
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE F--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Rental equipment...................................................... $ 229,095 $ 211,948
Equipment and fixtures................................................ 12,787 11,460
Building and improvements............................................. 7,589 7,486
Land.................................................................. 149 149
---------- ----------
249,620 231,043
Less accumulated depreciation and amortization........................ (136,031) (108,337)
---------- ----------
$ 113,589 $ 122,706
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense related to property, plant and
equipment was $26.5 million, $26.3 million and $26.1 million in 1997, 1996 and
1995, respectively.
NOTE G--ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Interest................................................................ $ 2,135 $ 5,360
Payroll and related taxes............................................... 3,588 3,756
Severance............................................................... 2,431 2,971
Government investigations............................................... 4,200 6,000
Insurance............................................................... 1,960 1,632
Pension................................................................. 1,961 2,188
Other................................................................... 6,457 5,822
--------- ---------
$ 22,732 $ 27,729
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE H--LONG TERM DEBT
Senior debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Term loans............................................................ $ 128,933 $ 27,448
Revolving credit facilities........................................... 3,500 --
Capital lease obligations payable in varying installments through 1999
at fixed rates from 9.1% to 13.6%................................... 3,346 6,204
Senior secured notes due 1999......................................... -- 100,000
Lines of credit....................................................... -- 26,030
7.25% convertible subordinated debentures due 2006.................... -- 22,500
10% subordinated notes due 2004....................................... -- 8,799
10% subordinated notes due 1999....................................... -- 10,000
---------- ----------
135,779 200,981
Less current portion.................................................. 7,648 8,520
---------- ----------
$ 128,131 $ 192,461
---------- ----------
---------- ----------
</TABLE>
Subordinated debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Corporate debt:
7.50% exchangeable subordinated debentures due 2003................... $ 10,055 $ 34,500
7.25% convertible subordinated debentures due 2006.................... -- 6,729
--------- ---------
$ 10,055 $ 41,229
--------- ---------
--------- ---------
</TABLE>
On October 1, 1996, the Company, together with MEDIQ/PRN entered into a $260
million Credit Agreement with a group of lenders led by Banque Nationale de
Paris as Administrative Agent and NationsBank, N.A. as the Documentation Agent.
(the "Existing Credit Agreement"). The Credit Agreement provides 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 allowed the Company
to refinance substantially all of its existing senior debt, its outstanding
lines of credit, all of MEDIQ/PRN's subordinated debt, and MEDIQ/PRN's $100
million 11 1/8% Senior Secured Notes due 1999. Accordingly, the Company
reflected the outstanding balances of its lines of credit, certain subordinated
debt and Senior Secured Notes as long-term senior debt on its Consolidated
Balance Sheet at September 30, 1996.
In January 1997, the Credit Agreement was amended to increase certain
components of the facility by $50 million, subject to approval of the proposed
acquisition of UHS pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
and by UHS' stockholders. This amendment was terminated in conjunction with the
termination of the proposed acquisition of UHS in September 1997. In November
1997, the Acquisition Revolver was reduced to $25 million.
F-12
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE H--LONG TERM DEBT (CONTINUED)
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 September 30, 1997)
plus .5% or Eurodollar (6.0625% at September 30, 1997) plus 2.0% and the
interest rate on the Term B loan is prime plus 1.25% or Eurodollar plus 2.75%.
During fiscal 1997, the weighted average interest rates were as follows: (i)
Term A loan--8.45%, (ii) Acquisition Revolver--8.56%, (iii) Working Capital
Revolver-- 9.15%, and (iv) Term B loan--9.00%. The loans are collateralized by
substantially all of the assets of the Company. The proceeds from the sales of
PCI, NutraMax, Mobile X-Ray and Health Examinetics were utilized to repay
outstanding advances under the Acquisition Revolver upon receipt.
The Term A loan is payable in quarterly installments of $1.2 million from
December 31, 1996 through September 30, 2001 and in quarterly installments of
$2.7 million from December 31, 2001 through September 30, 2002. The Term B loan
is payable in quarterly installments of $250,000 from December 31, 1996 through
September 30, 2002, quarterly installments of $8.5 million in fiscal 2003 and
quarterly installments of $15 million in fiscal 2004. The Company can borrow and
repay under the Acquisition Revolver until March 31, 1998 in accordance with the
Credit Agreement. On March 31, 1998, the Acquisition Revolver converts to a term
loan which will be repaid in quarterly installments beginning on June 30, 1998.
The first two installments will be at 5.0% of the converted balance and all
remaining quarterly payments will be at 5.625% of the converted balance. The
Working Capital Revolver terminates on September 30, 2002 at which time all
outstanding balances are due.
The Credit Agreement requires the Company to maintain certain financial
ratios and imposes certain other financial limitations. The terms of the
Company's Credit Agreement precluded the payment of cash dividends until October
1, 1997. The Company does not intend to pay any dividends in the foreseeable
future.
As a result of the refinancing, the Company recognized an extraordinary
charge of $13.0 million ($7.7 million net of taxes) resulting from the write-off
of deferred charges and premiums incurred related principally to the tender
offer to purchase the $100 million 11 1/8% Senior Secured Notes due 1999, and a
non-recurring charge of $11.0 million for the repurchase of a warrant to
purchase 10% of the capital stock of MEDIQ/PRN issued in connection with
financing the Kinetic Concepts, Inc. acquisition. The non-recurring charge is
reflected as equity participation, a component of Other Expense-net, in the
Company's Consolidated Statement of Operations.
The 7.50% debentures are exchangeable into shares of NutraMax common stock
owned by the Company, at an equivalent of $15.30 per share, and are redeemable
in whole or in part at the option of the Company. The NutraMax shares are also
held in escrow under the terms of an agreement of sale, as discussed in Note B.
Interest is payable semi-annually on January 15 and July 15. In fiscal 1997, the
Company repurchased $24.4 million of the 7.50% debentures in the open market at
a discount. 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 $26,000 net of taxes.
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
F-13
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE H--LONG TERM DEBT (CONTINUED)
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.
Maturities of long-term debt giving effect to the refinancing described
above are as follows:
<TABLE>
<CAPTION>
SUBORDINATED
(IN
YEAR ENDING SEPTEMBER 30, SENIOR THOUSANDS) TOTAL
- -------------------------------------------------------------------------- ---------- ------------- ----------
<S> <C> <C> <C>
1998...................................................................... $ 7,648 $ -- $ 7,648
1999...................................................................... 7,148 -- 7,148
2000...................................................................... 5,914 -- 5,914
2001...................................................................... 5,788 -- 5,788
2002...................................................................... 15,475 -- 15,475
Thereafter................................................................ 93,806 10,055 103,861
---------- ------------- ----------
$ 135,779 $ 10,055 $ 145,834
---------- ------------- ----------
---------- ------------- ----------
</TABLE>
F-14
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE I--FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap contracts ("swap contracts") to
manage interest rate exposure. The principal objective of such contracts is to
minimize the risks and/or costs associated with financial activities. The
Company does not utilize swap contracts for trading or other speculative
purposes. The counterparties to these contractual agreements are a diverse group
of major financial institutions with which the Company also has other financial
relationships. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. However, the Company does not anticipate
nonperformance by the other parties.
INTEREST RATE INSTRUMENTS: The Company enters into interest rate swap and
interest rate collar contracts to reduce the impact of changes in interest rates
on its floating rate debt. The swap contracts exchange floating rate for fixed
interest payments periodically over the life of the contracts without the
exchange of the underlying notional amounts. The notional amounts of swap
contracts are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. For swap contracts that
effectively hedge interest rate exposures, the net cash amounts paid or received
on the contract are accrued and recognized as an adjustment to interest expense.
As of September 30, 1997, the Company had the following interest rate
instruments in effect (notional amounts in thousands; the swap and collar rates
are based on 3-month LIBOR):
<TABLE>
<CAPTION>
1997
-------------------------------------
NATIONAL STRIKE
AMOUNT RATE PERIOD
--------- ----------- -------------
<S> <C> <C> <C>
Interest rate swap.......................................... $ 50,000 6.26% 10/97--1/98
Interest rate collar........................................ 50,000 7.43% 10/97--1/98
50,000 5.25% 10/97--1/98
</TABLE>
NOTE J--COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain equipment, automobiles and office space.
The future minimum lease payments under noncancelable operating leases and
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
(IN THOUSANDS)
1998..................................................................... $ 2,104 $ 4,249
1999..................................................................... 1,499 2,627
2000..................................................................... 128 1,870
2001..................................................................... -- 831
2002 and thereafter...................................................... -- 342
--------- -----------
Total minimum lease payments............................................. 3,731 $ 9,919
-----------
-----------
Amount representing interest............................................. 385
---------
Present value of minimum lease payments.................................. $ 3,346
---------
---------
</TABLE>
F-15
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense under operating leases was $5.6 million, $5.2 million and
$5.4 million in 1997, 1996 and 1995, respectively. Certain leases, which are for
terms of up to 5 years, contain options to renew for additional periods.
At September 30, 1997, rental equipment and machinery and equipment included
assets under capitalized lease obligations of $11.5 million, less accumulated
amortization of $4.3 million.
PURCHASE COMMITMENTS--Pursuant to a Distribution Agreement and several
purchase agreements with vendors, MEDIQ/PRN has agreed to purchase approximately
$31.0 million of certain products in the next two fiscal years. The Company
purchased $1.2 million, $5.9 million and $2.4 million under purchase commitment
agreements in 1997, 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS--The Company maintains employment agreements with two
of its Executive Officers and certain officers and employees of its
subsidiaries. Such agreements, which automatically renew each year unless
terminated as described in the agreement, provide for minimum salary levels,
adjusted annually in accordance with Company policy, as well as for incentive
bonuses that are payable if specified management goals are attained. A majority
of the employment agreements contain provisions for severance payments unless
the individual is terminated for cause or resigns. As of September 30, 1997, the
aggregate minimum commitment under these employment agreements, excluding
bonuses, was approximately $6,000,000. In addition, the agreements provide for
special bonuses to be paid to the Executive Officers, as well as the former
Chief Financial Officer, if a Sale Transaction were to occur (as defined in the
agreement). The special bonuses are based on the aggregate value of any future
transaction, and accordingly cannot be determined at this time.
INVESTIGATIONS AND LEGAL PROCEEDINGS--MEDIQ Imaging, the assets of which
were sold by the Company in August 1995, was the subject of a civil
investigation by the United States Attorney's Office for the District of New
Jersey and the Department of Health and Human Services. The investigation
focused on advice given by certain MEDIQ Imaging employees to physician
customers of MEDIQ Imaging relating to the reassignment of certain Medicare
claims. The Company and MEDIQ Imaging voluntarily reported the issue to the U.S.
Government in January 1995 after learning that the advice given by the employees
may have been inconsistent with the regulations relating to reassignment. The
Company and MEDIQ Imaging cooperated in the investigation and denied any
wrongdoing. In December 1997, desiring to avoid the delay, expense, and
uncertainty of protracted litigation, the Company reached a settlement with the
U.S. Government for $4.2 million, which was fully reserved as of September 30,
1997. The settlement represents the repayment of alleged excess Medicare
reimbursements.
In February 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 challenged 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. In addition, beginning in February 1997, MHM
stopped making the required monthly installments on the note, and therefore, 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. In September 1997,
as a result of continued deterioration in MHM's financial condition, the Company
recorded a reserve for the remaining balance of the note receivable, which had
been partially reserved in 1996, and accrued interest on the note receivable. In
October 1997, the Company filed a motion for summary judgment against MHM. In
November 1997, the Court granted summary judgment in
F-16
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
favor of the Company and against MHM on all counts. Specifically, the Court
ruled that the note receivable was valid and enforceable. The Court also
rejected MHM's request for a stay pending appeal. MHM has filed a Motion for
Reconsideration which is currently pending.
Mobile X-Ray, the assets of which the Company sold in November 1996, was the
subject of an investigation by the Wage and Hour Division of the United States
Department of Labor (the "DOL"). The DOL had indicated that it believed that the
practice of treating technologists as exempt professionals was incorrect. The
Company maintained that the practice of treating x-ray technologists as exempt
was correct and proper. In May 1997, the Company reached a settlement with the
DOL which required the Company to pay certain Mobile X-Ray employees back wages
aggregating $213,000 including legal fees. The back wages were paid in September
1997.
On June 12, 1996, the Company, ATS Medical Services, Inc. ("ATS") and Mobile
X-Ray were sued in the United States District Court for the Middle District of
Pennsylvania by Gerard and Sharon Callie, who are both former employees of ATS.
The lawsuit alleges that the Callies were wrongfully terminated and asserts
claims pursuant to the whistleblower provisions of the False Claims Act and the
Pennsylvania Wage Payment and Collection Law. The plaintiffs made a demand for
damages totaling nearly $800,000. The Company believes it has no liability and
intends to vigorously defend this case. Trial has been scheduled for February
1998.
In addition, the Company has pending several legal claims incurred in the
normal course of business, which in the opinion of management, will not have
material effect on the consolidated financial statements.
NOTE K--FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments is provided in accordance with
the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--The carrying amounts of these
items are an estimate of their fair values at September 30, 1997.
LONG-TERM DEBT (EXCLUDING CAPITAL LEASE OBLIGATIONS)--The fair value of
the Company's publicly-traded debt is based on quoted market prices.
Interest rates that are currently available to the Company for issuance of
debt with similar terms and remaining maturities are used to estimate fair
value for debt issues for which quoted market prices are not available. The
carrying amount and estimated fair value of long-term debt are $145.8
million and $146.2 million, respectively.
F-17
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE K--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST RATE INSTRUMENTS--The fair values are the estimated amounts
that the Company would receive or pay to terminate the agreements at
September 30, 1997, taking into account current interest rates and the
current creditworthiness of the counterparties. At September 30, 1997, the
notional amounts were $100 million, the carrying value was $61,000 and the
fair value was $304,000, which represents the cost to settle these
instruments.
The fair value estimates presented herein are based on information available
to management as of September 30, 1997, and have not been comprehensively
revalued for purposes of these financial statements since that date. Current
estimates of fair value may differ significantly from the amounts presented
herein.
NOTE L--COMMON AND PREFERRED STOCK
Series A preferred stock is convertible on a one-for-one basis into shares
of common stock, votes generally with the common stock as a single class, and in
all such votes, has ten votes per share. The preferred stock participates in
cash dividends at a rate equal to 60% of the amount paid on the common stock and
has a $.50 per share preference in the event of dissolution or liquidation.
NOTE M--INCOME TAXES
Income tax expense (benefit) relating to continuing operations consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Current:
Federal............................................. $ (24,397) $ -- $ --
State............................................... 51 272 122
---------- --------- ---------
(24,346) 272 122
---------- --------- ---------
Deferred:
Federal............................................. 29,641 (810) (1,432)
State............................................... (161) 160 998
---------- --------- ---------
29,480 (650) (434)
---------- --------- ---------
Total income tax expense (benefit)................ $ 5,134 $ (378) $ (312)
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-18
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE M--INCOME TAXES (CONTINUED)
The differences between the Company's income tax expense (benefit) and the
income tax expense (benefit) computed using the U.S. federal income tax rate
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Statutory federal tax expense (benefit)............... $ 984 $ (2,229) $ (1,244)
State income taxes, net of federal income taxes....... (72) 1,201 739
Goodwill amortization................................. 350 368 344
Equity Participation--PRN warrants.................... 3,756 213 --
Other items--net...................................... 116 69 (151)
--------- --------- ---------
Income tax expense (benefit).......................... $ 5,134 $ (378) $ (312)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Depreciation.......................................................... $ 28,004 $ 30,105
Intangible assets..................................................... 2,050 13,887
Accrued Expenses...................................................... 4,510 4,720
Prepaid Expenses...................................................... 117 76
Other................................................................. 768 674
--------- ---------
Gross deferred tax liabilities...................................... 35,449 49,462
Assets:
Net operating and capital loss carry forwards......................... 4,894 29,478
Tax credit carry forwards............................................. 1,997 5,878
Accrued expenses and reserves......................................... 6,972 8,721
Intangible assets..................................................... 364 231
Other................................................................. 4,905 3,504
--------- ---------
Gross deferred tax assets........................................... 19,132 47,812
Valuation allowance................................................... (4,894) (3,157)
--------- ---------
14,238 44,655
--------- ---------
Net deferred tax liability............................................ $ 21,211 $ 4,807
--------- ---------
--------- ---------
</TABLE>
During fiscal 1997, the Company utilized $49.7 million of net operating loss
carry forwards and $25.5 million of capital loss carry forwards. At September
30, 1997, for income tax purposes, the Company had alternative minimum tax
credit carry forwards of approximately $1.6 million. State net operating loss
carry forwards were $81.6 million, expire through 2010, and are fully reserved
in the valuation allowance. The
F-19
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE M--INCOME TAXES (CONTINUED)
Company also had a carry forward of Investment Tax Credit and Rehabilitation Tax
Credit of $219,000 expiring through 2003.
NOTE N--RELATED PARTY TRANSACTIONS
In connection with the spin-off of MHM in fiscal 1993, MHM was obligated to
the Company pursuant to a promissory note with MHM in the original amount of
$11.5 million due in August 1998. The note bears interest at the prime rate plus
1.5% with interest payments only through fiscal 1995. Principal and interest
payments commenced October 1, 1996. The Company recorded interest income related
to the MHM note of $1.0 million, $1.1 million and $1.2 million in 1997, 1996 and
1995, respectively. As a result of the continued deterioration in MHM's
financial condition, the Company established reserves of $5.5 million and $6.0
million on amounts due from MHM, including accrued interest, in fiscal 1997 and
1996 respectively.
In 1997, 1996 and 1995, the Company incurred legal fees of approximately
$2.2 million, $657,000, and $700,000 respectively, to a law firm in which the
Company's Chairman of the Board of Directors was a partner.
In 1997 and 1996, the Company incurred consulting fees of approximately
$85,000 and $126,000 respectively to a law firm of which another member of the
Board of Directors is a partner.
The Company derived revenues of $33,000, $175,000 and $340,000 in 1997, 1996
and 1995, respectively, pursuant to agreements to provide financial management,
legal and risk management services to PCI, NutraMax, MHM and InnoServ.
NOTE O--STOCK OPTION PLANS
The Company maintains stock option plans (the "Plans") for the benefit of
officers and key employees of the Company and its subsidiaries. Options granted
vest over periods up to five years and are exercisable for periods up to ten
years from the date of grant at a price which equals fair market value at the
date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have been reduced by $556,000 and $.02 per share, respectively, for fiscal 1997
and $129,000 and $.01 per share respectively, for fiscal 1996.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-20
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE O--STOCK OPTION PLANS (CONTINUED)
The following summarizes all stock option transactions for the Company under
the Plans from October 1, 1994 through September 30, 1997:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996 FISCAL 1995
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........... 1,686 $ 3.89 1,111 $ 3.10 1,442 $ 3.13
Granted.................................. 553 8.06 1,153 4.49 21 4.11
Exercised................................ (37) 3.98 (575) 2.87 (60) 3.06
Canceled................................. (160) 7.04 (3) 4.22 (292) 3.39
----- ----- ----- ----- ----- -----
Outstanding, end of year................. 2,042 $ 4.97 1,686 $ 3.89 1,111 $ 3.10
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Exercisable, end of year................. 893 $ 4.13 617 $ 3.43 1,111 $ 3.10
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The weighted average fair value of options granted during fiscal 1997 and
1996 was $2.1 million and $2.3 million respectively. The fair value of the
options granted were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in both fiscal
1997 and 1996: risk-free interest rates ranging from 5.48% to 6.43%, expected
life of 7 years, expected volatility of 36% and dividend yield of 0%.
Information relative to stock options outstanding as of September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES OPTIONS LIFE IN YEARS PRICE OPTIONS PRICE
- --------------------------- ----------- ------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
(000'S) (000'S)
$2.73--$3.49............... 395 1.36 $ 3.06 395 $ 3.06
$4.00--$5.3125............. 1,208 7.64 4.47 410 4.33
$8.06--$8.13............... 439 9.75 8.06 88 8.06
----- --- ----- --- -----
2,042 6.60 $ 4.97 893 $ 4.13
----- --- ----- --- -----
----- --- ----- --- -----
</TABLE>
As of September 30, 1997, approximately 461,000 additional shares were
available to be issued pursuant to the Plans.
NOTE P--PENSION PLAN
The Company maintains a noncontributory pension plan which provides
retirement benefits to substantially all employees. Employees generally are
eligible to participate in the plan after one year of service and become fully
vested after five years of service. The plan provides defined benefits based on
years of credited service and compensation. The Company makes contributions that
are sufficient to fully
F-21
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE P--PENSION PLAN (CONTINUED)
fund its actuarially determined cost, generally equal to the minimum amounts
required by ERISA. Assets of the plan consist primarily of stocks, bonds and
annuities.
Net periodic pension expense is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period............... $ 451 $ 609 $ 785
Interest cost on projected benefit obligation................. 1,158 1,066 929
Actual return on plan assets.................................. (3,029) (1,463) (1,642)
Net amortization and deferrals................................ 1,952 544 851
--------- --------- ---------
Net periodic pension expense.................................. $ 532 $ 756 $ 923
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents the funded status of the Company's pension plan
and the amounts reflected in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits..................................................... $ (15,116) $ (13,141)
---------- ----------
---------- ----------
Accumulated benefit obligation...................................... $ (15,857) $ (13,713)
---------- ----------
---------- ----------
Projected benefit obligation.......................................... $ (16,680) $ (14,539)
Plan assets at fair value............................................. 16,528 13,663
---------- ----------
Projected benefit obligation in excess of plan assets................. (152) (876)
Unrecognized net gain................................................. (2,047) (1,673)
Balance of unrecorded transition obligation........................... 238 361
---------- ----------
Accrued pension liability............................................. $ (1,961) $ (2,188)
---------- ----------
---------- ----------
</TABLE>
The actuarial assumptions used in determining net periodic pension costs
were:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Discount rate.................................................... 7.5% 8% 8%
Expected long-term return on plan assets......................... 8% 8% 8%
Weighted average rate of increase in compensation levels......... 5% 5% 4.5%
</TABLE>
F-22
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE Q--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except per share data) for
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues (A)..................................................... $ 35,483 $ 42,566 $ 39,625 $ 38,286
Operating income (A)............................................. 6,538 10,189 7,781 4,996
Income (loss) from continuing operations......................... (7,491) 6,357 2,561 (3,668)(C)
Income (loss) from discontinued operations....................... 37,241(B) (66) (1,092) (1,142)
Extraordinary item............................................... (6,464) (462) (76) (1,035)
Net income (loss)................................................ 23,286 5,829 1,393 (5,845)
Earnings per share:
Income (loss) from continuing operations......................... (.30) .25 .10 (.14)
Income (loss) from discontinued operations....................... 1.47 -- (.04) (.04)
Extraordinary item............................................... (.25) (.02) -- (.04)
Net income (loss)................................................ .92 .23 .06 (.22)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues (A)..................................................... $ 32,093 $ 36,999 $ 34,386 $ 32,588
Operating income (A)............................................. 2,912(D) 10,161 6,899 5,474
Income (loss) from continuing operations......................... (2,370) 1,273 293 (5,374) (C)
Income (loss) from discontinued operations....................... 1,002 1,542 (1,514) (11,699) (E)
Extraordinary item............................................... 1,001 -- 153 (11)
Net income (loss)................................................ (367) 2,815 (1,068) (17,084)
Earnings per share:
Income (loss) from continuing operations......................... (.09) .05 .01 (.22)
Income (loss) from discontinued operations....................... .04 .06 (.06) (.47)
Extraordinary item............................................... .04 -- .01 --
Net income (loss)................................................ (.01) .11 (.04) (.69)
</TABLE>
- ------------------------
(A) Reflects seasonal nature of MEDIQ/PRN's business.
(B) Reflects gain on sales of PCI and NutraMax, net of taxes.
(C) Includes MHM reserves of $3.6 million in 1997 and $3.9 million in 1996,
respectively, and the write-off of UHS deferred acquisition costs of $2.4
million, net of tax benefits.
(D) Includes non-recurring expenses of $2.2 million related to the restructuring
charge.
(E) Reflects adjustment of the Company's reserve for the disposal of
discontinued operations.
F-23
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997
NOTE R--BUSINESS SEGMENT DATA
The Company operates primarily in one business segment. The Company, through
MEDIQ/PRN, rents movable medical equipment on a short-term basis nationwide and
distributes a variety of disposable products, accessories and repair parts used
with the types of equipment it rents. This segment represents more than 90% of
the consolidated revenues, operating profit and assets exclusive of corporate
assets.
NOTE S--NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Board has issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"),
which was adopted by the Company in fiscal year 1997 as required by the
statement. The Company has elected to continue to measure such compensation
expense using the method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," as permitted by SFAS 123. (See
Note O)
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 determined that the adoption of this standard will not
have a material impact 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 the adoption of this standard will have on the Company's financial
statements.
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 the adoption of this
standard will have on the Company's financial statements.
F-24
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rental.............................................................................. $ 36,599 $ 34,076 $ 69,993 $ 63,193
Sales............................................................................... 7,285 5,731 13,979 9,459
Other............................................................................... 2,525 2,759 5,007 5,397
--------- --------- --------- ---------
46,409 42,566 88,979 78,049
Costs and Expenses:
Cost of sales....................................................................... 5,779 4,685 11,270 7,759
Operating........................................................................... 14,003 11,477 28,449 22,228
Selling............................................................................. 3,938 3,754 7,557 6,570
General and administrative.......................................................... 4,534 5,097 9,348 10,034
Non-recurring merger costs.......................................................... 306 -- 363 --
Depreciation and amortization....................................................... 8,294 7,364 16,586 14,731
--------- --------- --------- ---------
36,854 32,377 73,573 61,322
--------- --------- --------- ---------
Operating Income.................................................................... 9,555 10,189 15,406 16,727
Other (Charges) Credits:
Interest expense.................................................................... (3,578) (5,409) (7,235) (11,922)
Equity participation--repurchase of MEDIQ/PRN warrants.............................. -- -- -- (11,047)
Gain on sale and market appreciation of Cardinal Health stock....................... -- 4,021 -- 9,213
Gain on NutraMax note receivable.................................................... -- 1,195 -- 1,195
Other--net.......................................................................... 251 679 479 1,144
--------- --------- --------- ---------
Income from Continuing Operations before Income Taxes and Extraordinary Item........ 6,228 10,675 8,650 5,310
Income Tax Expense.................................................................. 2,799 4,318 3,888 6,444
--------- --------- --------- ---------
Income (loss) before Discontinued Operations and Extraordinary Item................. 3,429 6,357 4,762 (1,134)
Discontinued Operations (net of taxes).............................................. -- (66) -- 37,175
Extraordinary Item--Early Retirement of Debt (net of taxes)......................... -- (462) -- (6,926)
--------- --------- --------- ---------
Net Income.......................................................................... $ 3,429 $ 5,829 $ 4,762 $ 29,115
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Continuing Operations............................................................... $ .13 $ .25 $ .19 $ (.04)
Discontinued Operations............................................................. -- -- -- 1.49
Extraordinary Item.................................................................. -- (.02) -- (.28)
--------- --------- --------- ---------
Net Income.......................................................................... $ .13 $ .23 $ .19 $ 1.17
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Shares Outstanding................................................. 25,635 25,042 25,624 24,922
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--assuming dilution:
Continuing Operations............................................................... $ .13 $ .25 $ .18 $ (.04)
Discontinued Operations............................................................. -- -- -- 1.49
Extraordinary Item.................................................................. -- (.02) -- (.28)
--------- --------- --------- ---------
Net Income.......................................................................... $ .13 $ .23 $ .18 $ 1.17
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted Average Shares Outstanding................................................. 26,455 26,117 26,358 24,922
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-25
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
------------ ----------------
<S> <C> <C>
(Unaudited) (See Note)
ASSETS
Current Assets:
Cash............................................................................ $ 3,925 $ 3,639
Accounts receivable--net........................................................ 46,385 39,686
Inventories..................................................................... 15,428 13,047
Deferred income taxes........................................................... 4,297 6,967
Income taxes receivable......................................................... -- 4,917
Other current assets............................................................ 1,197 1,495
------------ --------
Total Current Assets.......................................................... 71,232 69,751
Property, plant and equipment--net................................................ 113,703 113,589
Goodwill--net..................................................................... 55,558 57,056
Other Assets...................................................................... 13,287 17,156
------------ --------
Total assets...................................................................... $ 253,780 $ 257,552
------------ --------
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 10,667 $ 8,793
Accrued expenses................................................................ 15,802 23,401
State taxes payable............................................................. 870 177
Current portion of long-term debt............................................... 6,534 7,648
------------ --------
Total Current Liabilities..................................................... 33,873 40,019
Senior debt....................................................................... 127,311 128,131
Subordinated debt................................................................. 10,055 10,055
Deferred income taxes and other liabilities....................................... 29,045 30,744
Stockholders' Equity.............................................................. 53,496 48,603
------------ --------
Total Liabilities and Stockholders' Equity........................................ $ 253,780 $ 257,552
------------ --------
------------ --------
</TABLE>
Note: The balance sheet at September 30, 1997 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
F-26
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------------
<S> <C> <C>
1998 1997
---------- -----------
Cash Flows from Operating Activities:
Net income............................................................................... $ 4,762 $ 29,115
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Income from discontinued operations.................................................... -- (37,175)
Gain on sale of Cardinal shares........................................................ -- (9,213)
Equity participation--repurchase of MEDIQ/PRN warrants................................. -- 11,047
Other--net............................................................................. 9,969 (4,242)
---------- -----------
Net cash provided by (used in) operating activities...................................... 14,731 (10,468)
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations.......................................... -- 120,790
Proceeds from sale of equipment and other assets....................................... -- 546
Purchase of equipment.................................................................. (15,275) (8,005)
Collections on note receivable......................................................... 2,250 --
Repurchase of MEDIQ/PRN warrant........................................................ -- (12,500)
Other.................................................................................. 384 (3,043)
---------- -----------
Net cash provided by (used in) investing activities.................................... (12,641) 97,788
Cash Flows from Financing Activities:
Borrowings............................................................................. 11,000 214,000
Debt repayments........................................................................ (12,934) (293,126)
Deferred financing fees................................................................ -- (8,746)
Exercise of stock options.............................................................. 130 272
---------- -----------
Net cash provided by (used in) financing activities.................................... (1,804) (87,600)
---------- -----------
Increase (decrease) in cash.............................................................. 286 (280)
Cash:
Beginning balance...................................................................... 3,639 3,219
---------- -----------
Ending balance......................................................................... $ 3,925 $ 2,939
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Interest paid.......................................................................... $ 6,792 $ 13,034
---------- -----------
---------- -----------
Income taxes paid (refunded)........................................................... $ (3,416) $ 3,249
---------- -----------
---------- -----------
Supplemental disclosure of non-cash investing and financing activities:
Conversion of 7.25% subordinated debentures into common stock.......................... $ -- $ 6,251
---------- -----------
---------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-27
<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 March 31, 1998 and the
condensed consolidated statements of operations and cash flows for the six
months ended March 31, 1998 and 1997 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 March 31, 1998 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, 1997 Annual Report on Form 10-K.
The results of operations for the period ended March 31, 1998 are not
necessarily indicative of the operating results for the full year.
RECLASSIFICATION OF ACCOUNTS--Certain reclassifications have been made to
conform prior year balances to the current year presentation.
NOTE B--INVENTORIES
Inventories, which consist primarily of disposable products and repair parts
for rental equipment, are stated at the lower of cost (first-in, first-out
method) or market.
NOTE C--NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
Per Share," which changes the computation and presentation of earnings per
share. The Company was required to adopt this standard during its quarter ended
December 31, 1997. In connection with the consummation of the Merger
F-28
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
(as discussed in Note D), the Company's equity structure and earnings per share
data will change materially.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
Basic EPS:
Income from Continuing Operations...................................... $ 3,429 25,635 $ 0.13
Effect of Dilutive Securities:
Assumed exercise of stock options...................................... -- 820
------ ------
Diluted EPS:
Income from Continuing Operations...................................... $ 3,429 26,455 $ 0.13
------ ------ -----
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
Basic EPS:
Income from Continuing Operations...................................... $ 6,357 25,042 $ 0.25
Effect of Dilutive Securities:
Assumed exercise of stock options...................................... -- 479
Assumed conversion of debentures....................................... 103 596
------ ------
Diluted EPS:
Income from Continuing Operations...................................... $ 6,460 26,117 $ 0.25
------ ------ -----
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 31, 1998
-------------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
Basic EPS:
Income from Continuing Operations...................................... $ 4,762 25,624 $ 0.19
Effect of Dilutive Securities:
Assumed exercise of stock options...................................... -- 734
------ ------
Diluted EPS:
Income from Continuing Operations...................................... $ 4,762 26,358 $ 0.18
------ ------ -----
------ ------ -----
</TABLE>
F-29
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<S> <C> <C> <C>
Basic EPS:
Loss from Continuing Operations........................................ $ (1,134) 24,922 $ (0.04)
Effect of Dilutive Securities:
Assumed exercise of stock options...................................... -- 388
Assumed conversion of debentures....................................... 404 1,492
------------ ------
Diluted EPS:
Loss from Continuing Operations........................................ $ (730) 26,802(a) $ (0.04)(a)
------------ ------ -----------
------------ ------ -----------
</TABLE>
- ------------------------
(a) In accordance with the provisions of SFAS No. 128, no potential common
shares shall be included in the computation of any diluted per-share amount
when a loss from continuing operations exists, even if the entity reports
net income. Accordingly, earnings per share--assuming dilution for the six
months ended March 31, 1997 on the face of the Statement of Operations
reflects the same earnings per share and weighted average shares outstanding
as for the basic EPS calculation.
The Financial Accounting Standards Board has issued SFAS No. 132,
"Employers' Disclosures about Pensions and other Postretirement Benefits." This
statement, which improves disclosure about pensions and other postretirement
benefits, is effective for fiscal years beginning after December 15, 1997,
although earlier application is permitted. At this time, the Company has not
determined the impact the adoption of this standard will have on the Company's
financial statements.
NOTE D--THE MERGER
On January 15, 1998, the Company announced that, pursuant to the terms of a
definitive agreement and plan of merger dated as of January 14, 1998, (as
amended on April 27, 1998, the "Merger Agreement"), MQ Acquisition Corporation
("Acquiror"), a Delaware corporation formed by Bruckmann, Rosser, Sherrill &
Co., L.P. ("BRS"), has agreed to enter into a transaction with the Company
whereby Acquiror will be merged with and into the Company (the "Merger"), with
the Company being the Surviving Corporation in the Merger (the "Surviving
Corporation"). In the Merger, holders of the Company's outstanding Common Stock
and Preferred Stock will be entitled to receive, in exchange for each
outstanding share of Common Stock or Preferred Stock (except for shares held
directly or indirectly by the Company or MQ, the Rolled Shares (as defined
below) and dissenting shares), $13.75 in cash, without interest, and 0.075 of a
share of a newly created Series A 13% Cumulative Compounding Preferred Stock,
par value $.01 per share (the "13% Senior Preferred Stock") of the Surviving
Corporation. The 13% Senior Preferred Stock will have a liquidation preference
of $10.00 per share. The aggregate consideration payable pursuant to the Merger,
including amounts payable to holders of options, is expected to be approximately
$390.7 million.
In connection with, and as a condition to entering into the Merger
Agreement, Acquiror required that Bessie G. Rotko, Michael J. Rotko, Judith M.
Shipon and a trust established by the late Bernard B. Rotko for the benefit of
certain members of his family (together, the "Rotko Entities") enter into an
agreement pursuant to which they will receive 109,781 shares of the Common Stock
of the Surviving Corporation
F-30
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--THE MERGER (CONTINUED)
equal to 11.0% of the total outstanding shares of Common Stock of the Surviving
Corporation and 1,340,219 shares of newly created Series B Preferred Stock of
the Surviving Corporation, in exchange for 1,000,000 shares of outstanding
Preferred Stock of the Company presently held by the Rotko Entities (the "Rolled
Shares"). The Rotko Entities have also been given the right, following the
Merger, to appoint a representative to the Company's Board of Directors. Michael
J. Rotko will be so appointed by the Rotko Entities.
The Rotko Entities also granted Acquiror an option, pursuant to a certain
Stock Option Agreement, to purchase up to 4,701,464 shares of the Company's
Common Stock and up to 4,730,006 shares of the Company's Preferred Stock owned
by them, representing a majority of the outstanding Preferred Stock and a
majority of the outstanding total voting power of the Preferred Stock and the
Common Stock, voting together as a single class. The option is exercisable upon
the occurrence of certain events, as set forth in more detail in the Stock
Option Agreement and will terminate upon the consummation of the Merger and upon
the occurrence of certain other events. The Rotko Entities also entered into
certain Stockholder Agreements under which they have agreed to vote in favor of,
and otherwise to support the Merger, subject to the limitations set forth
therein. The affirmative vote of the shares of the Company's stock subject to
the Stockholder Agreements will be sufficient to approve the Merger and the
Merger Agreement.
Thomas E. Carroll, President and Chief Executive Officer, and Jay M. Kaplan,
Senior Vice President-Finance and Chief Financial Officer, and such other
members of management as may be selected by the Company and BRS are expected to
purchase $4.2 million of the common and preferred equity of the Surviving
Corporation.
The transaction is intended to be treated as a recapitalization for
financial reporting purposes. The Board of Directors of the Company and a
Special Committee thereof have unanimously approved the Merger Agreement and the
Merger. The Merger is subject to customary closing conditions in addition to the
Company's shareholder approval, including the termination or expiration of the
relevant waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and funding of committed financing. On
February 24, 1998, termination under the HSR Act was granted. BRS has received
financing commitments for the transactions from Credit Suisse First Boston
Corporation, Credit Suisse First Boston, NationsBank, N.A., NationsBanc
Montgomery Securities LLC, NationsBridge LLC and Banque Nationale de Paris,
which commitments are subject to certain conditions.
Simultaneously with the Merger, the Company will refinance substantially all
of its existing debt except for capital leases and the Company's 7.5%
Exchangeable Subordinated Debentures (the "Exchangeable Debentures") (the
"Refinancing"). Pursuant to the terms of the indenture related to the
Exchangeable Debentures, upon consummation of the Merger the holders of the
Exchangeable Debentures will have the right to require the Company to repurchase
their Exchangeable Debentures at 100% of the principal amount thereof, together
with accrued and unpaid interest.
The Merger and the Refinancing are expected to be funded by (i) investments
by BRS, certain persons affiliated with BRS and certain funds affiliated with
Ferrer Freeman Thompson & Co. LLC and Galen Partners III (collectively, the
"Investors") of approximately $109.5 million, (ii) the $4.2 million investment
by various members of management, (iii) a $14.5 million investment by the Rotko
Entities, (iv) funds from a new $275.0 million Senior Credit Facility, (v) funds
from $265.0 million of Senior Subordinated Notes,
F-31
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--THE MERGER (CONTINUED)
(vi) funds from $50.0 million of Senior Discount Debentures, and (vii) existing
cash balances. After consummation of the Merger, the Company anticipates it will
have up to $50.0 million available for working capital, $75.0 million available
to finance future acquisitions and $50.0 million available to consummate the CH
Medical Acquisition (see Note E) under the new Senior Credit Facility.
Upon consummation of the Merger, the Investors will own approximately 82.9%
of the Surviving Corporation's common stock, the Rotko Entities will own
approximately 11.0% and management will own approximately 6.1%.
On January 15, 1998, a complaint, purporting to be a class action, was filed
in Delaware Chancery Court, naming the Company and each of its directors as
defendants and seeking to enjoin consummation of the Merger, or, in the
alternative, compensatory damages. Plaintiff alleges generally that the
directors have breached fiduciary duties to stockholders. The Company believes
that the allegations in the complaint are completely without merit and intends
to vigorously defend this case. Based on the information currently available,
the Company believes that resolution of the claim will not have a material
adverse effect on the operations or financial condition of the Company.
NOTE E--SUBSEQUENT EVENT
The Company, through its wholly-owned subsidiary MEDIQ/PRN Life Support
Services, Inc., entered into an Asset Purchase Agreement with CH Industries,
Inc., certain direct and indirect subsidiaries, including CH Medical, Inc. and
subsidiaries ("CH Medical"), and certain other parties dated as of April 24,
1998, to purchase specified assets and rights of the Sellers (the "CH Medical
Business") 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 CH Medical Business (the "CH Medical Acquisition").
The Company currently expects to finance the purchase price and related costs
and expenses for the CH Medical Acquisition with $50.0 million of Term Loans
under a new Senior Credit Facility to be entered into in connection with the
Merger (see Note D). Consummation of the CH Medical Acquisition is subject to
the receipt of all statutory and regulatory consents and approvals, due
diligence and other conditions of closing.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MEDIQ/PRN Life Support Services, Inc.
Pennsauken, New Jersey
We have audited the accompanying consolidated balance sheets of MEDIQ/PRN
Life Support Services, Inc. (a wholly-owned subsidiary of MEDIQ Incorporated)
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MEDIQ/PRN Life Support
Services, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, in May
1998, MEDIQ Incorporated completed a restructuring of the legal organization of
certain of its subsidiaries. The Company's consolidated financial statements
have been presented giving effect to the reorganization for all periods
presented in a manner similar to a pooling of interests.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 21, 1998
F-33
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Revenues:
Rental..................................................................... $ 124,316 $ 114,275 $ 117,043
Sales...................................................................... 19,922 11,696 7,036
Other...................................................................... 11,915 10,858 8,087
---------- ---------- ----------
156,153 136,829 132,166
Costs and Expenses:
Cost of sales.............................................................. 16,334 9,534 5,686
Operating.................................................................. 56,609 47,934 47,478
Selling and administrative................................................. 20,931 18,424 17,800
Management fees--MEDIQ..................................................... 3,341 920 920
Depreciation and amortization.............................................. 30,333 30,105 30,051
---------- ---------- ----------
127,548 106,917 101,935
---------- ---------- ----------
Operating Income............................................................. 28,605 29,912 30,231
Other (Charges) Credits:
Interest expense........................................................... (16,912) (20,478) (21,176)
Interest income............................................................ 985 49 182
Other--net................................................................. 6,989 589 (336)
---------- ---------- ----------
Income from Continuing Operations before Income Tax Expense and Extraordinary
Item....................................................................... 19,667 10,072 8,901
Income Tax Expense........................................................... 7,438 4,201 4,650
---------- ---------- ----------
Income from Continuing Operations before Discontinued Operations and
Extraordinary Item......................................................... 12,229 5,871 4,251
Discontinued Operations:
Income from operations (net of income taxes of $3,027,000 in 1996 and
$2,437,000 in 1995)...................................................... -- 5,596 3,962
Gain (Loss) on disposal (net of income taxes of $24,548,000 in 1997,
($3,427,000) in 1996 and $366,000 in 1995)............................... 36,432 (6,681) (7,322)
---------- ---------- ----------
36,432 (1,085) (3,360)
---------- ---------- ----------
Income before Extraordinary Item............................................. 48,661 4,786 891
Extraordinary Loss, Early Retirement of Debt (net of income taxes of
($5,172,000) in 1997 and ($9,000) in 1996)................................. (7,757) (17) --
---------- ---------- ----------
Net Income................................................................... $ 40,904 $ 4,769 $ 891
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
ASSETS
Current Assets:
Cash............................................................................... $ 3,472 $ 2,811
Accounts receivable (net of allowance of $4,077,000 in 1997 and $2,377,000 in
1996)............................................................................ 39,686 30,168
Inventories........................................................................ 13,047 6,614
Deferred income taxes.............................................................. 2,010 1,975
Other current assets............................................................... 1,183 195
---------- ----------
Total Current Assets......................................................... 59,398 41,763
Investment in discontinued operations--restricted.................................... -- 52,410
Property, plant and equipment........................................................ 113,589 122,673
Goodwill............................................................................. 57,056 57,700
Other assets......................................................................... 17,249 10,198
---------- ----------
Total Assets................................................................... $ 247,292 $ 284,744
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................................................... $ 8,791 $ 8,676
Accrued expenses................................................................... 20,605 24,227
Other current liabilities.......................................................... 669 458
Current portion of long-term debt.................................................. 16,115 8,520
---------- ----------
Total Current Liabilities.................................................... 46,180 41,881
Senior debt.......................................................................... 119,664 155,941
Deferred income taxes................................................................ 28,385 37,859
Other liabilities.................................................................... 990 1,443
Commitments and contingencies........................................................ -- --
Stockholder's Equity:
Common stock ($10 par value: Authorized 2,000 shares; issued 1,000 shares)......... 10 10
Capital in excess of par value..................................................... 86,457 98,962
Retained earnings.................................................................. 53,924 13,058
Advances to Parent................................................................. (88,318) (64,410)
---------- ----------
Total Stockholder's Equity..................................................... 52,073 47,620
---------- ----------
Total Liabilities and Stockholder's Equity..................................... $ 247,292 $ 284,744
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- CAPITAL IN
SHARES EXCESS OF RETAINED ADVANCES
ISSUED AMOUNT PAR VALUE EARNINGS TO PARENT
----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1994................................... 1,000 $ 10 $ 164,661 $ 2,837 $ (101,736)
Net income................................................ 891
Increase in advances to Parent--net....................... (10,779)
----- --------- ---------- --------- -----------
Balance September 30, 1995................................ 1,000 10 164,661 3,728 (112,515)
Net income................................................ 4,769
Dividends................................................. (65,699) 4,561 57,575
Increase in advances to Parent--net....................... (9,470)
----- --------- ---------- --------- -----------
Balance September 30, 1996................................ 1,000 10 98,962 13,058 (64,410)
Net income................................................ 40,904
Dividends................................................. (5) (38) 438
Repurchase of warrants.................................... (12,500)
Increase in advances to Parent--net....................... (24,346)
----- --------- ---------- --------- -----------
Balance September 30, 1997................................ 1,000 $ 10 $ 86,457 $ 53,924 $ (88,318)
----- --------- ---------- --------- -----------
----- --------- ---------- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 40,904 $ 4,769 $ 891
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 30,333 30,105 30,051
Provision for doubtful accounts.................................................. 3,214 1,237 991
Provision for deferred income taxes (benefit).................................... (790) 1,026 4,528
(Income) loss from discontinued operations....................................... (36,432) 1,085 3,360
Extraordinary item, early extinguishment of debt................................. 2,457 25 --
Gain on sale of Cardinal Stock................................................... (9,213) -- --
Other............................................................................ 1,625 (1,705) 1,842
Increase (decrease), net of effects from acquisitions:
Accounts receivable.............................................................. (8,085) (2,452) (11,274)
Inventories...................................................................... (6,397) (2,433) 1,758
Accounts payable................................................................. (1,351) 2,444 (150)
Accrued expenses................................................................. 4,330 (74) 1,770
Deferred income taxes............................................................ (9,048) (4,046) 4,033
Other current assets and liabilities............................................. (2,613) (64) (1,980)
--------- --------- ---------
Net cash provided by operating activities.......................................... 8,934 29,917 35,820
Cash Flows From Investing Activities
Proceeds from sale of assets....................................................... -- 3,977 10,299
Proceeds from sale of discontinued operations...................................... 130,159 -- 17,470
Purchase of equipment.............................................................. (15,458) (18,073) (11,543)
Acquisition of SpectraCair......................................................... (1,915) -- --
Other.............................................................................. 1,201 (1,258) 1,924
--------- --------- ---------
Net cash provided by (used in) investing activities................................ 113,987 (15,354) 18,150
Cash Flows From Financing Activities
Borrowings......................................................................... 214,000 12,010 960
Debt repayments.................................................................... (247,032) (16,574) (27,079)
Repurchase of MEDIQ/PRN warrants................................................... (12,500) -- --
Deferred financing fees............................................................ (8,874) -- --
Advances to Parent................................................................. (67,854) (9,223) (27,342)
--------- --------- ---------
Net cash used in financing activities.............................................. (122,260) (13,787) (53,461)
--------- --------- ---------
Increase in cash................................................................... 661 776 509
Cash:
Beginning balance................................................................ 2,811 2,035 1,526
--------- --------- ---------
Ending balance................................................................... $ 3,472 $ 2,811 $ 2,035
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid...................................................................... $ 18,101 $ 18,473 $ 18,364
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of non-cash investing and financing activities:
Equipment financed with long-term debt and capital leases.......................... $ -- $ 840 $ 1,808
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS-- MEDIQ/PRN Life Support Services, Inc., a
Delaware corporation, and subsidiaries (the "Company") is a wholly-owned
subsidiary of MEDIQ Incorporated ("MEDIQ"). The Company rents movable critical
care, life support and other medical equipment, sells a variety of disposable
products, accessories and repair parts primarily used with the types of
equipment it rents and provides other services to its customers in the health
care industry.
PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements include
the accounts of the Company and all wholly-owned subsidiaries. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated.
On May 20, 1998, MEDIQ completed a restructuring of the legal organization
of certain of its subsidiaries (the "Reorganization"). The Reorganization
involved MEDIQ's contribution to the Company of ownership interests in certain
of its consolidated subsidiaries (the "Contributed Subsidiaries"), all of which
were under MEDIQ's direct or indirect control as of the date of the
Reorganization. The Reorganization has been accounted for in a manner similar to
a pooling of interests. Accordingly, the Company's consolidated financial
statements include the accounts of the Contributed Subsidiaries for all periods
presented.
The contributed subsidiaries include: MEDIQ Imaging Services, Inc. and MEDIQ
Mobile X-Ray Services Inc. (substantially all of the assets of these two
entities were sold in fiscal years 1995 and 1997, respectively), MEDIQ
Management Services, Inc. and MEDIQ Investment Services, Inc. (including its
equity investments PCI Services, Inc. and NutraMax Products, Inc. ). Certain
non-operating entities which have been dissolved into MEDIQ in fiscal years 1996
and 1997 were also treated as having been contributed for all applicable periods
presented.
INVENTORIES-- Inventories, which consist primarily of disposable products
and repair parts for rental equipment, are stated at the lower of cost
(first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT-- Rental equipment, machinery and equipment,
buildings and improvements, and land are recorded at cost. Capital leases are
recorded at the lower of fair market value or the present value of future lease
payments. The Company provides straight-line depreciation and amortization over
the estimated useful lives (rental equipment and machinery and equipment--2 to
10 years and buildings and improvements--10 to 25 years).
GOODWILL-- The cost of acquired businesses in excess of net assets is
amortized on a straight-line basis primarily over periods of 20 years.
Accumulated amortization was $13.1 million and $9.8 million as of September 30,
1997 and 1996, respectively.
CARRYING VALUE OF LONG-TERM ASSETS-- The Company evaluates the carrying
value of long-term assets, including rental equipment, goodwill and other
intangible assets, based upon current and anticipated undiscounted cash flows,
and recognizes an impairment when it is probable that such estimated cash flows
will be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value.
REVENUE RECOGNITION POLICY-- The Company derives revenues from the
following sources: RENTAL-- rental of moveable medical equipment; SALES--sales
of disposable products, repair parts and equipment; and OTHER--logistical
services, maintenance and reconditioning services and management consulting
services.
F-38
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 bills the customer and
pays the OEM a fee based upon a percentage of the amount billed.
Revenue share arrangements have allowed the Company to generate revenue
without any additional capital investment. The Company bears the risk of loss
relating to the equipment and collection of revenue. The revenue related to the
rental of such OEM-owned equipment is included in rental revenue while the
related fees are reflected in operating expenses. The revenue related to the
sale of the OEM's disposable products is included in sales while the related
fees are reflected in cost of goods sold.
Rental revenue is recognized in accordance with the terms of the related
rental agreement and the usage of the related rental equipment. Revenues from
other operating activities are recognized as services are rendered, as income is
earned or as products are shipped.
INCOME TAXES-- The Company is included in the consolidated federal tax
return of MEDIQ. The Company's provision or benefit is determined as if all tax
credits and losses are utilized currently. Calculation of the Company's income
taxes on a separate return basis would not result in any change to the amounts
reflected in the accompanying financial statements.
ESTIMATES-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
RECLASSIFICATION OF ACCOUNTS-- Certain reclassifications have been made to
conform prior years' balances to the current year presentation.
NOTE B--DISPOSITIONS
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. Under the terms of the agreement, 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 is payable
when NutraMax shares owned by the Company, which currently are held in escrow in
support of MEDIQ's 7.50% Exchangeable Subordinated Debentures ("7.50%
debentures"), are released from that escrow. The NutraMax shares are to be
released from escrow upon the purchase or redemption of the 7.50% debentures. In
the event the 7.50% debentures are exchanged into shares of NutraMax, the note
receivable will be reduced on a pro rata basis. The note does not bear a market
rate of interest for its full term. Accordingly, the Company discounted the note
to $13.6 million and recognized an after-tax gain of $4.8 million.
From January through September 1997, the Company repurchased $17.8 million
of MEDIQ's 7.50% debentures in the open market and a private transaction 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 Expense-net on the Company's Consolidated Statement
of Operations. At September 30, 1997, the balance of the note
F-39
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--DISPOSITIONS (CONTINUED)
receivable was $4.8 million, net of a discount of $1.1 million. The cash
proceeds from these transactions were used to reduce debt.
In November 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 at the closing with
the possibility of the Company receiving additional cash consideration based
upon the occurrence of certain future events. In July 1997, the Company sold the
IHS shares at an amount which approximated its carrying value. Also, in fiscal
1997 the Company received approximately $1.1 million in additional cash
consideration.
On October 11, 1996, PCI Services, Inc. ("PCI"), was acquired by Cardinal
Health, Inc. ("Cardinal"). In that transaction, the Company received 1,449,000
shares (adjusted for stock split) of Cardinal stock in exchange for its 46%
ownership interest in PCI. The Company recognized an after-tax gain of $32.6
million on this transaction as a component of Income from Discontinued
Operations in the Company's Consolidated Statement of Operations. The Company
sold its Cardinal shares in January 1997 for $88.4 million and used the proceeds
to reduce debt.
In August 1995, the Company sold the assets of MEDIQ Imaging Services, Inc.,
to NMC Diagnostic Services Inc., a division of W.R. Grace & Co., for
approximately $17 million in cash, and the assumption of $9.7 million of debt.
Revenues from discontinued operations (excluding equity investees) were $2.5
million, $28.5 million and $53.2 million in 1997, 1996 and 1995 respectively.
NOTE C--UNIVERSAL HOSPITAL SERVICES, INC.
In February 1997, the Company entered into a definitive agreement with
Universal Hospital Services, Inc. ("UHS") to acquire the outstanding shares of
UHS for $17.50 per share. Including the assumption of debt, the total purchase
price would have been $138.0 million. In April 1997, the shareholders of UHS
approved the acquisition subject to federal regulatory approval pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act. In July 1997, the Company and UHS
were informed by the Federal Trade Commission ("FTC") that it had authorized its
staff to take legal action to block the proposed transaction, and subsequently
the FTC filed a motion for a preliminary injunction to block the transaction. In
September 1997, facing the likelihood of a protracted administrative proceeding
before the FTC, the uncertainty of the outcome and the costs associated with
continuing to defend against the efforts of the FTC to prevent the merger, the
Company and UHS mutually terminated the proposed acquisition. The Company
wrote-off $4.0 million ($2.4 million net of taxes, or $.09 per share) of
deferred acquisition and financing costs related to the proposed acquisition
which is included in Other Expense-net in the Company's Consolidated Statement
of Operations.
NOTE D--SPECTRACAIR ACQUISITION
On September 18, 1997, the Company acquired the remaining 50% interest in
its SpectraCair Joint Venture ("SpectraCair") from a subsidiary of Huntleigh
Healthcare ("Huntleigh") for $1.9 million in cash and the assumption of
Huntleigh's portion of the outstanding debt of SpectraCair. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based on
their estimated fair market values at the date of the
F-40
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--SPECTRACAIR ACQUISITION (CONTINUED)
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired was recorded as goodwill and is being amortized over
twenty years.
NOTE E--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Rental equipment........................................................... $ 229,095 $ 211,948
Equipment and fixtures..................................................... 12,787 10,585
Building and improvements.................................................. 7,589 7,486
Land....................................................................... 149 149
---------- ----------
249,620 230,168
Less accumulated depreciation and amortization............................. (136,031) (107,495)
---------- ----------
$ 113,589 $ 122,673
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense related to property, plant and
equipment was $26.5 million, $26.3 million and $26.0 million in 1997, 1996 and
1995, respectively.
NOTE F--ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Interest...................................................................... $ 1,978 $ 3,994
Payroll and related taxes..................................................... 3,588 3,757
Severance..................................................................... 2,431 2,971
Government investigations..................................................... 4,200 6,000
Insurance..................................................................... 1,960 1,677
Other......................................................................... 6,448 5,828
--------- ---------
$ 20,605 $ 24,227
--------- ---------
--------- ---------
</TABLE>
F-41
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--LONG-TERM DEBT
Senior debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Term loans................................................................. $ 128,933 $ 27,448
Revolving credit facilities................................................ 3,500 --
Capital lease obligations payable in varying installments through 1999 at
fixed rates from 9.1% to 13.6%........................................... 3,346 6,204
Senior secured notes due 1999.............................................. -- 100,000
Lines of credit............................................................ -- 12,010
10% subordinated notes due 2004............................................ -- 8,799
10% subordinated notes due 1999............................................ -- 10,000
---------- ----------
135,779 164,461
Less current portion....................................................... 16,115 8,520
---------- ----------
$ 119,664 $ 155,941
---------- ----------
---------- ----------
</TABLE>
On October 1, 1996, the Company, together with MEDIQ, entered into a $260
million Credit Agreement with a group of lenders led by Banque Nationale de
Paris as Administrative Agent and NationsBank, N.A. as the Documentation Agent
(the "Credit Agreement"). The Credit Agreement provides 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 allowed the Company to refinance
substantially all of its existing senior debt including its outstanding lines of
credit, its subordinated debt, and its $100 million 11 1/8% Senior Secured Notes
due 1999. Accordingly, the Company reflected the outstanding balances of its
lines of credit, its subordinated debt and Senior Secured Notes as long-term
senior debt on its Consolidated Balance Sheet at September 30, 1996.
As a result of the refinancing, the Company recognized an extraordinary
charge of $13 million ($7.8 million net of taxes) resulting from the write-off
of deferred charges and premiums incurred related principally to the tender
offer to purchase the $100 million 11 1/8% Senior Secured Notes due 1999. In
connection with the refinancing, the Company repurchased outstanding warrants to
purchase 10% of the capital stock of the Company issued in connection with
financing the Kinetic Concepts, Inc. acquisition for $12.5 million which is
reflected as a reduction of Capital in Excess of Par Value.
In January 1997, the Credit Agreement was amended to increase certain
components of the facility by $50 million, subject to approval of the proposed
acquisition of UHS pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
and by UHS' stockholders. This amendment was terminated in conjunction with the
termination of the proposed acquisition of UHS in September 1997. In November
1997, the Acquisition Revolver was reduced to $25 million.
On March 31, 1998, the Company made a mandatory prepayment on its Term A and
Term B loans of approximately $9.3 million in accordance with the terms of its
Credit Agreement. Accordingly, the Term A and Term B loans' quarterly
installments were reduced on a pro rata basis. The Term A loan is payable in
quarterly installments of $932,000 from March 31, 1998 through September 30,
2001 and in quarterly installments of $2.1 million from December 31, 2001
through September 30, 2002. The Term B loan is payable in quarterly installments
of $242,000 from March 31, 1998 through September 30, 2002, quarterly
installments of $8.2 million in fiscal 2003 and quarterly installments of $14.5
million in fiscal 2004. Also on
F-42
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--LONG-TERM DEBT (CONTINUED)
March 31, 1998, the Acquisition Revolver which had no outstanding balance,
expired. The Working Capital Revolver terminates on September 30, 2002 at which
time all outstanding amounts are due.
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 September 30, 1997)
plus .5% or Eurodollar (6.0625% at September 30, 1997) plus 2.0% and the
interest rate on the Term B loan is prime plus 1.25% or Eurodollar plus 2.75%.
During fiscal 1997, the weighted average interest rates were as follows: (i)
Term A loan--8.45%, Acquisition Revolver--8.56%, (iii) Working Capital
Revolver--9.15%, and (iv) Term B loan--9.00%. The loans are collateralized by
substantially all of the assets of the Company. The proceeds from the sales of
PCI, NutraMax, Mobile X-Ray and Health Examinetics were utilized to repay
outstanding advances under the Acquisition Revolver upon receipt.
The Credit Agreement requires the Company to maintain certain financial
ratios and imposes certain other financial limitations. The terms of the
Company's Credit Agreement precluded the payment of cash dividends until October
1, 1997. The Company does not intend to pay any dividends in the foreseeable
future.
Maturities of senior debt giving effect to the refinancing described above
are as follows:
<TABLE>
<S> <C>
YEAR ENDING SEPTEMBER 30,
1998................................................. $ 16,115
1999................................................. 6,057
2000................................................. 4,823
2001................................................. 4,697
2002................................................. 13,013
Thereafter........................................... 91,074
---------
$ 135,779
---------
---------
</TABLE>
NOTE H--FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap contracts ("swap contracts") to
manage interest rate exposure. The principal objective of such contracts is to
minimize the risks and/or costs associated with financial activities. The
Company does not utilize swap contracts for trading or other speculative
purposes. The counterparties to these contractual agreements are a diverse group
of major financial institutions with which the Company also has other financial
relationships. The Company is exposed to credit loss in the event of
nonperformance by these counterparties. However, the Company does not anticipate
nonperformance by the other parties.
INTEREST RATE INSTRUMENTS: The Company enters into interest rate swap and
interest rate collar contracts to reduce the impact of changes in interest rates
on its floating rate debt. The swap contracts exchange floating rate for fixed
interest payments periodically over the life of the contracts without the
exchange of the underlying notional amounts. The notional amounts of swap
contracts are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. For swap contracts that
effectively hedge interest rate exposures, the net cash amounts paid or received
on the contract are accrued and recognized as an adjustment to interest expense.
F-43
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--FINANCIAL INSTRUMENTS (CONTINUED)
As of September 30, 1997, the Company had the following interest rate
instruments in effect (notional amounts in thousands; the swap and collar rates
are based on 3-month LIBOR):
<TABLE>
<CAPTION>
1997
-----------------------------------
<S> <C> <C> <C>
NOTIONAL STRIKE
AMOUNT RATE PERIOD
--------- ----------- -----------
Interest rate swap..................................................... $ 50,000 6.26% 10/97-1/98
Interest rate collar................................................... 50,000 7.43% 10/97-1/98
50,000 5.25% 10/97-1/98
</TABLE>
NOTE I--COMMITMENTS AND CONTINGENCIES
LEASES-- The Company leases certain equipment, automobiles and office
space. The future minimum lease payments under noncancelable operating leases
and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
- ----------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
(IN THOUSANDS)
1998............................................................................... $ 2,104 $ 4,244
1999............................................................................... 1,499 2,627
2000............................................................................... 128 1,870
2001............................................................................... -- 831
2002 and thereafter................................................................ -- 342
--------- -----------
Total minimum lease payments....................................................... 3,731 $ 9,914
-----------
-----------
Amount representing interest....................................................... 385
---------
Present value of minimum lease payments............................................ $ 3,346
---------
---------
</TABLE>
Total rent expense under operating leases was $5.6 million, $5.1 million and
$5.3 million in 1997, 1996 and 1995, respectively. Certain leases, which are for
terms of up to 5 years, contain options to renew for additional periods.
At September 30, 1997, rental equipment and machinery and equipment included
assets under capitalized lease obligations of $11.5 million, less accumulated
amortization of $4.3 million.
PURCHASE COMMITMENTS-- Pursuant to a Distribution Agreement and several
purchase agreements with vendors, the Company has agreed to purchase
approximately $31 million of certain products in the next two fiscal years. The
Company purchased $1.2 million, $5.9 million and $2.4 million under purchase
commitment agreements in 1997, 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS-- The Company maintains employment agreements with
two of its Executive Officers and certain officers and employees of its
subsidiaries. Such agreements, which automatically renew each year unless
terminated as described in the agreement, provide for minimum salary levels,
adjusted annually in accordance with Company policy, as well as for incentive
bonuses that are payable if specified management goals are attained. A majority
of the employment agreements contain provisions for severance payments unless
the individual is terminated for cause or resigns. As of September 30, 1997, the
aggregate minimum commitment under these employment agreements, excluding
bonuses, was approximately $6.0 million. In addition, the agreements provide for
special bonuses to be paid to the Executive
F-44
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Officers if a Sale Transaction were to occur (as defined in the agreements). The
special bonuses are based on the aggregate value of any transaction, and based
upon the aggregate consideration of the Merger as discussed in Note O would
approximate $4.3 million.
INVESTIGATIONS AND LEGAL PROCEEDINGS-- MEDIQ Imaging, the assets of which
were sold by the Company in August 1995, was the subject of a civil
investigation by the United States Attorney's Office for the District of New
Jersey and the Department of Health and Human Services. The investigation
focused on advice given by certain MEDIQ Imaging employees to physician
customers of MEDIQ Imaging relating to the reassignment of certain Medicare
claims. The Company and MEDIQ Imaging voluntarily reported the issue to the U.S.
Government in January 1995 after learning that the advice given by the employees
may have been inconsistent with the regulations relating to reassignment. The
Company and MEDIQ Imaging cooperated in the investigation and denied any
wrongdoing. In December 1997, desiring to avoid the delay, expense, and
uncertainty of protracted litigation, the Company reached a settlement with the
U.S. Government for $4.2 million, which was fully reserved as of September 30,
1997. The settlement represents the repayment of alleged excess Medicare
reimbursements.
In addition, the Company has pending several legal claims incurred in the
normal course of business, which in the opinion of management, will not have
material effect on the consolidated financial statements.
OBLIGATIONS OF MEDIQ--See Note L for discussion of MEDIQ obligations.
NOTE J--FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments is provided in accordance with
the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE-- The carrying amounts of
these items are an estimate of their fair values at September 30, 1997.
LONG-TERM DEBT (EXCLUDING CAPITAL LEASE OBLIGATIONS)-- Interest
rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities are used to estimate fair
value for debt issues for which quoted market prices are not available.
Accordingly, the carrying amount and estimated fair value of long-term
debt is $135.8 million.
INTEREST RATE INSTRUMENTS-- The fair values are the estimated
amounts that the Company would receive or pay to terminate the agreements
at September 30, 1997, taking into account current interest rates and the
current creditworthiness of the counterparties. At September 30,
F-45
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
1997, the notional amounts were $100 million, the carrying value was
$61,000 and the fair value was $304,000, which represents the cost to
settle these instruments.
The fair value estimates presented herein are based on information available to
management as of September 30, 1997, and have not been comprehensively revalued
for purposes of these financial statements since that date. Current estimates of
fair value may differ significantly from the amounts presented herein.
NOTE K--INCOME TAXES
Income tax expense relating to continuing operations consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 8,177 $ 2,903 $ --
State.................................................................... 51 272 122
--------- --------- ---------
8,228 3,175 122
--------- --------- ---------
Deferred:
Federal.................................................................. (629) 866 3,530
State.................................................................... (161) 160 998
--------- --------- ---------
(790) 1,026 4,528
--------- --------- ---------
Total income tax expense (benefit)......................................... $ 7,438 $ 4,201 $ 4,650
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the Company's income tax expense and the income tax
expense computed using the U.S. federal income tax rate were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal tax expense.............................................. $ 6,687 $ 3,425 $ 3,026
State income taxes, net of federal income taxes............................ (72) 285 1,181
Goodwill amortization...................................................... 349 338 338
Other items--net........................................................... 474 153 105
--------- --------- ---------
Income tax expense......................................................... $ 7,438 $ 4,201 $ 4,650
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-46
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Depreciation.................................................................... $ 27,989 $ 30,086
Intangible assets............................................................... 2,050 13,887
Accrued Expenses................................................................ 1,917 926
Prepaid Expenses................................................................ 117 76
Other........................................................................... 768 674
--------- ---------
Gross deferred tax liabilities................................................ 32,841 45,649
Assets:
Net operating and capital loss carry forwards................................... 3,003 1,989
Tax credit carry forwards....................................................... 208 208
Accrued expenses and reserves................................................... 4,906 5,687
Intangible assets............................................................... 364 231
Other........................................................................... 988 3,639
--------- ---------
Gross deferred tax assets..................................................... 9,469 11,754
Valuation allowance............................................................. (3,003) (1,989)
--------- ---------
6,466 9,765
--------- ---------
Net deferred tax liability........................................................ $ 26,375 $ 35,884
--------- ---------
--------- ---------
</TABLE>
NOTE L--RELATED PARTY TRANSACTIONS
MANAGEMENT FEES--MEDIQ-- MEDIQ is a non-operating holding company which
derives all of its revenue from management fees charged to its wholly-owned
operating subsidiaries. The allocation of management fees to the Company was
based upon an estimate of the level of services provided by MEDIQ. Actual costs
for these services cannot be reasonably estimated for the Company on a
stand-alone basis. The Company incurred management fees of $3.3 million,
$920,000 and $920,000 in fiscal 1997, 1996 and 1995, respectively.
PENSION PLAN-- The Company participates in a noncontributory pension plan
maintained by MEDIQ which provides retirement benefits to substantially all of
the Company's employees. Employees generally are eligible to participate in the
plan after one year of service and become fully vested after five years of
service. The plan provides defined benefits based on years of credited service
and compensation. The Company makes contributions that are sufficient to fully
fund its actuarially determined cost, generally equal to the minimum amounts
required by ERISA. The Company made contributions to the pension plan of
$424,000, $386,000 and $508,000 in fiscal 1997, 1996 and 1995, respectively.
STOCK OPTION PLAN-- The Company participates in MEDIQ's stock option plans.
Under MEDIQ's stock option plans, options may be granted to officers and key
employees. No option may be granted for a term in excess of ten years from the
date of the grant. The exercise prices of outstanding options represent the fair
market value at dates of grant.
F-47
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--RELATED PARTY TRANSACTIONS (CONTINUED)
ADVANCES TO PARENT-- The Company has advanced funds to MEDIQ, principally
for debt service including interest payments, pension contributions, federal
income tax payments and miscellaneous corporate expenditures. Such amounts
advanced to MEDIQ totaled $88.3 million and $64.8 million at September 30, 1997
and 1996, respectively, and have been classified as a component of stockholder's
equity due to their related party nature and the lack of financial resources of
MEDIQ to repay such advances.
As a result of the Reorganization (as discussed in Note A), MEDIQ's
remaining assets consist primarily of its investment in MEDIQ/PRN Life Support
Services, Inc. As of September 30, 1997, MEDIQ's remaining liabilities consist
primarily of the amounts due to the Company, $10.1 million of exchangeable
subordinated debentures, which are exchangeable into NutraMax Common Stock held
in escrow, and approximately $5.3 million of accrued expenses and other
liabilities. MEDIQ anticipates it will be required to make the following
payments with respect to these liabilities as follow:
<TABLE>
<CAPTION>
1998.................................................. $ 2,428
<S> <C>
1999.................................................. 854
2000.................................................. 854
2001.................................................. 854
2002.................................................. 854
2003.................................................. 10,721
---------
$ 16,565
---------
---------
</TABLE>
Accordingly, the Company will be required to fund such amounts to MEDIQ in
order for MEDIQ to meet its obligations.
NOTE M--BUSINESS SEGMENT DATA
The Company operates primarily in one business segment. The Company rents
movable critical care, life support and other medical equipment, sells a variety
of disposable products, accessories and repair parts primarily used with the
types of equipment it rents and provides other services to its customers in the
health care industry. This segment represents more than 90% of the consolidated
revenues, operating profit and assets exclusive of corporate assets.
NOTE N--NEW ACCOUNTING PRONOUNCEMENTS
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 the
standard until fiscal 1999. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.
The Financial Accounting Standards Board has issued SFAS No. 132 "Employers'
Disclosures about Pension and other Postretirement Benefits". This statement,
which improves disclosure about pensions and other postretirement benefits, is
effective for fiscal years beginning after December 15, 1997, although earlier
application is permitted. At this time, the Company has not yet determined the
impact the adoption of the standard will have on the Company's financial
statements.
F-48
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--SUBSEQUENT EVENTS
On January 15, 1998, MEDIQ announced that, pursuant to the terms of a
definitive agreement and plan of merger (the "Merger Agreement"), MQ Acquisition
Corporation ("Acquiror"), a Delaware corporation formed by Bruckmann, Rosser,
Sherrill & Co., L.P. ("BRS"), has agreed to enter into a transaction with MEDIQ
whereby Acquiror will be merged with and into MEDIQ (the "Merger"), with MEDIQ
being the Surviving Corporation in the Merger (the "Surviving Corporation"). In
the Merger, holders of MEDIQ's outstanding Common Stock and Preferred Stock will
be entitled to receive, in exchange for each outstanding share of Common Stock
or Preferred Stock (except for shares held directly or indirectly by the Company
or MQ, the Rolled Shares, and dissenting shares), $13.75 in cash, without
interest, and 0.075 of a share of a newly created Series A 13% Cumulative
Compounding Preferred Stock, par value $.01 per share (the "13% Senior Preferred
Stock") of the Surviving Corporation. The 13% Senior Preferred Stock will have a
liquidation preference of $10.00 per share. The aggregate consideration payable
pursuant to the Merger, including amounts payable to holders of options, is
expected to be approximately $390.7 million.
In May 1998, in conjunction with the consummation of the Merger, the Company
anticipates offering $265 million of notes (the "Notes") in a private placement
(the "Offering"). In addition to the Offering, in connection with the Merger the
Company will enter into a new credit facility (the "New Credit Facility")
aggregating $275.0 million with a syndicate of banks. The New Credit Facility
will consist of three facilities: (i) an eight-year senior secured term loan
facility in an aggregate principal amount equal to $150.0 million; (ii) a
six-year revolving credit facility in an aggregate principal amount not to
exceed $50.0 million; and (iii) a six-year senior secured acquisition facility
in an aggregate principal amount not to exceed $75.0 million. A portion of the
proceeds of the Notes and the New Credit Facility will be used to repay all
existing indebtedness except the capital leases.
On April 24, 1998 the Company entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with CH Industries, Inc. ("CHI"), certain direct and
indirect subsidiaries of CHI and certain other parties (collectively, the
"Sellers") to purchase certain of the assets and rights of the Sellers
including, but not limited to, accounts receivable, inventory, rental equipment
and other tangible property, intellectual property rights, key records
(including custom lists, customer files, supplier information) and certain
contract rights 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.
F-49
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue:
Rental.............................................................. $ 36,599 $ 34,076 $ 69,993 $ 63,193
Sales............................................................... 7,285 5,731 13,979 9,459
Other............................................................... 2,589 2,819 5,145 5,495
--------- --------- --------- ---------
46,473 42,626 89,117 78,147
Costs and Expenses:
Cost of sales....................................................... 5,779 4,685 11,270 7,759
Operating........................................................... 14,003 11,477 28,449 22,228
Selling............................................................. 3,938 3,754 7,557 6,570
General and administrative.......................................... 4,602 4,334 9,486 8,802
Non-recurring merger costs.......................................... 306 -- 363 --
Management fees--MEDIQ.............................................. 127 49 279 148
Depreciation and amortization....................................... 8,294 7,358 16,586 14,715
--------- --------- --------- ---------
37,049 31,657 73,990 60,222
--------- --------- --------- ---------
Operating Income...................................................... 9,424 10,969 15,127 17,925
Other (Charges) Credits:
Interest expense.................................................... (3,330) (4,811) (6,739) (10,194)
Gain on sale and market appreciation of Cardinal Health stock....... -- 4,021 -- 9,213
Gain on NutraMax note receivable.................................... -- 1,195 -- 1,195
Other--net.......................................................... 251 577 479 765
--------- --------- --------- ---------
Income from Continuing Operations before Income Taxes and
Extraordinary Item.................................................. 6,345 11,951 8,867 18,904
Income Tax Expense.................................................... 2,839 4,752 3,962 7,309
--------- --------- --------- ---------
Income before Discontinued Operations and Extraordinary Item.......... 3,506 7,199 4,905 11,595
Discontinued Operations (net of taxes)................................ -- (66) -- 37,175
Extraordinary Item--Early Retirement of Debt (net of taxes)........... -- -- -- (6,723)
--------- --------- --------- ---------
Net Income............................................................ $ 3,506 $ 7,133 $ 4,905 $ 42,047
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-50
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
----------- -------------
<S> <C> <C>
(UNAUDITED) (SEE NOTE)
ASSETS
Current Assets:
Cash............................................................................... $ 3,846 $ 3,472
Accounts receivable--net........................................................... 46,385 39,686
Inventories........................................................................ 15,428 13,047
Deferred income taxes.............................................................. 3,728 2,010
Other current assets............................................................... 1,197 1,183
----------- -------------
Total current assets............................................................. 70,584 59,398
Property, plant and equipment--net................................................... 113,703 113,589
Goodwill--net........................................................................ 55,558 57,056
Other Assets......................................................................... 13,408 17,249
----------- -------------
Total assets......................................................................... $ 253,253 $ 247,292
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................................................... $ 10,667 $ 8,791
Accrued expenses................................................................... 13,075 20,562
State taxes payable................................................................ 837 43
Other current liabilities.......................................................... 558 669
Current portion of long-term debt.................................................. 6,534 16,115
----------- -------------
Total current liabilities........................................................ 31,671 46,180
Senior debt.......................................................................... 127,311 119,664
Deferred income taxes................................................................ 29,151 28,385
Other liabilities.................................................................... 700 990
Stockholder's Equity................................................................. 64,420 52,073
----------- -------------
Total Liabilities and Stockholder's Equity........................................... $ 253,253 $ 247,292
----------- -------------
----------- -------------
</TABLE>
Note: The balance sheet at September 30, 1997 has been condensed from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
F-51
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................................. $ 4,905 $ 42,047
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:.......................................................................... -- (37,175)
Gain on sale of Cardinal shares...................................................... -- (9,213)
Other--net........................................................................... 2,633 (35,233)
---------- -----------
Net cash provided by (used in) operating activities.................................... 7,538 (39,574)
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations.......................................... -- 120,790
Proceeds from sale of equipment and other assets....................................... -- 546
Purchase of equipment.................................................................. (15,275) (8,005)
Collection of notes receivable......................................................... 2,250 --
Other.................................................................................. 353 (10,207)
---------- -----------
Net cash provided by (used in) investing activities.................................... (12,672) 103,124
Cash Flows from Financing Activities:
Borrowings............................................................................. 11,000 214,000
Debt repayments........................................................................ (12,934) (236,304)
Repurchase of MEDIQ/PRN warrant........................................................ -- (12,500)
Deferred financing fees................................................................ -- (8,909)
Advances to Parent..................................................................... 7,442 (19,790)
---------- -----------
Net cash provided by (used in) financing activities.................................... 5,508 (63,503)
---------- -----------
Increase in cash......................................................................... 374 47
---------- -----------
Cash:
Beginning balance...................................................................... 3,472 2,811
---------- -----------
Ending balance......................................................................... $ 3,846 $ 2,858
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Interest paid.......................................................................... $ 6,370 $ 10,304
---------- -----------
---------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-52
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 1998 and the
condensed consolidated statements of operations and cash flows for the six
months ended March 31, 1998 and 1997 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 March 31, 1998 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 financial statements as of and for the three
years ended September 30, 1997. The results of operations for the period ended
March 31, 1998 are not necessarily indicative of the operating results for the
full year.
NOTE B--PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts and
transactions among consolidation entities have been eliminated.
Simultaneous with the consummation of the merger (as defined in Note E)
MEDIQ will complete a restructuring of the legal organization of certain of its
subsidiaries (the "Reorganization"). The Reorganization involves MEDIQ's
contribution to the Company of ownership interests in certain of its
consolidated subsidiaries (the "Contributed Subsidiaries"), all of which were
under MEDIQ's direct or indirect control as of the date of the Reorganization.
The Reorganization will be accounted for in a manner similar to a pooling of
interest. Accordingly the Company's consolidated financial statements include
the accounts of the Contributed Subsidiaries for all periods presented.
The Contributed subsidiaries include: MEDIQ Imaging Services, Inc. and MEDIQ
Mobile X-Ray Services Inc. (substantially all of the assets of these two
entities were sold in fiscal years 1995 and 1997, respectively), MEDIQ
Management Services, Inc. and MEDIQ Investment Services, Inc. (including its
equity investments PCI Services, Inc. and NutraMax Products, Inc.)
NOTE C--INVENTORIES
Inventories, which consist primarily of disposable products and repair parts
for rental equipment, are stated at the lower of cost (first-in, first-out
method) or market.
NOTE D--LONG-TERM DEBT
On March 31, 1998, the Company made a mandatory prepayment on its Term A and
Term B loans of approximately $9.3 million in accordance with the terms of its
Credit Agreement. Accordingly, the Term A and Term B loans' quarterly
installments were reduced on a pro rata basis. The Term A loan is payable in
quarterly installments of $932,000 from March 31, 1998 through September 30,
2001 and in quarterly installments of $2.1 million from December 31, 2001
through September 30, 2002. The Term B loan is payable in quarterly installments
of $242,000 from March 31, 1998 through September 30, 2002, quarterly
installments of $8.2 million in fiscal 2003 and quarterly installments of $14.5
million in fiscal 2004. Also on March 31, 1998, the Acquisition Revolver which
had no outstanding balance, expired. The Working Capital Revolver terminates on
September 30, 2002 at which time all outstanding amounts are due.
F-53
<PAGE>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE E--MEDIQ MERGER
On January 15, 1998, MEDIQ announced that, pursuant to the terms of a
definitive agreement and plan of merger (the "Merger Agreement"), MQ Acquisition
Corporation ("Acquiror"), a Delaware corporation formed by Bruckmann, Rosser,
Sherrill & Co., L.P. ("BRS"), has agreed to enter into a transaction with the
Company whereby Acquiror will be merged with and into the Company (the
"Merger"), with the Company being the Surviving Corporation in the Merger (the
"Surviving Corporation"). In the Merger, holders of the Company's outstanding
Common Stock and Preferred Stock will be entitled to receive, in exchange for
each outstanding share of Common Stock or Preferred Stock, (except for shares
held directly or indirectly by the Company or MQ, the Rolled Shares, and
dissenting shares), $13.75 in cash, without interest, and 0.075 of a share of a
newly created Series A 13% Cumulative Compounding Preferred Stock, par value
$.01 per share (the "13% Senior Preferred Stock") of the Surviving Corporation.
The 13% Senior Preferred Stock will have a liquidation preference of $10.00 per
share. The aggregate consideration payable pursuant to the Merger, including
amounts payable to holders of options, is expected to be approximately $390.7
million.
NOTE F--RELATED PARTY TRANSACTIONS
ADVANCES TO PARENT--The Company has advanced funds to MEDIQ, principally for
debt service including interest payments, pension contributions, federal income
tax payments and miscellaneous corporate expenditures. Such amounts advanced to
MEDIQ totaled $80.9 million and $88.3 million at March 31, 1998 and September
30, 1997, respectively, and have been classified as a component of stockholder's
equity due to their related party nature and the lack of financial resources of
MEDIQ to repay such advances.
After giving effect to the Reorganization (as discussed in Note A), MEDIQ's
remaining assets will consist primarily of its investment in MEDIQ/PRN Life
Support Services, Inc. As of March 31, 1998, MEDIQ's remaining liabilities
consisted primarily of the amounts due to the Company, $10.1 million of
exchangeable subordinated debentures, which are exchangeable into NutraMax
Common Stock held in escrow, and approximately, $4.0 million of accrued expenses
and other liabilities. Accordingly, the Company will be required to fund such
amounts to MEDIQ in order for MEDIQ to meet its obligations.
NOTE G--SUBSEQUENT EVENTS
In May 1998, in conjunction with the consummation of the Merger, the Company
anticipates offering $265 million of notes (the "Notes") in a private placement
(the "Offering"). In addition to the Offering, in connection with the Merger the
Company will enter into a new credit facility (the "New Credit Facility")
aggregating $275.0 million with a syndicate of banks. The New Credit Facility
will consist of three facilities: (i) an eight-year senior secured term loan
facility in an aggregate principal amount equal to $150.0 million; (ii) a
six-year revolving credit facility in an aggregate principal amount not to
exceed $50.0 million; and (iii) a six-year senior secured acquisition facility
in an aggregate principal amount not to exceed $75.0 million. A portion of the
proceeds of the Notes and the New Credit Facility will be used to repay all
existing indebtedness except in the capital leases.
On April 24, 1998 the Company entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with CH Industries, Inc. ("CHI"), certain direct and
indirect subsidiaries of CHI and certain other parties (collectively, the
"Sellers") to purchase certain of the assets and rights of the Sellers
including, but not limited to, accounts receivable, inventory, rental equipment
and other tangible property, intellectual property rights, key records
(including custom lists, customer files, supplier information) and certain
contract rights 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.
F-54
<PAGE>
(This page has been left blank intentionally.)
F-55
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
ASSETS:
Current
Cash and cash equivalents........................................................ $ 307,080 $ 297,473
Accounts receivable--trade, net of allowance for doubtful accounts of $1,072,353
and $1,373,268, in 1997 and 1996, respectively (Note 3)........................ 7,149,520 5,471,764
Accounts receivable--other....................................................... -- 91,876
Inventories (Notes 1 and 3)...................................................... 4,226,283 2,722,507
Other............................................................................ 200,427 81,515
Intercompany income tax receivable due from CH Industries........................ 576,637 --
------------- -------------
Total current assets............................................................... 12,459,947 8,665,135
------------- -------------
Accounts receivable--long-term..................................................... 859,660 --
Net property and equipment (Notes 2, 3 and 5)...................................... 5,457,197 5,001,237
Other assets....................................................................... 62,446 58,765
------------- -------------
$ 18,839,250 $ 13,725,137
------------- -------------
------------- -------------
LIABILITIES:
Current
Accounts payable................................................................. $ 983,434 $ 95,279
Accrued expenses................................................................. 685,343 446,825
Income taxes payable............................................................. 117,000 --
Current maturities of obligations under capital lease............................ -- 6,118
Dealer deposits.................................................................. 25,470 25,470
Revolving line of credit (Note 3)................................................ 4,181,663 1,934,837
Other liabilities................................................................ 458,891 1,618
------------- -------------
Total current liabilities.......................................................... 6,451,801 2,510,147
------------- -------------
Note payable to officer............................................................ 285,315 399,337
Income taxes payable (Note 7)...................................................... -- 499,911
Deferred income taxes (Note 7)..................................................... 338,442 264,496
Other liabilities.................................................................. 127,000 --
------------- -------------
Total liabilities.................................................................. 7,202,558 3,673,891
------------- -------------
Commitments and contingencies (Note 6)
Net assets......................................................................... $ 11,636,692 $ 10,051,246
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-56
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Rental and Sales................................................ $ 26,710,137 $ 22,711,898 $ 19,385,404
Rental Expenses and Cost of Goods Sold.............................. 11,599,013 8,344,227 8,043,952
------------- ------------- -------------
Gross Profit........................................................ 15,111,124 14,367,671 11,341,452
------------- ------------- -------------
Operating Expenses (Note 4):
Selling expenses.................................................. 4,005,107 3,857,026 2,514,278
Depreciation...................................................... 1,739,735 1,166,054 946,801
General and administrative expenses including $348,708, $455,633
and $401,729 to related parties (Note 5)........................ 7,692,257 6,137,383 4,455,563
------------- ------------- -------------
Total Operating Expenses............................................ 13,437,099 11,160,463 7,916,642
------------- ------------- -------------
Operating Income.................................................... 1,674,025 3,207,208 3,424,810
------------- ------------- -------------
Other Income (Expense):
Other income...................................................... 442,898 526,738 125,814
Interest.......................................................... (245,000) (96,394) (34,344)
Litigation settlement............................................. (250,000) -- --
------------- ------------- -------------
Total Other Income (Expense)........................................ (52,102) 430,344 91,470
------------- ------------- -------------
Income Before Income Taxes.......................................... 1,621,923 3,637,552 3,516,280
Income Taxes (Note 7)............................................... 616,330 1,382,270 1,336,186
------------- ------------- -------------
Net Income.......................................................... $ 1,005,593 $ 2,255,282 $ 2,180,094
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-57
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -------------
Operating Activities:
Net income......................................................... $ 1,005,593 $ 2,255,282 $ 2,180,094
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation..................................................... 1,739,735 1,166,054 946,801
Loss on disposition of fixed assets.............................. -- 588 93,824
Deferred taxes................................................... 73,946 106,123 219,178
Provision for bad debt........................................... 170,000 1,119,384 --
Changes in operating assets and liabilities:
Accounts receivable--trade....................................... (2,236,501) (3,727,898) 207,512
Accounts receivable--other..................................... 91,876 (91,876) 87,148
Inventories.................................................... (1,503,776) (318,261) (466,436)
Other assets..................................................... (695,549) 128,767 (212,430)
Accounts payable............................................... 888,155 (200,808) 80,689
Accrued expenses............................................... 238,518 (242,215) 531,705
Income taxes payable........................................... (382,911) (591,220) 169,183
Other liabilities................................................ 334,273 (13,366) 8,866
------------- ------------- -------------
Cash provided by (used in) operating activities...................... (276,641) (409,446) 3,846,134
------------- ------------- -------------
Cash Used In Investing Activities--
Capital expenditures............................................... (1,840,438) (2,144,190) (2,226,921)
------------- ------------- -------------
Financing Activities:
Net borrowing (repayments) under note payable--officer............. (114,022) 399,337 --
Principal payments on obligations under capital lease.............. (6,118) (48,870) (86,092)
Net borrowings (repayments) under revolving line of credit......... 2,246,826 1,769,873 (846,764)
------------- ------------- -------------
Cash provided by (used in) financing activities...................... 2,126,686 2,120,340 (932,856)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. 9,607 (433,296) 686,357
Cash and cash equivalents at beginning of year....................... 297,473 730,769 44,412
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 307,080 $ 297,473 $ 730,769
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-58
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION--The statements of net
assets, 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 Company's
operations were conducted as an integral part of CH Industries overall
operations, and separate financial statements were not prepared for the Company.
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 expenses which would have resulted if the Company had been
operated as a separate entity. In addition, the Company was allocated a portion
of CH Industries line of credit and related interest based on the ratio of debt
to certain assets. Therefore, the statements of net assets, income and cash
flows may not be indicative of the financial position and the results of
operation that would have resulted if the Company were operated on a stand alone
basis. All of the allocations 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.
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.
F-59
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
All significant intercompany transactions and balances have been eliminated
in consolidation.
REVENUE RECOGNITION--Service 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. Betterments which extend the useful life of the equipment are capitalized.
DEPRECIATION AND AMORTIZATION--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 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 bases. The provision for deferred
income taxes represents the change in deferred income tax accounts during the
year.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make 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.
F-60
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Raw materials..................................................... $ 292,878 $ 139,589
Work--in--process................................................. 2,835,748 2,252,633
Finished goods.................................................... 1,097,657 330,285
------------ ------------
Total............................................................. $ 4,226,283 $ 2,722,507
------------ ------------
------------ ------------
</TABLE>
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Rental medical equipment........................................ $ 10,067,172 $ 8,300,665
Machinery and equipment......................................... 463,336 450,381
Office equipment................................................ 505,206 230,419
Building and improvements....................................... 216,933 174,790
Vehicles........................................................ 89,142 89,142
Land............................................................ 8,536 8,536
------------- -------------
Total cost...................................................... 11,350,325 9,253,933
Accumulated depreciation........................................ (5,893,128) (4,252,696)
------------- -------------
Net property and equipment...................................... $ 5,457,197 $ 5,001,237
------------- -------------
------------- -------------
</TABLE>
3. LINE OF CREDIT
CH Industries has a $7,000,000 revolving line of credit with a bank which
expires January 5, 1998. 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 certain assets. At August 31, 1997, the Company's interest
rate was 7.9375 percent. The outstanding borrowings are secured by CH
Industries' accounts receivable, inventories (including those 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 ALLOCATED EXPENSES
All operating expenses are allocated to the Company using procedures deemed
appropriate to the nature of the expenses involved. The procedures utilize
various allocation bases such as relative investment 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 Company on the basis of its proportionate share of certain 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 Company had been a separate entity.
F-61
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS
The Company leases certain office space, warehouse facilities and equipment
from its stockholder, CH Realty and CH Leasing, Ltd., a limited partnership
controlled 99 percent by the stockholder. Rental expense for operating leases to
affiliates was $348,708, $455,633, and $401,729 for the years ended August 31,
1997, 1996, and 1995, respectively.
6. COMMITMENTS
The Company leases certain facilities and automobiles under operating leases
expiring at various dates through 2004. Total rent expense under these operating
leases was $1,137,356, $1,433,822, and $1,086,922 for the years ended August 31,
1997, 1996, and 1995. As of August 31, 1997, future net minimum lease payments
under operating leases that have initial or remaining noncancellable terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
VEHICLES FACILITIES TOTAL
---------- ------------ ------------
<S> <C> <C> <C>
1998.................................................. $ 296,661 $ 565,410 $ 862,071
1999.................................................. 307,553 352,083 659,636
2000.................................................. 108,139 246,245 354,384
2001.................................................. -- 246,245 246,245
2002.................................................. -- 246,245 246,245
Thereafter............................................ -- 389,887 389,887
---------- ------------ ------------
Total minimum lease payments.......................... $ 712,353 $ 2,046,115 $ 2,758,468
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Minimum payments to affiliates total $246,245 per annum through 2002 and
$389,887 thereafter.
7. INCOME TAXES
Federal, state and local income taxes are allocated based upon an effective
tax rate of 38 percent for 1997, 1996, and 1995. The allocation approximates the
results that would occur if the businesses were a separate taxpayer. The
components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ------------ ------------
Current expense....................................... $ 542,384 $ 1,276,147 $ 1,117,008
Deferred.............................................. 73,946 106,123 219,178
---------- ------------ ------------
Total income taxes.................................... $ 616,330 $ 1,382,270 $ 1,336,186
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
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.
During the fiscal year ending August 31, 1995 CH Industries applied with the
Internal Revenue Service to change their method of accounting for tax purposes.
The change is currently being reviewed by the Internal Revenue Service. As a
result of the change, for tax purposes, an estimated amount of $300,000 will be
subject to a four year payout.
F-62
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Income tax expense differs from the amounts computed by applying the federal
statutory rate of 34 percent primarily due to state income taxes.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Interest and income taxes paid during the year and allocated to the Company
based on average outstanding debt and net income before taxes, respectively,
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Interest................................................................ $ 226,900 $ 84,100 $ 35,600
------------ ------------ ------------
------------ ------------ ------------
Income taxes............................................................ $ 1,500,000 $ 1,921,000 $ 1,040,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-63
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-------------
<S> <C>
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
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-64
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-65
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
--------------------------
<S> <C> <C>
1998 1997
----------- -------------
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.
F-66
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF 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.
The condensed consolidated statement of net assets as of February 28, 1998
and the condensed consolidated statements of operations and cash flows for the
six months ended February 28, 1998 and 1997 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 February 28, 1998 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 August 31, 1997 audited financial statements.
The results of operations for the period ended February 28, 1998 are not
necessarily indicative of the operating results for the full year.
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.
Cardio Systems--Oklahoma City, Inc.
Cardio Systems--Sacramento, Inc.
Cardio Systems--Tampa, Inc.
F-67
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
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 life 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 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.
F-68
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
------------
<S> <C>
Raw materials................................................................... $ 351,665
Work-in-process................................................................. 3,365,938
Finished goods.................................................................. 1,306,185
------------
Total........................................................................... $ 5,023,788
------------
------------
</TABLE>
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-------------
<S> <C>
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
-------------
-------------
</TABLE>
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 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.
F-69
<PAGE>
CH MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-70
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized.
This Prospectus does not constitute an offer to sell or solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such an offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the affairs of the Issuers since such date.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Available Information................................. i
Summary............................................... 1
Risk Factors.......................................... 22
The Transactions...................................... 31
Use of Proceeds....................................... 33
MEDIQ/PRN Capitalization.............................. 34
Holdings Capitalization............................... 35
Pro Forma Condensed Consolidated Financial
Statements.......................................... 36
Selected Consolidated Historical
Financial Information............................... 51
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 53
The Exchange Offers................................... 61
Certain Federal Income Tax Considerations Relating to
the Exchange Offers................................. 69
Business.............................................. 70
Management............................................ 85
Ownership of Capital Stock............................ 90
Description of Capital Stock.......................... 93
Certain Relationships and Related Transactions........ 98
Description of Certain Indebtedness................... 100
Description of the Notes.............................. 102
Description of the Debentures......................... 135
Plan of Distribution.................................. 165
Certain U.S. Federal Income Tax Considerations........ 165
Legal Matters......................................... 172
Experts............................................... 172
Index to Financial Statements......................... F-1
</TABLE>
Until , 1998 (90 days after the date of this Prospectus), all dealers
effecting transactions in the Securities, whether or not participating in the
original distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[LOGO]
OFFER TO EXCHANGE
All Outstanding
11% Senior Subordinated Notes
Due 2008
for
11% Senior Subordinated Notes
Due 2008
of
MEDIQ/PRN Life Support
Services, Inc.
OFFER TO EXCHANGE
All Outstanding
13% Senior Discount Debentures
Due 2009
for
13% Senior Discount Debentures
Due 2009
of
MEDIQ Incorporated
PROSPECTUS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation of each Issuer provides that directors of such Issuer shall not be
personally liable to such Issuer or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to such Issuer or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, relating to prohibited dividends or distributions or the
repurchase or redemption of stock, or (iv) for any transaction from which the
director derives an improper personal benefit. In addition, the By-laws of each
Issuer provide for indemnification of such Issuer's officers and directors to
the fullest extent permitted under Delaware law. Section 145 of the Delaware
General Corporation Law provides that a corporation may indemnify any persons,
including officers and directors, who were or are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation or
is or was serving at the request of such corporation as an officer, director,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, for criminal
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify officers and directors in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses that
such officer or director actually and reasonably incurred. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling an Issuer pursuant to
the foregoing provisions, the Issuers have been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The directors and officers of the Registrants are insured against certain
liabilities under the Registrants' directors' and officers' liability insurance.
The foregoing summary of the Delaware General Corporation Law and of the
Certificate of Incorporation and By-laws of each Issuer is qualified in its
entirety by reference to the relevant provisions of the Delaware General
Corporation Law and of each Issuer's Certificate of Incorporation and By-laws,
which are filed as exhibits to this Registration Statement.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of January 14, 1998, as amended as of April 27, 1998, by and
between Holdings and MQ (incorporated by reference to Annex A of the Proxy Statement/Prospectus included
in Form S-4 Registration Statement originally filed by Holdings on February 13, 1998, as amended, File
No. 333-46233)
2.2 Stock Option Agreement dated January 14, 1998 between MQ and the persons signatory thereto (incorporated
by reference to Annex E of the Proxy Statement/Prospectus included in Form S-4 Registration Statement
originally filed by Holdings on February 13, 1998, as amended, File No. 333-46233)
2.3 Stockholder Agreements between BRS and the Rotko Entities (incorporated by reference to Annex F of the
Proxy Statement/Prospectus included in Form S-4 Registration Statement originally filed by Holdings on
February 13, 1998, as amended, File No. 333-46233)
2.4 Rollover Agreement dated January 14, 1998 by and among Holdings, MQ and the Rotko Entities (incorporated
by reference to Annex G of the Proxy Statement/Prospectus included in Form S-4 Registration Statement
originally filed by Holdings on February 13, 1998, as amended, File No. 333-46233)
2.5 Agreement and Plan of Merger dated July 23, 1996 among Holdings, Cardinal Health, Inc., Panther Merger
Corp. and PCI Services, Inc. (incorporated by reference to Exhibit 2.1 to Schedule 13D filed by Cardinal
Health, Inc. on July 29, 1996, File No. 5-42666)
2.6 Amended and Restated Stock Purchase Agreement dated November 20, 1996 among Holdings, MEDIQ Investment
Services, Inc. and NutraMax Products, Inc. (incorporated by reference to Exhibit 2(a) to Annual Report on
Form 10-K filed by NutraMax Products, Inc. for the fiscal year ended September 28, 1996, File No.
0-18671)
2.7 Affiliate Letter to Cardinal Health, Inc. from Holdings dated August 16, 1996 (incorporated by reference
to Exhibit 4 to Current Report on Form 8-K filed by Holdings on October 21, 1996, File No. 1-08147)
2.8 Stock Purchase Agreement dated November 13, 1997 among Holdings, MEDIQ Investment Services, Inc. and
InnoServ Technologies, Inc. (incorporated by reference to Exhibit 2.8 to Annual Report on Form 10-K filed
by Holdings for the fiscal year ended September 30, 1997, File No. 1-08147)
2.9 Asset Purchase Agreement dated November 6, 1996 among Holdings, MEDIQ Mobile X-Ray Services, Inc. and
Symphony Diagnostic Services No. 1, Inc. (incorporated by reference to Exhibit 2.5 to Annual Report on
Form 10-K filed by Holdings for the fiscal year ended September 30, 1996, File No. 1-08147)
2.10 Asset Purchase Agreement dated as of April 24, 1998 among MEDIQ/PRN, CH Medical, Inc. and the other
parties named therein (incorporated by reference to Exhibit 2 to Current Report on Form 8-K filed by
Holdings on April 28, 1998, File No. 1-08147)
3.1* Certificate of Incorporation of MEDIQ/PRN
3.2* By-Laws of MEDIQ/PRN
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.3* Restated Certificate of Incorporation of Holdings, including Certificate of Designation, Preferences and
Rights for Series A 13.0% Cumulative Compounding Preferred Stock; Certificate of Designation, Preferences
and Rights for Series B 12.5% Cumulative Compounding Perpetual Preferred Stock; and Certificate of
Designation, Preferences and Rights for Series C 13.5% Cumulative Compounding Preferred Stock
3.4* By-laws of Holdings
3.5* Certificate of Incorporation of MEDIQ Diagnostic Centers, Inc.
3.6* By-Laws of MEDIQ Diagnostic Centers, Inc
3.7* Certificate of Incorporation of MEDIQ Diagnostic Centers -- I, Inc.
3.8* By-Laws of MEDIQ Diagnostic Centers -- I, Inc.
3.9* Certificate of Incorporation of MEDIQ Imaging Services, Inc.
3.10* By-Laws of MEDIQ Imaging Services, Inc.
3.11* Certificate of Incorporation of MEDIQ Investment Services, Inc.
3.12* By-Laws of MEDIQ Investment Services, Inc.
3.13* Certificate of Incorporation of MEDIQ Management Services, Inc.
3.14* By-Laws of MEDIQ Management Services, Inc.
3.15* Certificate of Incorporation of MEDIQ Mobile X-Ray Services, Inc.
3.16* By-Laws of MEDIQ Mobile X-Ray Services, Inc.
3.17* Certificate of Incorporation of MDTC Haddon, Inc.
3.18* By-Laws of MDTC Haddon, Inc.
3.19* Certificate of Incorporation of Value-Med Products, Inc.
3.20* By-Laws of Value-Med Products, Inc.
3.21* Certificate of Incorporation of American Cardiovascular Imaging Labs, Inc.
3.22* By-Laws of American Cardiovascular Imaging Labs, Inc.
4.1 Credit Agreement dated as of May 29, 1998 among MEDIQ/PRN, the Lender Parties party thereto, Banque
Nationale de Paris, as Administrative Agent, Swing Line Bank, Initial Issuing Bank and Arranger,
NationsBank, N.A., as Syndication Agent, and Credit Suisse First Boston, as Documentation Agent
(incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed by Holdings on June 15,
1998, File No. 1-08147)
4.2 Indenture dated as of July 1, 1993 between Holdings and First Union Bank, N.A. (formerly First Fidelity
Bank, N.A.) for 7.5% Exchangeable Subordinated Debentures due 2003 (incorporated by reference to Exhibit
4.1 to Form S-2 Registration Statement originally filed by Holdings on April 28, 1993, as amended, File
No. 33-61724)
4.3 Form of 7.5% Exchangeable Subordinated Debentures due 2003 (incorporated by reference to Exhibit 4.2 to
Form S-2 Registration Statement originally filed by Holdings on April 28, 1993, as amended, File No.
33-61724)
4.4 Indenture dated as of May 15, 1998 among MEDIQ/PRN, the Subsidiary Guarantors and United States Trust
Company of New York, as Trustee (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K
filed by Holdings on June 15, 1998, File No. 1-08147)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
4.5 Form of Old Note (included in Exhibit 4.4)
4.6 Form of New Note (included in Exhibit 4.4)
4.7 Indenture dated as of May 15, 1998 among Holdings and United States Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed by Holdings on June 15,
1998, File No. 1-08147)
4.8 Form of Old Debenture (included in Exhibit 4.7)
4.9 Form of New Debenture (included in Exhibit 4.7)
4.10 Warrant Agreement dated May 29, 1998 between Holdings and United States Trust Company of New York, as
Warrant Agent (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed by Holdings
on June 15, 1998, File No. 1-08147)
4.11 Form of Warrant (included in Exhibit 4.10)
4.12 Registration Rights Agreement dated May 29, 1998 among the Issuers, the Subsidiary Guarantors, Credit
Suisse First Boston Corporation, NationsBanc Montgomery Securities LLC and Banque Nationale de Paris
(incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K filed by Holdings on June 15,
1998, File No. 1-08147)
4.13 Registration Rights Agreement dated as of May 29, 1998 among Holdings, the investors named therein and MQ
Acquisition Corporation (incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K filed by
Holdings on June 15, 1998, File No. 1-08147)
4.14 Securities Purchase and Holders Agreement dated as of May 29, 1998 among Holdings, the investors named
therein and MQ Acquisition Corporation (incorporated by reference to Exhibit 4.7 to Current Report on
Form 8-K filed by Holdings on June 15, 1998, File No. 1-08147)
5.1* Opinion of Dechert Price & Rhoads as to the New Notes
5.2* Opinion of Dechert Price & Rhoads as to the New Debentures
10.1 MEDIQ Executive Security Plan (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K
filed by Holdings for the fiscal year ended September 30, 1995, File No. 1-08147)
10.2 Employment contract dated as of April 27, 1995 with Thomas E. Carroll (incorporated by reference to
Exhibit 10.9 to Annual Report on Form 10-K filed by Holdings for the fiscal year ended September 30,
1995, File No. 1-08147)
10.3 Amendment No. 1 dated as of November 14, 1997 to employment contract with Thomas E. Carroll (incorporated
by reference to Exhibit 10.9(a) to Annual Report on Form 10-K filed by Holdings for the fiscal year ended
September 30, 1997, File No. 1-08147)
10.4 Employment contract dated as of June 20, 1995 with Jay M. Kaplan (incorporated by reference to Exhibit
10.10 to Annual Report on Form 10-K filed by Holdings for the fiscal year ended September 30, 1995, File
No. 1-08147)
10.5 Letter Agreement dated January 14, 1998 by and between Bruckmann, Rosser, Sherrill & Co., Inc. and
Holdings (incorporated by reference to Exhibit 2.7 to Current Report on Form 8-K filed by Holdings on
January 21, 1998, File No. 1-08147)
12.1* Statement of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Holdings (incorporated by reference to Exhibit 2.1 to Annual Report on Form 10-K filed by
Holdings for the fiscal year ended September 30, 1997, File No. 1-08147)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1)
23.3 Consent of Dechert Price & Rhoads (included in Exhibit 5.2)
24.1 Powers of Attorney (included on signature pages)
25.1 Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as
Trustee under the Indenture filed as Exhibit 4.4
25.2* Statement of Eligibility and Qualification, Form T-1, of United States Trust Company of New York, as
Trustee under the Indenture filed as Exhibit 4.7
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1* Form of Letter of Transmittal for 11% Senior Subordinated Notes due 2008 of MEDIQ/PRN
99.2* Form of Notice of Guaranteed Delivery for 11% Senior Subordinated Notes due 2008 of MEDIQ/PRN
99.3* Form of Letter of Transmittal for 13% Senior Discount Debentures due 2009 of Holdings
99.4* Form of Notice of Guaranteed Delivery for 13% Senior Discount Debentures due 2009 of Holdings
</TABLE>
- ------------------------
* To be supplied by amendment.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrants hereby undertake:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
II-5
<PAGE>
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrants pursuant to the foregoing provisions,
or otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(d) The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
By: /s/ THOMAS E. CARROLL
-----------------------------------------
Thomas E. Carroll
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ THOMAS E. CARROLL Officer and Director
- ------------------------------ (Principal Executive
Thomas E. Carroll Officer)
Senior Vice President,
/s/ JAY M. KAPLAN Chief Financial Officer
- ------------------------------ and Director (Principal
Jay M. Kaplan Accounting Officer)
/s/ ALAN S. EINHORN
- ------------------------------ Director
Alan S. Einhorn
</TABLE>
II-7
<PAGE>
MEDIQ INCORPORATED
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ INCORPORATED
By: /s/ THOMAS E. CARROLL
-----------------------------------------
Thomas E. Carroll
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ THOMAS E. CARROLL Officer and Director
- ------------------------------ (Principal Executive
Thomas E. Carroll Officer)
Senior Vice
/s/ JAY M. KAPLAN President-Finance and
- ------------------------------ Chief Financial Officer
Jay M. Kaplan (Principal Accounting
Officer)
- ------------------------------ Director
Michael J. Rotko
/s/ BRUCE C. BRUCKMANN
- ------------------------------ Director
Bruce C. Bruckmann
/s/ STEPHEN C. SHERRILL
- ------------------------------ Director
Stephen C. Sherrill
/s/ ROBERT T. THOMPSON
- ------------------------------ Director
Robert T. Thompson
- ------------------------------ Director
L. John Wilkerson
</TABLE>
II-8
<PAGE>
MEDIQ DIAGNOSTIC CENTERS, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ DIAGNOSTIC CENTERS, INC.
By: /s/ JO A. SURPIN
-----------------------------------------
Jo A. Surpin
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ JO A. SURPIN President and Director
- ------------------------------ (Principal Executive
Jo A. Surpin Officer)
Chief Financial Officer,
/s/ JAY M. KAPLAN Treasurer and Director
- ------------------------------ (Principal Accounting
Jay M. Kaplan Officer)
/s/ EUGENE M. SCHLOSS, JR.
- ------------------------------ Director
Eugene M. Schloss, Jr.
</TABLE>
II-9
<PAGE>
MEDIQ DIAGNOSTIC CENTERS-I, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ DIAGNOSTIC CENTERS-I, INC.
By: /s/ JO A. SURPIN
-----------------------------------------
Jo A. Surpin
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ JO A. SURPIN President and Director
- ------------------------------ (Principal Executive
Jo A. Surpin Officer)
Chief Financial Officer,
/s/ JAY M. KAPLAN Treasurer and Director
- ------------------------------ (Principal Accounting
Jay M. Kaplan Officer)
/s/ EUGENE M. SCHLOSS, JR.
- ------------------------------ Director
Eugene M. Schloss, Jr.
</TABLE>
II-10
<PAGE>
MEDIQ IMAGING SERVICES, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ IMAGING SERVICES, INC.
By: /s/ ALAN S. EINHORN
-----------------------------------------
Alan S. Einhorn
VICE PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Vice President and
/s/ ALAN S. EINHORN Director
- ------------------------------ (Principal Executive
Alan S. Einhorn Officer)
Vice President, Chief
/s/ JAY M. KAPLAN Financial Officer,
- ------------------------------ Treasurer and Director
Jay M. Kaplan (Principal Accounting
Officer)
</TABLE>
II-11
<PAGE>
MEDIQ INVESTMENT SERVICES, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ INVESTMENT SERVICES, INC.
By: /s/ THOMAS E. CARROLL
-----------------------------------------
Thomas E. Carroll
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ THOMAS E. CARROLL President and Director
- ------------------------------ (Principal Executive
Thomas E. Carroll Officer)
Vice President, Chief
/s/ JAY M. KAPLAN Financial Officer and
- ------------------------------ Treasurer (Principal
Jay M. Kaplan Accounting Officer)
/s/ ALAN S. EINHORN
- ------------------------------ Director
Alan S. Einhorn
</TABLE>
II-12
<PAGE>
MEDIQ MANAGEMENT SERVICES, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ MANAGEMENT SERVICES, INC.
By: /s/ JO A. SURPIN
-----------------------------------------
Jo A. Surpin
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ JO A. SURPIN
- ------------------------------ President (Principal
Jo A. Surpin Executive Officer)
Chief Financial Officer,
/s/ JAY M. KAPLAN Treasurer and Director
- ------------------------------ (Principal Accounting
Jay M. Kaplan Officer)
/s/ ALAN S. EINHORN
- ------------------------------ Director
Alan S. Einhorn
</TABLE>
II-13
<PAGE>
MEDIQ MOBILE X-RAY SERVICES, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MEDIQ MOBILE X-RAY SERVICES, INC.
By: /s/ ALAN S. EINHORN
-----------------------------------------
Alan S. Einhorn
VICE PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Vice President and
/s/ ALAN S. EINHORN Director
- ------------------------------ (Principal Executive
Alan S. Einhorn Officer)
Vice President, Chief
/s/ JAY M. KAPLAN Financial Officer,
- ------------------------------ Treasurer and Director
Jay M. Kaplan (Principal Accounting
Officer)
</TABLE>
II-14
<PAGE>
MDTC HADDON, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
MDTC HADDON, INC.
By: /s/ JO A. SURPIN
-----------------------------------------
Jo A. Surpin
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ JO A. SURPIN President and Director
- ------------------------------ (Principal Executive
Jo A. Surpin Officer)
Chief Financial Officer,
/s/ JAY M. KAPLAN Treasurer and Director
- ------------------------------ (Principal Accounting
Jay M. Kaplan Officer)
/s/ EUGENE M. SCHLOSS, JR.
- ------------------------------ Director
Eugene M. Schloss, Jr.
</TABLE>
II-15
<PAGE>
VALUE-MED PRODUCTS, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
VALUE-MED PRODUCTS, INC.
By: /s/ THOMAS E. CARROLL
-----------------------------------------
Thomas E. Carroll
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ THOMAS E. CARROLL President and Director
- ------------------------------ (Principal Executive
Thomas E. Carroll Officer)
/s/ JAY M. KAPLAN Treasurer and Director
- ------------------------------ (Principal Accounting
Jay M. Kaplan Officer)
/s/ ALAN S. EINHORN
- ------------------------------ Director
Alan S. Einhorn
</TABLE>
II-16
<PAGE>
AMERICAN CARDIOVASCULAR IMAGING LABS, INC.
Pursuant to the requirements of the Securities Act of 1933, as amended, the
above-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Pennsauken, State of New Jersey, on the 9th day of July, 1998.
<TABLE>
<S> <C> <C>
AMERICAN CARDIOVASCULAR IMAGING
LABS, INC.
By: /s/ ALAN S. EINHORN
-----------------------------------------
Alan S. Einhorn
VICE PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Thomas E. Carroll and Jay
M. Kaplan, either of whom may act without the joinder of the other, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on July 9, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Vice President and
/s/ ALAN S. EINHORN Director
- ------------------------------ (Principal Executive
Alan S. Einhorn Officer)
Vice President, Chief
/s/ JAY M. KAPLAN Financial Officer,
- ------------------------------ Treasurer and Director
Jay M. Kaplan (Principal Accounting
Officer)
</TABLE>
II-17
<PAGE>
MEDIQ INCORPORATED AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ------------------------------------------------ ----------- ------------------------------ ----------- -----------
ADDITIONS
---------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (1) (2) PERIOD
----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997:
Allowance for doubtful accounts............. $ 2,383 $ 3,234 $ 478 $ (2,018) $ 4,077
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
Year ended September 30, 1996:
Allowance for doubtful accounts............. $ 2,207 $ 1,237 $ -- $ (1,061) $ 2,383
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
Year ended September 30, 1995:
Allowance for doubtful accounts............. $ 2,195 $ 993 $ -- $ (981) $ 2,207
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
</TABLE>
(1) Primarily represents allowances for doubtful accounts related to
acquisitions.
(2) Represents accounts directly written-off net of recoveries.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of MEDIQ Incorporated
and subsidiaries ("MEDIQ") and MEDIQ/PRN Life Support Services, Inc. and
subsidiaries ("PRN") (a wholly owned subsidiary of MEDIQ) on Form S-4 of our
reports dated November 25, 1997 for MEDIQ and May 21, 1998 for PRN,
respectively, appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
July 10, 1998
<PAGE>
FORM T-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)
114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)
------------------
MEDIQ/PRN Life Support Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 95-3692387
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MEDIQ Diagnostic Centers, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-2703398
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
<PAGE>
-2-
MEDIQ Diagnostic Centers-I, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-2721914
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MEDIQ Imaging Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-2888200
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MEDIQ Investment Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 51-0261761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MEDIQ Management Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-2744388
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MEDIQ Mobile X-Ray Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 23-6764081
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
MDTC Haddon, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-2987001
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
Value-Med Products, Inc.
(Exact name of obligor as specified in its charter)
Delaware 22-3387171
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
<PAGE>
-3-
American Cardiovascular Imaging Labs, Inc.
(Exact name of obligor as specified in its charter)
Pennsylvania 23-2485277
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
One Mediq Plaza
Pennsauken, NJ 08110
(Address of principal executive offices)
--------
----------
11 % Senior Subordinated Notes due 2008
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
-4-
GENERAL
1. General Information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, DC
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. Affiliations with the Obligor
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
MEDIQ/PRN Life Support Services, Inc. currently is not in default under any
of its outstanding securities for which United States Trust Company of New
York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10,
11, 12, 13, 14 and 15 of Form T-1 are not required under General
Instruction B.
16. List of Exhibits
T-1.1 -- Organization Certificate, as amended, issued by the State
of New York Banking Department to transact business as a
Trust Company, is incorporated by reference to Exhibit T-1.1
to Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
<PAGE>
-5-
16. List of Exhibits
(cont'd)
T-1.4 -- The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No.
33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of July 8, 1998, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States Trust
Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 8th day
of July, 1998.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By: /s/ John Guiliano
-----------------
John Guiliano
Vice President
<PAGE>
Exhibit T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
January 7, 1997
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: /s/ Gerard F. Ganey
-------------------
Gerard F. Ganey
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
MARCH 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Cash and Due from Banks $ 303,692
Short-Term Investments 325,044
Securities, Available for Sale 650,954
Loans 1,717,101
Less: Allowance for Credit Losses 16,546
----------
Net Loans 1,700,555
Premises and Equipment 58,868
Other Assets 120,865
----------
Total Assets $3,159,978
----------
----------
LIABILITIES
- -----------
Deposits:
Non-Interest Bearing $ 602,769
Interest Bearing 1,955,571
----------
Total Deposits 2,558,340
Short-Term Credit Facilities 293,185
Accounts Payable and Accrued Liabilities 136,396
----------
Total Liabilities $2,987,921
----------
----------
STOCKHOLDER'S EQUITY
- --------------------
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 105,214
Unrealized Gains on Securities
Available for Sale (Net of Taxes) 2,307
----------
Total Stockholder's Equity 172,057
----------
Total Liabilities and
Stockholder's Equity $3,159,978
----------
----------
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
/s/ Richard E. Brinkmann, SVP & Controller
May 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000350920
<NAME> MEDIQ INCORPORATED AND SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> MAR-31-1998 SEP-30-1997
<CASH> 3,925 3,639
<SECURITIES> 0 0
<RECEIVABLES> 50,097 43,763
<ALLOWANCES> 3,712 4,077
<INVENTORY> 15,428 13,047
<CURRENT-ASSETS> 71,232 69,751
<PP&E> 256,105 249,620
<DEPRECIATION> 142,402 136,031
<TOTAL-ASSETS> 253,780 257,552
<CURRENT-LIABILITIES> 33,873 40,019
<BONDS> 137,366 128,131
0 0
3,322 3,322
<COMMON> 20,068 20,068
<OTHER-SE> 30,106 25,213
<TOTAL-LIABILITY-AND-EQUITY> 253,780 257,552
<SALES> 13,979 19,922
<TOTAL-REVENUES> 75,000 136,038
<CGS> 11,270 16,334
<TOTAL-COSTS> 62,303 110,122
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,235 19,107
<INCOME-PRETAX> 8,650 2,893
<INCOME-TAX> 3,888 5,134
<INCOME-CONTINUING> 4,762 (2,241)
<DISCONTINUED> 0 34,941
<EXTRAORDINARY> 0 (8,037)
<CHANGES> 0 0
<NET-INCOME> 4,762 24,663
<EPS-PRIMARY> .19 .95
<EPS-DILUTED> .18 .95
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000887420
<NAME> MEDIQ/PRN LIFE SUPPORT SERVICES, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> MAR-31-1998 SEP-30-1997
<CASH> 3,846 3,472
<SECURITIES> 0 0
<RECEIVABLES> 50,097 43,763
<ALLOWANCES> 3,712 4,077
<INVENTORY> 15,428 13,047
<CURRENT-ASSETS> 70,584 59,398
<PP&E> 256,105 249,620
<DEPRECIATION> 142,402 136,031
<TOTAL-ASSETS> 253,253 247,292
<CURRENT-LIABILITIES> 31,671 46,180
<BONDS> 127,311 119,664
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 64,410 52,063
<TOTAL-LIABILITY-AND-EQUITY> 253,253 247,292
<SALES> 13,979 19,992
<TOTAL-REVENUES> 75,138 136,231
<CGS> 11,270 16,334
<TOTAL-COSTS> 62,720 111,214
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,739 16,912
<INCOME-PRETAX> 8,867 19,667
<INCOME-TAX> 3,962 7,438
<INCOME-CONTINUING> 4,905 12,229
<DISCONTINUED> 0 36,432
<EXTRAORDINARY> 0 (7,757)
<CHANGES> 0 0
<NET-INCOME> 4,905 40,904
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
